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EX-10.37 - GENVEC INCv213704_ex10-37.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



 

FORM 10-K



 

 
(Mark One)     
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

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: 0-24469



 

GENVEC, INC.

(Exact name of Registrant as specified in its charter)

 
DELAWARE   23-2705690
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

 
65 WEST WATKINS MILL ROAD,
GAITHERSBURG, MD
  20878
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: 240-632-0740



 

Securities registered pursuant to section 12(b) of the Act:

 
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, Par Value $0.001 Per Share   The NASDAQ Stock Market

Securities registered pursuant to section (12g) of the Act: Preferred Share Purchase Rights



 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.Yes o No x

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
        Large accelerated filer o   Accelerated filer x
        Non-accelerated filer o   Smaller reporting company o
(Do not check if a smaller reporting company)     

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934.Yes o No x

As of June 30, 2010 the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based on the closing sale price of such stock as reported by the NASDAQ Global Market on such date was $57,527,856. For purposes of this calculation, shares of common stock held by directors, officers, and stockholders whose ownership exceeds 10 percent of the common stock outstanding at June 30, 2010 were excluded. Exclusion of such shares held by any person should not be construed to indicate that the person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that the person is controlled by or under common control with the Registrant.

As of February 28, 2011 there were 129,172,226 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Definitive Proxy Statement for its 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

 

 


 
 

TABLE OF CONTENTS

GENVEC, INC.
  
TABLE OF CONTENTS

     
PART
NO.
  ITEM
NO.
  DESCRIPTION   PAGE
NO.
I   1   Business   1
     1A   Risk Factors   20
     1B   Unresolved Staff Comments   34
     2   Properties   34
     3   Legal Proceedings   34
     4   Removed and Reserved   34
II   5   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   35
     6   Selected Financial Data   37
     7   Management’s Discussion and Analysis of Financial Condition and Results
of Operations
  38
     7A   Quantitative and Qualitative Disclosures About Market Risk   47
     8   Financial Statements and Supplementary Data   47
     9   Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
  47
     9A   Controls and Procedures   47
     9B   Other Information   48
III   10   Directors, Executive Officers, and Corporate Governance   49
     11   Executive Compensation   49
     12   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   49
     13   Certain Relationships and Related Transactions, and Director
Independence
  49
     14   Principal Accountant Fees and Services   49
IV   15   Exhibits and Financial Statement Schedules   50
          Signatures     
          Financial Statements   F-1 – F-27

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This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements also may be included in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements and are based on management’s estimates, assumptions and projections that are subject to risks and uncertainties. These statements can generally be identified by the use of forward-looking words like “believe,” “expect,” “intend,” “may,” “will,” “should,” “anticipate,” or similar terminology.

Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date we make them, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to:

Our product candidates being in the early stages of development;
Our ability to find collaborators and the terms of our agreements that we may enter into with them;
Uncertainties with, and unexpected results and related analyses relating to, pre-clinical development and clinical trials of our product candidates;
The timing, amount, and availability of revenues from our government-funded vaccine programs;
The timing and content of future FDA regulatory actions related to us, our product candidates, or our collaborators;
Our financial condition, the sufficiency of our existing cash, cash equivalents, marketable securities, and cash generated from operations and our ability to lower our operating costs; and
The scope and validity of patent protection for our product candidates and our ability to commercialize products without infringing the patent rights of others.

Further information on the factors and risks that could affect our business, financial condition and results of operations is set forth under Item 1A in this Annual Report and is contained in our other filings with the Securities and Exchange Commission (SEC). The filings are available on our website at www.genvec.com or at the SEC’s website, www.sec.gov.

These forward-looking statements speak only as of the date of this Annual Report and we assume no duty to update our forward-looking statements.

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PART I

ITEM 1. BUSINESS

OVERVIEW

GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, Merial, and the U.S. Government to support a portfolio of product programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss, balance disorders, and cancer; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus type 2 (HSV-2), dengue fever, influenza, malaria, and human immunodeficiency virus (HIV). In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).

Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene that causes production of an antigen, which then stimulates the desired immune reaction by the body.

Our research and development activities yield product candidates that utilize our technology platform and we believe represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and development of novel treatments for hearing loss and balance disorders. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

In partnership with our collaborators we have multiple vaccines in development. These programs are funded by third-parties and utilize our core adenovector technology. GenVec has grant-supported preclinical programs to develop vaccine candidates for the prevention of RSV and HSV-2. In addition, we have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to develop a HIV vaccine and an influenza virus vaccine. We also have programs with the U.S. Naval Medical Research Center to develop vaccines for dengue fever and malaria. In the field of animal health, we are working with Merial to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.

As a biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties. Material risks and uncertainties relating to our business and our industry are described in Item 1A of this Form 10-K. The description of our business in this Form 10-K should be read in conjunction with the information in Item 1A and the Financial Statements found under Item 8 of Part II of this Annual Report, which includes additional financial information about our total assets, revenue, measures of profit and loss, and financial information.

OUR STRATEGY

Our primary objective is to develop and commercialize products with significant medical benefits. We plan to achieve this objective through the following strategies:

Working with Novartis to facilitate the development of first-in-class products for the treatment of hearing and balance disorders.  We believe that a significant commercial opportunity exists for hearing loss and balance disorder treatments utilizing our technology. We are committed to realizing the value of this program by facilitating Novartis’ development program.

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Entering into new collaborations to support the development of our pipeline of products.  We are engaged in seeking strategic collaborations and partnerships to further develop and potentially commercialize our therapeutic and vaccine product candidates. In December 2010, we announced a collaboration with Merial to develop vaccines against FMD utilizing our technology. We intend to seek corporate partnerships in the following programs:

Vaccine against RSV, which is the most common viral cause of lower respiratory infections in infants and young children.
Vaccine against HSV-2, which is the virus responsible for most cases of genital herpes.
TNFeradeTM for the treatment of cancer.

Supporting our funded contracts and collaborations for the development of new vaccines.  We believe that product opportunities can be realized by supporting our established vaccine collaborations.

Exploring new applications of our technology to address the treatment and prevention of major unmet medical needs.  We intend to continue to enhance our core technologies through internal research as well as external collaborations and possible acquisitions. We have received peer-reviewed external funding from the U.S. government and from nonprofit foundations to improve our technology platform for vaccine and gene delivery applications. For example, we have received funding to develop our cell line technology for antigen discovery and for a second-generation product candidate to treat cancer. We intend to further strengthen our technologies relating to process development, formulation, and manufacturing through our existing and future relationships.

Minimizing our cash burn rate and avoiding the need for additional equity financing.  We intend to further develop our product candidates and technology through collaborations and selective deployment of our resources in a prudent manner. We believe this strategy will allow us to advance our programs without the use of substantial additional capital and will insulate us from fluctuating capital raising conditions.

THERAPEUTIC PRODUCT DEVELOPMENT PROGRAMS

Hearing and Balance Disorders.  In a collaboration with Novartis, our hearing and balance disorders program is focused on the restoration of hearing and balance function through the regeneration of critical cells of the inner ear. Hearing and balance require specialized cells of the inner ear called sensory hair cells. During embryonic development, an atonal gene (Atoh1) induces the generation of these cells. In multiple animal models we have demonstrated formation of new inner ear sensory hair cells and the restoration of hearing and balance function using our technology to deliver the Atoh1 gene to the inner ear. There are currently no marketed drug therapies in the U.S. to treat hearing loss or balance disorders.

In December 2007, we received a sub-award under a grant from the National Institute on Deafness and Other Communication Disorders (NIDCD), of the NIH, to develop a gene-based drug therapy to treat severe balance disorders. Under this grant, GenVec supports preclinical research in collaboration with the University of Kansas Medical Center, leading to potential drug candidates.

In January 2010, we announced a collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5.0 million upfront payment and Novartis purchased $2.0 million of our common stock. If certain clinical, regulatory, and sales milestones were met, we were eligible, at the inception of the agreement, to receive up to an additional $206.6 million in milestone payments in addition to royalties on future sales.

In August 2010, we entered into an additional agreement with Novartis, for the supply of services relating to development materials in connection with our collaboration in hearing loss and balance disorders. Under this additional agreement, GenVec could receive approximately $13 million over four years to manufacture clinical trial material for up to two lead product candidates. In 2010, we recognized approximately $4.4 million for services performed under this agreement.

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In September 2010, we announced that we had achieved the first milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities.

TNFerade.  We are evaluating our TNFeradeTM biologic (TNFerade) for use in the treatment of cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNFα), a known anti-tumor protein in cells of the tumor. In March 2010, we discontinued a Phase 3 pivotal trial for first-line treatment of inoperable, locally advanced pancreatic cancer (known as PACT) based on results of an interim analysis. The interim data strongly suggested that the trial would not achieve the statistical significance required to form the basis for approval of a biological license application in the population chosen for study, thereby warranting discontinuing the trial. Upon discontinuing the trial, we reevaluated our business strategy, for which TNFerade was previously at the center, and developed the strategy set forth above.

Clinical trials of TNFerade have been conducted and encouraging results have previously been reported in studies for esophageal cancer, head and neck cancer, rectal cancer, and soft tissue sarcomas. We believe that identifying an appropriate partner for TNFerade represents the best path forward in the development of this product.

Next Generation Cancer Program.  With funding from the NIH, we are exploring additional approaches to utilizing our technology in the treatment of cancer. In September 2009, we received a Phase 1 Small Business Innovation and Research (SBIR) grant from the National Cancer Institute (NCI) of the NIH to support research exploring a new approach to metastatic cancer treatment. Under this grant, valued at approximately $300,000, GenVec is investigating the hypothesis that the delivery of a specific gene will stimulate an antitumor response that could control cancer metastases.

VACCINE DEVELOPMENT PROGRAMS

In addition to our therapeutic product development programs, we are working with collaborators to develop vaccines using our adenovector technology. We are currently developing preventative vaccines for RSV, HSV-2, dengue fever, malaria, and HIV.

Respiratory Syncytial Virus (RSV).  We are developing vaccines against RSV, the single most important viral cause of lower respiratory infections in infants and young children. According to the World Health Organization, nearly all U.S. children have been infected with RSV by two years of age. Although RSV infection usually produces cold-like symptoms, the infection can result in severe lower respiratory tract infection, which causes up to 130,000 pediatric hospitalizations per year in the U.S. RSV also causes repeated infections throughout life, placing the elderly and individuals with compromised cardiac, pulmonary, or immune systems at risk for severe disease. Among the institutionalized elderly, it is estimated there are about 15,000 deaths annually from RSV. In March 2007, we entered into a Collaborative Research and Development Agreement (CRADA) with the NIAID to develop vaccines for the prevention and treatment of RSV. This three-year CRADA was renewed in July 2010 for a second three-year term. RSV infections can occur at any age, but typically occur in infants, the elderly or in those with compromised cardiac, pulmonary, or immune systems. Initial vaccine candidates are in preclinical testing. In May 2008, we received a $600,000 SBIR grant from the NIH to support work under this program. Work under this program is expected to be completed in April 2011.

In December 2010 data were presented on GenVec’s RSV vaccine program at the International Respiratory Syncytial Virus Symposium, which took place in Rotterdam, Netherlands. The data presented at the conference demonstrated encouraging preclinical proof-of-concept findings generated in multiple animal models at the NIH and GenVec. Specifically, the data show sustained production of neutralizing antibodies and the lack of immunological adverse events linked to prior unsuccessful RSV vaccine approaches.

HSV-2.  We are developing vaccines for the prevention and treatment of HSV-2, the virus responsible for most cases of genital herpes. In the United States, HSV-2 infects some 1.6 million new people per year, with approximately 500,000 of those suffering from disease symptoms. At least 40 million people in the United States are infected with HSV-2. Even higher infection rates are evident in developing countries, with further complications in people also infected with HIV. All HSV-2 infections are permanent and result in periodic

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virus shedding. There is no approved vaccine for HSV-2. Although antiviral regimens have become a standard of care, their inconvenience, cumulative cost and potential for drug resistance further underscore the need for safe, new approaches to reducing HSV-2 lesions, shedding, and transmission. Estimated costs of treating HSV-2 in the United States alone are close to $1 billion, primarily for drugs and outpatient medical care. In March 2008, we received a $600,000 Phase 1 SBIR grant from the NIH for our HSV-2 program. This is intended to support work being conducted in a collaborative effort by GenVec, the Vaccine and Infectious Disease Institute at Fred Hutchinson Cancer Research Center, and the University of Washington. We completed work under this grant in February 2011.

Dengue Fever.  With our collaborators we are generating vaccine candidates for the prevention of dengue fever. Dengue fever is a viral disease spread by mosquitoes that historically affected 50 million to 100 million people each year. The virus is found in tropical and sub-tropical climates worldwide, mostly in urban and semi-urban areas. In recent years dengue fever has spread to many new geographic locations, with cases confirmed in Florida and explosive outbreaks confirmed in Brazil and Venezuela. Symptoms are flu-like and generally occur 3 to 14 days after being bitten by an infected mosquito. Symptoms may include fever, headache, rash, eye pain and body aches. Dengue hemorrhagic fever is the most severe form of the disease and it can be fatal. There is no current vaccine or treatment for dengue fever.

We have entered into the following agreements related to our dengue fever vaccine program:

U.S. Naval Medical Research Center (NMRC).  In January 2011, we entered into a collaboration with the NMRC through a CRADA to support their dengue fever vaccine research. Under this agreement, NMRC will be responsible for pre-clinical animal studies of vaccines, designed and manufactured by GenVec, including studies in non-human primates.
Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc (HJF).  In January 2011, we signed a one-year, $530,000 agreement with HJF to fund the development and preparation of vaccines against dengue fever. Under the agreement, GenVec will work to design vaccine candidates that utilize GenVec’s adenovector technology and manufacture these vaccine candidates utilizing GenVec’s proprietary cell line.

Malaria.  With our collaborators we are generating vaccine candidates for the prevention of malaria. There are currently over 300 million cases of malaria in the world each year typically resulting in over two million deaths annually, mostly among children.

We have produced clinical supplies of a multi-antigen vaccine candidate for use by the NMRC in early stage clinical studies.

In April 2010, encouraging clinical and preclinical malaria vaccine data were presented at the Keystone Symposium — Malaria: New Approaches to Understanding Host-Parasite Interactions. Safety, tolerability, immunogenicity, and efficacy data from the Phase 1/2a malaria trial using GenVec technology were presented. Data indicate malaria vaccines given to malaria-naïve adults were found to be safe and well-tolerated with minimal local or systemic reactions and no serious vaccine-related adverse reactions. Sterile protection, a complete absence of parasites in the blood, was seen in 4 out of 15 volunteers that had been inoculated with the vaccine and subsequently challenged with the malaria parasite.

In April 2008, we received a Small Business Innovation and Research (SBIR) grant from the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to support our malaria vaccine program. This grant, valued at approximately $600,000, is being used to develop enhancements to our vectors for vaccine applications against malaria. We are currently performing work under this grant and we are expecting work to continue through March 2012. In July 2009, we received a grant from the NIAID, valued at approximately $600,000 to identify new antigens for malaria vaccine development. We are currently performing work under this grant and we are expecting work to continue through June 2012.

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We have entered into the following agreements related to our malaria vaccine program:

U.S Naval Medical Research Center (NMRC).  In January 2003, we entered into a collaboration with the NMRC, which included a Collaborative Research and Development Agreement (CRADA) and a two-year, $1.9 million contract to develop and construct vaccines against malaria and dengue fever {or “the dengue virus”} using our proprietary adenovector technologies and production cell line. Under the CRADA, NMRC has provided us with optimized malaria genes to be used in the development of the adenovector-based vaccines as well as providing preclinical evaluation of the vaccine candidates.

In January 2005, we signed a one-year, $1.6 million fixed price contract for the production of malaria vaccines under current Good Manufacturing Practices (cGMP) standards. The NMRC tested the vaccine candidates in preclinical and animal models to assess safety and effectiveness. In conjunction with the preclinical evaluation of the vaccine, we provided regulatory support to NMRC for an Investigational New Drug application with the FDA. A Phase 1/2a clinical trial conducted by NMRC and funded by the United States Agency for International Development (USAID), the Military Infectious Diseases Research Program, and the Congressionally Directed Medical Research Program was initiated in January 2007.

U.S. Military Malaria Vaccine Program.  In September 2007, we entered into a CRADA with the U.S. Military Malaria Vaccine Program at the Walter Reed Army Institute of Research and the NMRC for the development and preclinical testing of a malaria vaccine candidate against Plasmodium vivax (P. vivax). More than 50% of malaria cases in U.S. military personnel are caused by P. vivax, which is debilitating upon primary infection and can cause recurrent illness years after infection occurs. This malaria strain has a significant negative impact on world economic productivity and is a major threat to military preparedness. In addition to the CRADA, we signed a one-year, $247,000 contract with the Department of Defense to construct and test the adenovector-based vaccine against P. vivax. Work under this agreement has been completed.
PATH’s Malaria Vaccine Initiative (MVI).  In March 2004, we signed a two-year, $2.6 million Collaborative Research Development and Supply Agreement with PATH’s MVI for the development, production, and evaluation of vaccines against malaria. Under the contract, we were responsible for constructing adenovector-based vaccine candidates using our proprietary cell line and second-generation adenovector technology. The contract included $547,000 for work to be performed under a separate CRADA with the Navy Medical Research Center (NMRC). Under the CRADA, the NMRC provided us with optimized malaria genes to be used in the development of the adenovector vaccines as well as provide preclinical evaluation of the vaccine candidates. In August 2006, contract funding for the Collaborative Research Development and Supply Agreement was increased to $3.2 million and the term was extended through August 2007. In May 2007, we amended and extended our existing Collaborative Research, Development, and Supply Agreement with MVI. The amendment included up to $750,000 in additional funding in 2007 to continue advancing a new multivalent malaria vaccine toward clinical evaluation.

In March 2009, we signed a one-year contract with MVI to support the development of vaccines to fight malaria. This contract was valued at approximately $770,000 to continue work funded by MVI that began in 2004. The scope of work under this contract included the development and testing of novel adenovirus-based vaccines. In July 2009, this contract was amended to extend it by two years and expand the scope of work. In January 2011, we mutually agreed with MVI to terminate our relationship.

Global HIV Vaccine.  With our collaborators we are developing and providing adenovector-based vaccine candidates targeted against the major strains of HIV present in the world. The Vaccine Research Center (VRC) of the NIAID has completed multiple Phase 1 and Phase 2a clinical trials involving this vaccine candidate, including an international, 480-subject study.

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The VRC has completed multiple Phase 1 and Phase 2a clinical trials involving this vaccine candidate. The NIAID is currently evaluating trial designs for testing proof-of-concept for the control of HIV viral load. GenVec manufactured the adenovirus vector component for this trial.

We have entered into the following agreements related to our HIV vaccine program:

National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH).  In December 2001, the VRC at the NIAID selected us to collaborate in the development of a worldwide preventative HIV vaccine candidate. In February 2006, it was expanded to include an influenza vaccine candidate. We had a cost-plus fixed fee subcontract managed for the VRC through SAIC-Frederick, Inc (SAIC), a subsidiary of Science Applications International Corporation, which became effective in January 2002. Under the subcontract, we were responsible for constructing and producing adenovector-based vaccine candidates utilizing our proprietary cell line and second-generation adenovector technology. The program encompassed a base year and seven option years. This initial contract was completed in October 2009.

In November 2009, we entered into a new contract with SAIC for the development of influenza and HIV vaccines pursuant to SAIC’s prime grant from the National Cancer Institute. Work under this contract will include generation of HIV vaccine candidates, generation of a universal flu vaccine, process and assay development for manufacture of vaccine candidates for clinical testing, and continued support of the HIV vaccine candidates currently in clinical testing. In October 2010, we announced that SAIC executed its first option period (year two) of the contract. We will receive up to approximately $3.5 million for the second year of activities under the contract, increasing the total value of the contract, originally valued at $22 million, to up to approximately $24 million. There is no assurance that work will be requested in future periods.

In September 2006, we entered into an additional agreement directly with the NIAID that initially provided up to $52 million over five years, consisting of a base year and four option years. The agreement provided for an initial $7 million commitment with an additional $45 million remaining if the NIAID exercised its annual renewal options in full. Under the agreement, we support the transfer of our manufacturing and purification processes to the VRC to further clinical development of an HIV vaccine, including development of a larger-scale manufacturing and product-release process necessary for further clinical grade HIV vaccine production. We also receive funding for the continued development of next-generation HIV vaccine candidates. In connection with the agreement, we granted the NIAID a non-exclusive research license for our proprietary adenovector, production cell line, manufacturing process, and formulation technologies for HIV vaccines. In September 2010, the NIAID executed its fourth option period and the program entered its fifth year of funding during the fourth quarter of 2010. GenVec will receive up to $141,000 for the fifth contract year, which will support the generation of HIV vaccine candidates with GenVec’s alternate adenovirus serotype technology. Through December 31, 2010, the NIAID had funded approximately $19.0 million under the agreement.

ANIMAL HEALTH PRODUCT DEVELOPMENT PROGRAM

We are exploring applications of our technology to treat and prevent diseases for livestock and other animals.

With our collaborators, we are developing vaccine and anti-viral candidates for the prevention and containment of foot-and-mouth disease (FMD) outbreaks. FMD is a highly contagious viral disease affecting cows and other animals with cloven hoofs. Our novel FMD vaccine approach utilizes our proprietary adenovector technology and is manufactured on a proprietary GenVec cell line that is capable of producing antigens with without the highly contagious FMD virus. Because the vaccine is produced without using killed virus materials, it can be produced cost effectively in the U.S. and around the world. While the United States has not had an outbreak of FMD since 1929, the highly contagious nature of FMD, and the grave economic consequences of an outbreak, has made developing a vaccine and anti-viral candidates a high priority of the U.S. government. Initial testing with a vaccine against FMD showed that inoculated cattle challenged with the virus causing FMD did not develop symptoms. Pending the results of field safety trials, we anticipate a conditional license application for a FMD vaccine will be filed in late 2011.

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We have entered into the following agreements related to our FMD vaccine program:

Merial.  In December 2010, we entered into a collaboration with Merial to develop and commercialize our proprietary vaccine technology for use against foot-and-mouth disease (FMD). Merial is the leading FMD vaccine producer in the world, with leading positions in all key markets. Under the agreement, Merial will be responsible for all costs related to the development and commercialization of FMD vaccines developed through the collaboration. We will receive development milestones and royalties on sales.
U.S. Department of Homeland Security (DHS).  In January 2007, we signed a three-year contract with the Department of Homeland Security (DHS) to support the development and manufacture of novel adenovector-based vaccines against FMD. Under the agreement, we received $6.0 million in 2007 for program funding for the first year and had the possibility to receive up to $15.1 million over three years if DHS exercised its renewal options under the contract.

In August 2007, the DHS executed the first renewal option under this agreement, which provided $5.6 million in 2008 to support the development of vaccines for FMD and raised the total value of the three-year agreement to $17.5 million if all renewal options are exercised. In July 2008, the DHS executed the second renewal option under this agreement, which provided $6.6 million of funding and raised the total value of the agreement to $18.2 million. In January 2010 the term of the agreement was extended to December 31, 2010. In September 2010 the agreement was extended to May 31, 2011 and provided additional funding bringing the total value of the contract to $19.4 million.

In February 2010, we signed a new contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this new agreement, we will receive $3.8 million in program funding the first year and an additional $0.7 million if DHS exercises its renewal option under the contract. In June 2010, the DHS exercised its renewal option for $0.7 million. Under this contract, we will use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines.

U.S. Department of Agriculture (USDA).  In August 2004, we signed a one-year, $304,000 cooperative agreement with the U.S. Department of Agriculture (USDA) for the development of vaccine candidates against FMD. In March 2006, we received a 20-month, $1.7 million extension of our agreement with the USDA, which was funded through an interagency agreement by the U.S. Department of Homeland Security. The purpose of the agreement is to further advance the development of our proprietary cell line and adenovector technology for the generation of countermeasure vaccines and anti-viral agents to prevent the spread of FMD. This agreement was completed in December 2007.

TECHNOLOGY PLATFORM

We utilize a complimentary collection of differentiated, proprietary technologies to create product candidates with superior attributes.

Adenovirus Vector Technology.  Our products are developed with our proprietary adenovector technology, which uses modified adenoviruses to deliver genes to target cells. Adenoviruses are naturally occurring viruses that reproduce in certain tissues, spread, and can cause ailments such as a form of the common cold. Our product candidates consist of adenovectors that contain an inserted gene(s). We design our vectors so they cannot replicate or cause diseases. This limits toxicity, including unwanted effects on target cells and the surrounding tissues. We have multiple proprietary adenovectors to suit different applications in therapeutic and vaccine products.

When administered to tissues, our vectors enter target cells, leading the cells to produce the protein encoded by the inserted gene.

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We believe adenovectors are desirable gene delivery vehicles because they efficiently deliver genes, can be readily modified, and have the following safety characteristics:

Adenoviruses are naturally eliminated from cells and tissues;
Vectors derived from adenoviruses have been generally well tolerated in clinical testing when administered locally;
Adenovectors have been in clinical trials sponsored by pharmaceutical and biotechnology companies including Bayer, Biogen, Genzyme, Glaxo SmithKline, Novartis, Pfizer, and Sanofi-Aventis; and
Thousands of patients have been treated with GenVec adenovectors with very few serious adverse events related to these vectors.

We believe our differentiated gene delivery technology enables us to:

Improve the efficiency of discovering new therapies and vaccines;
Rapidly construct and screen product candidates;
Identify novel antigens in a quick, and cost-effective manner;
Minimize interference from antibodies to adenoviruses;
Put genes or antigens rapidly into vectors to evaluate function and usefulness in therapy;
Deliver our product candidates to specific organs or cell types to avoid systemic exposure;
Achieve efficient delivery of gene or antigen to, and stimulate protein expressions in, target cells;
Control the amount and duration of therapeutic protein production to allow flexibility in treating different diseases; and
Scale our manufacturing process for commercial production.

We believe our adenovector technology is preferred for therapeutic and vaccine products:

For local delivery and expression of therapeutic genes;
For cell type specific delivery and expression;
For rational vaccine design;
For high level antibody and cellular based vaccine responses;
For vaccine production without exposure to contagious pathogens; and
For the manufacture of new products that cannot be produced using standard technologies.

Local Delivery and Expression of Genes.  To achieve local production of proteins, we administer our product candidates directly to the site of disease using standard medical devices such as syringes. Direct administration of our product candidates into diseased tissue allows us to increase effectiveness by achieving high concentrations of the protein at disease sites while improving safety by avoiding exposure throughout the body.

New Adenovector Platforms.  We have generated vectors based on different types of adenovirus. These vectors have the potential to improve vaccine potency, avoid neutralizing antibodies, and generate mucosal immune responses. These new adenovectors are being explored as second-generation therapeutics and vaccine candidates.

Proprietary Cell Lines.  We have developed a proprietary production cell line 293-ORF6, which supports the growth of adenovectors. We have developed 293-ORF6 cells and a modification of these cells, M2A, to meet the needs for manufacture of our therapeutic and vaccine products. M2A cells have been developed to produce vectors, in particular vaccine vectors, that express antigens or proteins that interfere with the growth of the vector. In August 2009, we received a Phase 2 Small Business Innovation and Research grant from the

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NIAID to support the development of our cell line and vector production technology. This grant is valued at approximately $2.5 million over three years.

Control of Gene Expression.  Our technology also allows us to modify the location, duration, and rate of therapeutic gene expression. We alter gene expression by inserting a sequence of DNA, called a promoter, into our vectors adjacent to the target gene. We tailor our technology to the therapeutic or vaccine product need. For some diseases, long-term expression of the therapeutic gene is required to achieve a clinical benefit while high level antigen expression from our molecule vaccines is preferred. Moreover, our adenovector technology allows multiple antigens or therapeutic genes to be efficiently expressed for therapeutic benefit. We have also shown that local production of therapeutic proteins by regulating expression by inserting a specific proprietary promoter that either limits expression to specific cell types or can regulate expression after specific treatments can be preferred.

RESEARCH AND DEVELOPMENT

As a biopharmaceutical company developing biologic products, and to support the activities discussed above, we have significant research and development expenditures each year. Our research and development expenses were $20.9 million, $24.7 million, and $33.8 million for the years ended December 31, 2010, 2009, and 2008, respectively. These expenses were divided between our research and development platforms in the following manner:

     
  Years ended December 31,
(in millions)   2010   2009   2008
TNFerade   $ 8.1     $ 13.5     $ 21.3  
Vaccines     6.5       10.4       11.6  
Hearing     6.1       0.5       0.1  
Other Clinical Programs     0.2       0.3       0.8  
Total   $ 20.9     $ 24.7     $ 33.8  

INTELLECTUAL PROPERTY

We generally seek patent protection for our technology and product candidates in the U.S. and abroad. We have submitted patent applications that are pending in the U.S. and other countries. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether we can:

Obtain patents to protect our own products;
Obtain licenses to use the technologies of third parties, which may be protected by patents;
Protect our trade secrets and know-how; and
Operate without infringing the intellectual property and proprietary rights of others.

Patent Rights and Licenses.  We and our licensors have patents and continue to seek patent protection for technologies that relate to our product candidates, as well as technologies that may prove useful for future product candidates. As of December 31, 2010, we hold or have licenses to 272 issued, allowed, or pending patents worldwide, 91 of which are issued or allowed in the U.S. These patents and patent applications pertain to genes that encode therapeutic proteins; expression control elements that regulate the production of the therapeutic proteins by such genes and targeting technology for enhanced target cell selectivity of our product candidates; cell lines used to manufacture our product candidates; methods of constructing, producing (including purification, quality control, and assay techniques), storing, and shipping our product candidates; methods of administering our product candidates; and methods of treating disease using our product candidates.

Hearing Loss Program.  We have licensed the Atoh1 gene from the Baylor College of Medicine. This license is worldwide and is exclusive for gene therapy applications. We licensed our rights to this gene to Novartis as part of our worldwide collaboration with Novartis to develop treatments for hearing loss and balance disorders.

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TNFerade.  We have issued patents and pending patent applications pertaining to the adenovectors, the expression control elements used in TNFerade to increase production of the TNFα protein by the TNFα gene upon exposure to radiation and/or chemotherapy, and the methods of using TNFerade for treating disease. We have an exclusive worldwide license to issued patents, the last of which expires in 2026, pertaining to radiation-induced gene expression and a radiation-inducible promoter enabling controlled production of therapeutic proteins from gene therapy products, including TNFerade. We are aware, however, of issued patents and pending patent applications of third parties pertaining to the delivery of adenovectors and the treatment of cancer and tumors. It could be alleged that TNFerade conflicts with the issued patents as well as patents that may issue on these patent applications. We have taken licenses to patents covering the use of TNFerade from private companies and academic institutions that involve the payment of milestones and royalties.

In May 1993, we entered into a license agreement with ARCH Development Corporation, a non-profit corporation associated with the University of Chicago (Arch) that has subsequently been restated and amended. Concurrently with entering into that agreement, we also entered into a license agreement with ARCH Development Corporation and the Dana-Farber Cancer Institute, Inc. (DFCI). Pursuant to these two license agreements, which we refer to together as the UC-Tech Agreements, ARCH and DFCI granted us exclusive, worldwide royalty bearing licenses to certain intellectual property rights pertaining to TNFerade. We have previously made a $50,000 milestone payment under the UC-Tech Agreements pursuant to provisions that require us to make a milestone payment equal to $50,000 at the time of filing of an Investigational New Drug Application on a licensed product and $250,000 at the time of filing of an New Drug Application (NDA) on a licensed product (up to a certain maximum number of NDAs). No royalty payments have been made to date, and prior to commercialization of a licensed product, we have no royalty obligations pursuant to the UC-Tech Agreements. The UC-Tech Agreements are terminable by the licensors if we are in material breach of the agreements that we fail to cure or if we become insolvent. We also have the right to terminate the agreements for an uncured material breach or for convenience with prior notice. The UC-Tech Agreements continue in full force until the expiration of all patents or applications covered thereby, unless otherwise terminated. The latest expiring patent under the UC-Tech Agreements expires on September 22, 2026.

Targeted Vectors.  We have issued patents expiring beginning in 2014 and pending patent applications covering our technology that allow for the delivery of genes in adenovectors to essentially all cell types, as well as our targeted vectors, which are designed for the purpose of creating product candidates that deliver genes in adenovectors only to selected cells. We are aware, however, of issued patents and pending patent applications of third parties relating to such vectors. It could be alleged that our targeted vectors conflict with such existing or future patents. In May 1998, we entered into an Amended and Restated Exclusive License Agreement with the Cornell Research Foundation, which was subsequently amended. Pursuant to the Cornell agreement we license certain proteins, genes, gene vectors and similar biological materials that relate to our adenovector platform. We are obligated to pay Cornell a yearly maintenance fee of $50,000 (creditable against any royalties payable in that year). No royalty payments have been made to date, and prior to commercialization of a licensed product, we have no royalty obligations to Cornell. The Cornell agreement may be terminated by Cornell or by us in the event of an uncured material breach by the other party, or by us for any reason with prior written notice. The Cornell agreement continues in full force until the expiration of all patents or applications covered thereby, unless otherwise terminated. The latest expiring patent under the Cornell agreement expires on July 31, 2020.

Licenses to Genes.  To create our product candidates, we combine our vectors with genes intended to produce proteins with therapeutic potential. We have secured licenses to applicable genes for this purpose. We often seek to obtain exclusivity, consistent with our business needs, when securing such licenses. In return for the rights we receive under our gene licenses, we typically are required to pay royalties based on any commercial sales of the applicable product during a specified time period, as well as provide additional compensation, including up-front license fees and product development-related milestone payments.

Any of our licenses may be terminated by the licensor if we are in material breach of a term or condition of the particular license agreement, or if we become insolvent. In addition, some of our licenses require us to achieve specific milestones.

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Production, Purification, Quality Assessment, and Formulation Technology.  We have issued patents expiring beginning in 2019 and pending patent applications pertaining to the production, purification, quality assessment, and formulation of our product candidates. In particular, we have issued patents covering the process for manufacturing our product candidates, the purification of our product candidates applicable to both research and commercial scales, methods of assessing and confirming the quality and purity of our product candidates for clinical testing and commercialization, and product formulations that improve the stability of product candidates and allow our product candidates to be conveniently stored, shipped, and used. We are aware, however, of issued patents and pending patent applications of third parties relating to these and other aspects of production, purification, quality assessment, and formulation technology. It could be alleged that our production, purification, quality assessment, and formulation technology conflict with such existing or future patents.

We anticipate that we, and our current and future licensors, will continue to seek to improve existing technologies, develop new technologies and, when possible, secure patent protection for such improvements and new technologies.

Certain patents pertaining to our product candidates may be eligible for Patent Term Extension under 35 U.S.C. §156. The term of any patent that claims a human drug product (including human biological products), a method of using a drug product, or a method of manufacturing a drug product is eligible for an extension to restore that portion of the patent term that has been lost as a result of FDA review subject to certain limitations.

Trade Secrets.  To a more limited extent, we rely on trade secret protection and confidentiality agreements to protect our interests. It is our policy to require our employees, consultants, contractors, manufacturers, collaborators, and other advisors to execute confidentiality agreements upon the commencement of employment, consulting, or collaborative relationships with us. We also require signed confidentiality agreements from any entity that is to receive confidential data. With respect to employees, consultants, and contractors, the agreements generally provide that all inventions made by the individual while rendering services to us shall be assigned to us as our property.

MANUFACTURING AND SUPPLY

Technology for Production, Purification, Quality Assessment, and Formulation.  We believe our proprietary production technology and know-how facilitate the production, purification, quality assessment, and formulation of our product candidates. The structure of our vectors and the procedures for their production and purification enable us to minimize the presence of contaminants. We believe our proprietary positions provide a competitive advantage in the following areas:

Production and Scale-Up.  We produce our adenovectors using cell lines grown under standardized and controlled conditions. We have developed specialized proprietary cell lines for production of our vectors. We have designed our production processes to be scalable for commercial production and to reduce the potential for contamination.
Purification.  We have proprietary methods for the purification of our vectors that we believe are scalable to commercial levels as well as suitable for small-scale use in discovery and testing of new product candidates.
Quality Assessment.  We have established proprietary methods to assess and confirm the quality and purity of vectors for research purposes and clinical testing. We use advanced techniques to determine the physical characteristics of our product candidates as a means to establish product consistency and purity. We have an issued U.S. patent covering this technology. We believe these methods are also suitable for quality assessment of commercial production.
Formulation.  We have developed a novel product formulation that improves the stability of our vectors and is covered by issued U.S. patents. Our formulation allows products to be conveniently stored, shipped, and used. For research purposes, our formulation enhances the ease and reproducibility of testing.

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Manufacturing Strategy.  We rely on third-party manufacturers for current Good Manufacturing Practices (cGMP) production of our product candidates for clinical trials and commercialization. We have significant experience working with contract manufacturers and we have successfully transferred our manufacturing process to several collaborators and contract manufacturers. Our research and development facility is located in Gaithersburg, Maryland where we have established laboratories and staff to support the non-cGMP production and process development of more advanced manufacturing processes and characterization methods for our product candidates. We believe many of the production and assay technologies developed for TNFerade, and those developed under our HIV vaccine contract with NIH, are suitable for our other product development programs.

We intend to continue developing our own manufacturing and testing capabilities while continuing to use third-party contractors in areas where we lack sufficient internal capability. Any plans to expand internal manufacturing capabilities at our facility, including the facilities necessary to manufacture and package an adequate supply of finished products in order to meet our long-term clinical needs and projected commercial needs, will require significant resources and will be subject to ongoing government approval and oversight.

We currently have two suppliers for our clinical manufacturing components, one for human health and one for animal health candidates. Currently we procure raw materials, including specialized components known as resins, for our product purification and testing methods from a limited number of suppliers. We also procure nutrients used to support the growth of microorganisms or other cells from Life Technologies Corporation.

OUR COMPETITION

Competition in the discovery and development of new methods for treating and preventing disease is intense. We face, and will continue to face, intense competition from pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies both in the U.S. and abroad. We face significant competition from organizations pursuing the same or similar technologies used by us in our drug discovery efforts and from organizations developing pharmaceuticals that are competitive with our potential therapeutic and vaccine product candidates.

Most of our competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. In addition, most of these organizations, either alone or together with their collaborators, have significantly greater experience than we do in developing products, undertaking preclinical testing and clinical trials, obtaining FDA and other regulatory approvals of products, and manufacturing and marketing products. Mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated among our competitors. These companies, as well as academic institutions, governmental agencies, and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical and biotechnology field also depends on the status of our collaborations and on the continuing availability of capital to us.

We are aware of products under development or manufactured by competitors that are used for the prevention or treatment of diseases we have targeted for product development. We are aware of several development-stage and established entities, including major pharmaceutical and biotechnology firms that are actively engaged in infectious disease vaccine research and development. These include Sanofi-Aventis, Novartis, GlaxoSmithKline, MedImmune, Inc., (a wholly owned subsidiary of AstraZeneca), Merck, Pfizer, Crucell, Bavarian Nordic, Okairos, Intercell, Genocea, Vical, Emergent Biosolutions, and Novavax among others.

We believe our competitive success will be based on the efficacy and safety of our products, as well as our ability to create and maintain scientifically advanced technology, attract and retain skilled scientific and management personnel, obtain patents or other protection for our products and technology, obtain regulatory approvals, and manufacture and successfully market our products either independently or through outside parties. We will rely on corporate collaborators for support of some product candidates and enabling technologies and intend to rely on corporate collaborators for the development, manufacturing, and marketing of some future product candidates. Generally, our strategic alliance agreements do not preclude the corporate collaborator from pursuing development efforts utilizing approaches distinct from that which is the subject of the alliance. Our product candidates, therefore, may be subject to competition with a potential product under development by a corporate collaborator.

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Hearing loss and balance disorders.  Currently the market for hearing loss treatments is dominated by devices, and hearing aids or cochlear implants are the current standard of care. There are no FDA-approved drug therapies. Several biotechnology companies have announced research programs into drug or cell therapies for either the restoration of function or for the protection of hearing function. The companies that have begun Phase 1 trials include Auris Medical AG, Quark Pharmaceuticals, and Sound Pharmaceuticals.

RSV.  Medimmune, a subsidiary of Astra Zeneca and the manufacturer of Synagis®, has two vaccine candidates in Phase 1/2a clinical testing. Sanofi-Pasteur, the vaccine division of the sanofi-aventis Group, has conducted Phase 1 and Phase 2 clinical trials with RSV vaccine candidates. Bavarian Nordic and Crucell, in partnership with Johnson & Johnson, have both announced that they have preclinical programs targeting an RSV vaccine. Biotech companies such as AlphaVax, Genocea, NanoBio, and Okairos have also announced preclinical development programs for RSV vaccines, while Novavax announced its intention to start a Phase 1 clinical trial in 2011.

Dengue fever.  Sanofi-Pasteur is currently testing a tetravalent candidate based on their yellow-fever vaccine backbone in a Phase 2b trial and GSK is testing a live, attenuated tetravalent vaccine in Phase 2 trials. Merck & Co., Inc. recently acquired the dengue fever vaccine assets of Hawaii Biotech, which is Phase 1 testing, and is a tetravalent subunit vaccine. In addition, US NIH has two Phase 1 programs using separate live, attenuated product candidates.

FMD.  In 2008, global FMD vaccine sales were $460 million, which represented between 750 – 800 million doses of vaccine. Manufacturers include Merial, Intervet-SPAH, Bayer, Indian Immunologicals, and other local vaccine producers around the world. In 2008, total sales of all livestock biologicals (all vaccines for cattle, swine and sheep) were $2.4 billion.

Malaria.  There are currently no vaccines approved for the prevention of malaria. The most advanced clinical candidate is GSK’s RTS,S vaccine, which is composed of an antigen and an adjuvant. Other malaria vaccines are currently under development by Sanofi-Pasteur, Crucell, Genocea, Sanaria and Okairos.

HIV.  There are currently no vaccines approved for the prevention of HIV infection. The most advanced clinical candidate is a prime-boost vaccine being tested by the United States Military that lowered the rate of HIV infection by 31.2% compared with placebo in a Phase 3 trial in Thailand. This vaccine regimen combines a canary pox vector manufactured by Sanofi Pasteur prime vaccination with a boost from a separate protein subunit product that was manufactured by VaxGen.

HSV-2.  HSV2 vaccines are currently under development by biotech companies including Genocea, Vical, Alphavax and Juvaris. In September 2010, GSK Bio halted development of its product candidate that was in a Phase 3 trial.

GOVERNMENT REGULATION

Regulation of Biological Products.  The research, development, testing, manufacture, quality, safety, effectiveness, labeling, packaging, storage, approval, distribution, marketing, advertising, and promotion of any biological products developed by us or our collaborators are subject to regulation by federal, state, local, and foreign governmental authorities. In the U.S., new drugs are subject to extensive regulation under the Federal Food, Drug, and Cosmetic Act, and biological products, such as TNFerade and vaccines, are subject to regulation both under provisions of that Act and under the Public Health Service Act. The process of obtaining FDA approval for a new product is costly and time-consuming, and the outcome is not guaranteed. If approved, drug products are subject to ongoing regulation, and maintaining compliance with appropriate federal, state, local, and foreign statutes and regulations will require the expenditure of substantial time and financial resources.

The steps required before our proposed investigational products may be marketed in the U.S. (other than for veterinary biologics, including our FMD vaccine product candidates, which is discussed below), include:

Performance of preclinical (animal and laboratory) tests;
Submission to the FDA of an Investigational New Drug (IND) application, which must become effective before human clinical trials may commence;

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Performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the investigational product in the intended target population for each indication for which approval is sought;
Performance of a consistent and reproducible manufacturing process intended for commercial use;
Submission to the FDA of a Biologics License Application (BLA); and
FDA approval of the BLA before any commercial sale or shipment of the biologic product.

Preclinical studies may take several years to complete. The results of these studies, together with manufacturing information and analytical data, are submitted as part of an IND application to the FDA. The FDA must review the IND prior to the commencement of human clinical trials. Unless the FDA raises concerns (such as concerns that human research subjects will be exposed to unreasonable risks), the IND will become effective thirty days following its receipt by the FDA, and the clinical trials covered by the IND may commence.

Clinical trials typically are conducted in three sequential phases, which often overlap. In Phase 1, a drug is typically studied in a small number of healthy volunteers or patients to test the drug for safety or adverse effects, dosage tolerance, absorption, metabolism, excretion, and clinical pharmacology. Phase 2 involves clinical trials in the targeted patient population to determine the effectiveness of the drug for specific, targeted indications, to determine dosage tolerance and optimal dosage, and to gather additional safety data. Phase 3 clinical trials are commonly referred to as pivotal, or registrational, studies and are conducted to further evaluate dosage, to provide substantial evidence of clinical efficacy, and to further test for safety in an expanded and diverse patient population. Each phase may take several years to complete.

The conduct of the clinical trials is subject to extensive regulation, including compliance with good clinical practice regulations and guidelines, obtaining informed patient consent, sponsor monitoring, auditing of the clinical, laboratory and product manufacturing sites, and review and approval of each study by an independent institutional review board (IRB) for each site proposing to conduct the clinical trial. The FDA, the IRB, or the sponsor may, at its discretion, suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Promising data in early-stage clinical trials do not necessarily assure success in later-stage clinical trials. The FDA may request that additional clinical trials be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory approval of our products under development.

After the completion of the required clinical trials, if we believe the data indicate the biologic product is safe and effective, a BLA is prepared and submitted to the FDA. This process takes substantial time and effort. The FDA may refuse to file the BLA and request additional information, in which case, the application must be resubmitted with the supplemental information. Once a BLA is deemed filed by FDA, there is no guarantee the FDA will approve the application. The FDA has substantial discretion in the approval process and may disagree with our interpretation of the preclinical or clinical data and request additional data and information, which could significantly delay, limit, or even prevent regulatory approval.

As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of physicians, for review, evaluation, and an approval recommendation. Although the FDA is not bound by the opinion of the advisory committee, advisory committee discussions may further delay, limit, or prevent approval. The FDA also may conclude that as part of the BLA, the sponsor must develop a risk evaluation and mitigation strategy (REMS) to ensure that the benefits of the drug outweigh the risks. A REMS may have different components, including a package insert directed to patients, a plan for communication with healthcare providers, restrictions on a drug’s distribution, or a medication guide to provide better information to consumers about the drug’s risks and benefits.

If FDA evaluations of the BLA are favorable and the agency concludes that the standards for approval have been met, it will issue an approval letter. If it believes the BLA is deficient in some way that precludes approval, the agency will issue a Complete Response Letter that generally identifies the deficiencies, which can be minor, for example, requiring labeling changes, or major, for example, requiring additional preclinical

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or clinical studies. The Complete Response Letter may also include recommended actions that the applicant might take to place the BLA in a condition for approval. If a Complete Response Letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, or withdraw the application. If the deficiencies have been addressed to the FDA’s satisfaction, the FDA should be expected to issue an approval letter. Even if the requested information and data are submitted, however, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval.

Prior to granting approval, the FDA generally conducts an inspection of the facilities, including third-party contract facilities that will be involved in the manufacture, production, packaging, testing, and control of the drug substance and finished drug product for cGMP compliance. The FDA will not approve the BLA unless cGMP compliance is satisfactory. In addition, each manufacturing establishment must be registered with the FDA and is subject to periodic FDA inspection. To supply products for use either inside or outside the U.S., including for investigation in clinical trials, domestic, and foreign manufacturing establishments, including third-party facilities, must comply with cGMP regulations and are subject to periodic inspection by the corresponding regulatory agencies in their home country, often under reciprocal agreements with the FDA or by the FDA.

After a biological product is approved, it is subject to significant ongoing regulation and must comply with requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and recordkeeping. Additionally, as a condition of BLA approval, the FDA may require post-approval testing (referred to as Phase 4 clinical trials) and surveillance to monitor the product’s safety or efficacy. In addition, the holder of an approved BLA is required to keep extensive records, to report certain adverse reactions and production deviations and problems to the FDA, to provide updated safety and efficacy information, and to comply with requirements concerning advertising and promotional labeling for their products. Generally, a company can promote a product only for those claims relating to safety and efficacy that are consistent with the labeling approved by the FDA and supported by substantial evidence. Failure to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities could result in administrative or judicially imposed sanctions or other setbacks, including warning letters, restrictions on the product, product recalls, suspension or withdrawal of approval, seizures, injunctions, civil fines, and criminal sanctions.

Furthermore, if the FDA becomes aware of new safety information, the agency may require post-approval studies or clinical trials to investigate known serious risks or signals of serious risks or in response to the occurrence of unexpected serious risks. If a post-approval study is required, periodic status reports must be submitted to the FDA. Failure to conduct such post-approval studies in a timely manner may result in substantial civil fines. In addition, newly discovered or developed safety or efficacy data may require changes to an approved product’s distribution or labeling, including the addition of new warnings or contraindications, or suspended marketing or withdrawal of the product.

In addition to regulatory approvals that must be obtained in the U.S., a product is also subject to regulatory approval in other countries in which it is intended to be marketed. No such product can be marketed in a country until the regulatory authorities of that country have approved an appropriate license application. FDA approval does not assure approval by other regulatory authorities. In addition, in many countries the government is involved in the pricing of the product. In such cases, the pricing review period often begins after market approval is granted.

On March 23, 2010, the Biologics Price Competition and Innovation Act of 2009, or BPCIA, was signed into law. It creates an abbreviated approval pathway for biological products that are “biosimilar” to a previously approved biological product, which is called the “reference product.” If a proposed biosimilar product meets the statutory standards for approval (which include demonstrating that it is highly similar to the reference product and there are no clinically meaningful differences in safety, purity or potency between the products), the proposed biosimilar may be approved on the basis of an application that is different than the standard BLA. In addition, a biosimilar product may be approved as interchangeable with the reference product if the proposed product application meets standards intended to ensure that the biosimilar product can be expected to produce the same clinical result as the reference product.

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The BPCIA provides exclusivity periods during which a product approved under a BLA cannot be relied on as a reference product. No biosimilar application may be submitted to FDA for a period of four years after the reference product was approved, and no biosimilar application may be approved until twelve years after the reference product’s approval. If pediatric studies are performed and accepted by the FDA, the twelve-year exclusivity period will be extended for an additional six months. Additionally, the first biosimilar product approved as interchangeable with a reference product will be granted an exclusivity period of varying length, depending on the factual circumstances. Because the BPCIA is a highly complicated statute that has only recently been enacted, there is uncertainty as to how many important components of the new law will be implemented. Some issues may be resolved by issuance of regulations or guidances, but other positions may develop on an ad hoc basis as FDA confronts them in the context of specific applications.

Our FMD vaccine will also require approval prior to commercialization. In the U.S., governmental regulation of animal health products is primarily provided by two agencies: the USDA and the FDA. Vaccines for animals are considered veterinary biologics and are regulated by the Center for Veterinary Biologics of the USDA under the auspices of the Virus-Serum-Toxin Act. The USDA licensing process involves the submission of several data packages. These packages include information on how the product will be manufactured, information on the efficacy and safety of the product in laboratory and target animal studies and information on performance of the product in field conditions.

The Center for Veterinary Medicine of the FDA approves and monitors new pharmaceutical products, which typically include synthetic compounds, for animals. However, unlike product candidates that are intended for administration in humans, neither preclinical studies nor a sequential phase system of studies are required. Rather, for animal drugs, studies for safety and efficacy may be conducted immediately in the species for which the drug is intended. Thus, there is no required phased evaluation of drug performance.

Reimbursement of Pharmaceutical Products.  If and when our products reach commercialization, insurance companies, health maintenance organizations, other third-party payers, and federal and state governments will be the primary payers of our products. The largest payer in this group will probably be the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare program. Under Medicare, there are different reimbursement methodologies for certain drugs and biologic products that depend on the site of service. For physician-administered drugs and biologic products furnished in a physician’s office, currently there are two methodologies established by statute. Under the first methodology, if the physician purchases the drug or biologic product, CMS will reimburse the physician based upon that drug or biologic product’s Average Sales Price (ASP) plus 6%. The average sales price is the determined by CMS based upon information reported by manufacturers. The second methodology is the Competitive Acquisition Program (CAP). As an alternative to buying drugs and biologic products from the manufacturer, physicians can enroll in CAP to receive necessary drugs and biologic products from a third party vendor. CMS reimburses these vendors for the drugs and biologic products at prices established through competitive bidding. As of January 1, 2009, CMS has suspended operation of the CAP due to contractual issues with bidding vendors. CMS has indicated that it intends to restart the CAP, but it is not clear when the program will resume. Medicare also has several reimbursement methodologies for drugs and biological products administered in hospital outpatient departments. New drugs and biologicals whose cost is “not insignificant” in relation to payment for related procedures are granted “pass-through status” and are reimbursed at ASP plus 6% for the first two to three years of payment under the Medicare hospital outpatient prospective payment system. For many other drugs and biologic products that do not qualify for pass-through status but have an average cost per day greater than $65, the current Medicare payment to a hospital outpatient department is ASP plus 4%. Drugs and biological products with an average cost per day equal to or less than $65 are not separately reimbursed; payment for these products is included in payment for the associated procedure. Payment levels for drugs without pass-through status and the $65 threshold are subject to change through regulation each calendar year. In addition, Congress may change Medicare reimbursement amounts or methods by statute. Health reform legislation enacted in March of 2010, the Patient Protection and Affordable Care Act of 2010 (PPACA), also would require CMS to test new payment methodologies that would bundle payment for physician and hospital services and supplies, including drugs and biological products, for an episode of care.

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Effective January 1, 2006, an expanded prescription drug benefit for all Medicare beneficiaries (known as Medicare Part D) commenced to provide Medicare beneficiaries with drug coverage for self-administered drugs and biologic products and other drugs and biologic products not covered by Medicare, including many vaccines. This voluntary benefit is being implemented through private plans under contractual arrangements with the federal government. Currently, these plans negotiate directly with pharmaceutical manufacturers for rebates on drugs dispensed to Medicare Part D beneficiaries. Like pharmaceutical coverage through private health insurance, Medicare Part D plans establish formularies and use other utilization management tools when determining the drugs and biologic products that are offered by each plan. These formularies can change on an annual basis, subject to federal governmental review. These plans may also require beneficiaries to provide out-of-pocket payments for such products. Effective January 1, 2008, private Medicare Part D plans pay physicians one payment that includes both the administration cost and the cost of the vaccine for those vaccines that are not already covered by law under a different component of the Medicare program. PPACA requires manufacturers to pay rebates of 50% on all drugs dispensed to beneficiaries, other than low income beneficiaries, in the Medicare Part D coverage gap, often referred to as the “donut hole.” It is possible that future health reform legislation would require the government to negotiate Medicare Part D rebates directly, which could result in much higher rebate amounts than those currently negotiated with the plans. In addition, although certain cancer treatments are currently included in CMS’s protected classes of drugs for purposes of Medicare Part D formularies, which generally ensures inclusion on plan formularies, it is possible that future regulatory or legislative changes could change that status.

Federal law requires pharmaceutical manufacturers to pay rebates on covered outpatient drugs reimbursed by the Medicaid program as a condition of having federal funds being made available to pay for those drugs under Medicaid and Medicare Part B. Rebate amounts for a product are determined by a statutory formula that is based on prices defined by statute: average manufacturer price (AMP), which must be calculated for all products that are covered outpatient drugs under the Medicaid program, and best price, which must be calculated only for those covered outpatient drugs that are innovator products, such as biologic products and products approved under new drug applications.. Manufacturers are required to report AMP and best price for each of its covered outpatient drugs to the government on a regular basis. Various states have adopted mechanisms under Medicaid that seek to control drug reimbursement, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers. PPACA and subsequent legislation made significant changes to the Medicaid drug rebate program, including changing the definition of AMP, increasing the minimum rebate percentage, changing the rebate calculation for new formulations of existing products, capping the rebate amount for innovator products at 100% of AMP, and expanding rebates to Medicaid managed care populations.

A manufacturer must also participate in the 340B drug pricing program in order for federal funds to be available to pay for the manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge statutorily-defined covered entities no more than the 340B discounted price for the manufacturer’s covered outpatient drugs. The formula for determining the discounted purchase price is defined by statute and is based on the AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate program, discussed above. To the extent that PPACA and subsequent legislation, as discussed above, caused the statutory and regulatory definitions of AMP and the Medicaid rebate amount to change, these changes also impact the discounted purchase prices that a manufacturer is obligated to provide under this program. PPACA also, independently, expanded the 340B drug pricing program to include new entity types as well as inpatient purchases by covered entity hospitals, and would obligate manufacturers to sell to covered entities if they sell to any other purchaser.

Private insurers may also seek to control health care costs through the various means by which they pay for drugs and biologic products. Managed care has also become a potent force in the market place that increases downward pressure on the prices of pharmaceutical products. We anticipate that these programs will still be in effect when we commercialize our products.

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Other Regulations.  Our business is also subject to regulation under various state and federal environmental laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, and the Toxic Substances Control Act. These and other laws govern our use, handling, and disposal of various biological, chemical, and radioactive substances used in and wastes generated by our operations. We are not aware of any costs or liabilities in connection with any environmental laws that will have a material adverse effect on our business or financial condition.

If and when any of our products become commercialized, we could be subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The healthcare fraud and abuse laws and regulations that may affect our ability to operate include:

The Anti-Kickback Law, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering, or providing any kickback, bribe, or other remuneration, directly or indirectly, in exchange for or to induce the purchase, lease, order or recommending of, any item or services for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs;
Federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federally funded health care programs that are false or fraudulent, or statements that are knowingly false or fraudulent that support such claims or reduce obligations owed to the federal government; and which may apply to entities like us in relation to our submission of pricing data to the federal government under the programs discussed above, and also to the extent that our interactions with customers may affect their billing or coding practices and submission to the federal government;
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services; and
State and foreign law equivalents and analogues of each of the above federal laws, such as anti-kickback, consumer protection, false claims laws and the Foreign Corrupt Practices Act, which may apply to items or services reimbursed by any third-party payer, including state and local as well as commercial insurers, or when physicians are employees of a foreign government entity.

EXECUTIVE OFFICERS OF THE REGISTRANT

   
Name   Age   Present Position with the Registrant
Paul H. Fischer, Ph.D.     61       President and Chief Executive Officer  
Douglas J. Swirsky     41
  
      Sr. Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary  
Bryan T. Butman, Ph.D.     58       Sr. Vice President, Vector Operations  

The Board of Directors appoints all executive officers annually. There is no family relationship between or among any of the executive officers or directors, or any arrangement or understandings pursuant to which the officers were appointed.

Paul H. Fischer, Ph.D. serves as President and Chief Executive Officer. Dr. Fischer has served as President and Chief Executive Officer and as a director of the Company since 1996. Prior to joining GenVec, he was Executive Vice President of Research and Development with Oncologix, Inc., (now Antigenics, Inc.) a biotechnology company. Previous experience included Manager, Cancer Research at Pfizer, Inc., a pharmaceutical company. Dr. Fischer received his B.S. in Biology from the University of Denver and his Ph.D. in Pharmacology from the University of California at San Francisco. Dr. Fischer performed post-doctoral research in Pharmacology at Yale University School of Medicine. He was an Assistant Professor of Pharmacology at the University of Missouri, School of Medicine and an Associate Professor of Human Oncology at the University of Wisconsin, prior to joining Pfizer. Dr. Fischer also serves on numerous community, academic, and professional organizations and Boards.

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Douglas J. Swirsky joined GenVec in 2006 and serves as Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary. Prior to joining GenVec, Mr. Swirsky was a Managing Director and the Head of Life Sciences Investment Banking at Stifel Nicolaus from 2005 to 2006 and held investment banking positions at Legg Mason from 2002 until Stifel Financial’s acquisition of the Legg Mason Capital Markets business in 2005. Mr. Swirsky, a Certified Public Accountant and a CFA charter holder, has also previously held investment banking positions at UBS, PaineWebber, and Morgan Stanley. His experience also includes positions in public accounting and consulting. Mr. Swirsky received his B.S. in Business in Administration from Boston University and his M.B.A. from the Kellogg School of Management at Northwestern University. Mr. Swirsky is a member of the Board of Directors of PolyMedix, Inc.

Bryan T. Butman, Ph.D. has served as our Senior Vice President of Vector Operations since January 2006. He joined GenVec in 1999 and previously served as Director of Quality and Analytical Sciences from 1999 to 2002, Vice President of Quality from 2002 to 2005, and Vice President of Vector Operations from 2005 to 2006. Prior to joining GenVec, Dr. Butman was Executive Director of Diagnostic Product Research and Development with INTRACEL Corporation, a biotechnology company that originated from AKZO-Nobel, NV. During his 15-year career with INTRACEL, Dr. Butman developed FDA-regulated products in the areas of oncology, infectious disease, cardiovascular disease, and hematology. He began his product development career in 1983 as a Senior Scientist with Warner-Lambert, Co. Dr. Butman holds a Ph.D. in Biological Sciences from Wayne State University (Detroit, MI).

EMPLOYEES

As of February 28, 2011, we had 83 full-time employees, 12 of whom hold Ph.D. degrees and 27 of whom hold other advanced degrees. Of our total workforce, 58 are engaged primarily in research and development activities and 25 are engaged primarily in business development, finance, marketing, and administration functions. None of our employees is represented by a labor union or covered by a collective bargaining agreement, and we consider our employee relations to be good.

PRINCIPAL EXECUTIVE OFFICES

We were incorporated in Delaware in 1992. Our principal executive offices are located at 65 West Watkins Mill Road, Gaithersburg, Maryland 20878. Our telephone number at that location is (240) 632-0740.

AVAILABLE INFORMATION

We maintain an internet website at www.genvec.com. Our electronic filings with the U.S. Securities and Exchange Commission (including our annual report on Form 10-K, quarterly reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports) are available free of charge through our website as soon as reasonably practicable after we electronically file them with or furnish them to the U.S. Securities and Exchange Commission. Our website also includes copies or links to selected published studies and posters of presentations, within the limits of copyright law and practicability, which contain additional information about clinical trials of our product candidates. In addition to visiting our website, you may read and copy public reports we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549, or at www.sec.gov. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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ITEM 1A. RISK FACTORS

Investing in our securities involves a high degree of risk. In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following important factors that could affect our actual future results, including, but not limited to, our product development programs, contract revenues, expenses, net losses, and earnings per share.

We have a history of losses and anticipate future losses.

We have incurred net losses in each year since our inception in December 1992, including a net loss of $12.3 million for the year ended December 31, 2010. As of December 31, 2010, we had an accumulated deficit of approximately $244.3 million. We are unsure if or when we will become profitable. The size of our net losses will depend, in part, on the growth rate of our revenues and the level of our expenses.

We derive all of our revenues from payments from collaborations with corporations and government entities and will continue to do so for the foreseeable future. It may be several years, if ever, before we will recognize revenue from product candidate sales or royalties. A large portion of our expenses are fixed, including expenses related to facilities, equipment, and personnel. In addition, we expect to spend significant amounts to fund research and development and to enhance our core technologies. As a result of our operating expenses, we will need to generate significant additional revenue to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a consistent basis.

We are a biopharmaceutical company deploying unproven technologies, and we may never be able to develop, obtain regulatory approval of, or market any of our product candidates.

Gene-based products are new and rapidly evolving medical approaches, which have not been shown to be effective on a widespread basis. Only a limited number of gene-based products have been successfully developed and commercialized to date. In addition, no gene therapy product has received regulatory approval in the U.S. None of our product candidates have been approved for sale in the U.S. or elsewhere. Gene-based products may be susceptible to various risks, including undesirable and unintended side effects from genes or the delivery systems, unintended immune responses, inadequate therapeutic efficacy, or other characteristics that may prevent or limit their approval or commercial use. Successful products require significant development and investment, including a lengthy and uncertain period of testing to show their safety and effectiveness before their regulatory approval or commercialization. We have not proven our ability to develop, obtain regulatory approval of, or commercialize gene-based medicines or vaccines. In this regard, although we had previously announced encouraging preliminary clinical results for TNFerade, on March 29, 2010 we announced that we discontinued our Phase 3 clinical study of TNFerade in patients with locally advanced pancreatic cancer because an interim analysis of clinical data indicated that the trial would not meet its primary endpoint. While TNFerade has been studied for the treatment of other cancers, there are no trials currently ongoing, and we have not determined when or if we will pursue development of TNFerade for these other cancers, either on our own or with a collaborator. Neither we nor our collaborators may be able to successfully select those genes or antigens with the most potential for commercial development.

If we or our collaborators fail to adequately show the safety and efficacy of our product candidates, we will not be able to obtain FDA approval of our product candidates.

We face the risk of failure involved in developing therapies based on new technologies and the difficulties generally associated with drug development. Neither we nor our collaborators currently have any of our product candidates in clinical trials. Significant additional research and animal testing, referred to as preclinical testing, will need to be conducted before any of our product candidates currently under active development can advance to clinical trials. It may take us many years to complete preclinical testing or trials, and we expect that doing so will be dependent on our ability to enter into collaborations. Drug development is an uncertain scientific and medial endeavor, and failure could occur at any stage of development. Acceptable results in early testing or trials might not be repeated later. Not all products in preclinical testing or early stage clinical trials will become approved products, and historically there is a high rate of attrition for product candidates in preclinical and clinical trials due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables. Before an application can be filed with the FDA for product approval, we or our collaborators must show that a particular product candidate is safe and effective. Even with respect to

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product candidates that advance to clinical trials, we or our collaborators must demonstrate the safety and efficacy of those product candidates before FDA approval can be secured. The failure to adequately show the safety and effectiveness of our product candidates would prevent FDA approval of our products. Any one of our product candidates could fail at any time, as clinical development of drug candidates presents numerous unpredictable and significant risks and is very uncertain at all times prior to regulatory approval by the FDA or health authorities in other major markets.

Because regulatory approval must be obtained to market our products in the United States and in non-U.S. jurisdictions, we cannot predict whether or when our products will be commercialized; failure to comply with applicable regulations can also harm our business and operations.

The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether we or our collaborators will obtain regulatory approval for any of our products. No one can market a pharmaceutical product in the United States until it has completed rigorous preclinical testing, clinical trials, and an extensive regulatory approval process implemented by the FDA. To date, the FDA has not approved a gene therapy product for sale in the United States. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity, and novelty of the product, and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling, and promotion of drugs for human use. Before commencing clinical trials, an Investigational New Drug application (IND) must be submitted to the FDA and approval of the IND must be received from the FDA. Clinical trials are subject to continuing oversight by Institutional Review Boards (IRB) and the FDA. Clinical trials are also subject to:

Informed consent;
Good clinical practices (GCP) regulations; and
Potential suspension or termination by the company conducting the clinical trial, the IRB, or the FDA at any time if, among other reasons, it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND or the conduct of these trials.

Delays or rejections in the regulatory approval process may be encountered because of additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials, and FDA regulatory review. For instance, the FDA Amendments Act of 2007 imposed additional obligations on pharmaceutical companies and delegated more enforcement authority to the FDA in the area of drug safety. Key elements of this legislation give the FDA new authority to: (1) require companies conduct post-marketing safety studies of drugs, (2) impose certain drug labeling changes relating to safety, (3) mandate risk mitigation measures such as the education of healthcare providers and the restricted distribution of medicines, and (4) require companies to publicly disclose data from clinical trials.

Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production, or injunction, as well as other regulatory action against our product candidates or us. If regulatory approval of a product is granted, this approval will be limited to those disease indications for which the product has shown through clinical trials to be safe and effective. Even if approved, a product may not be approved for the indications that are necessary or desirable for successful commercialization or the FDA may impose restrictions on distribution of the product that may materially impact our operations. The FDA also strictly regulates promotion and labeling after approval. Outside the United States, the ability to market a product is contingent upon receiving clearances from the appropriate regulatory authorities. This non-U.S. regulatory approval process includes risks similar to those associated with FDA clearance described above and is subject to the independent judgments, policies, priorities and decisions of the applicable regulatory authorities, which may differ from those of the FDA.

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A central aspect of our business strategy is to enter into collaborations with other companies to develop, obtain regulatory approval of, and commercialize our potential products, and if we are unable to find collaborators or sustain existing relationships, we may not be able to develop, test, and commercialize our products.

A central aspect of our business strategy is to enter into collaborations to support the development of our pipeline of products in hearing loss, oncology, and vaccines. In addition to our existing collaborations, we are engaged in seeking or intend to seek strategic collaborations with corporate partners for our existing programs, including: vaccines against RSV and HSV-2, and TNFerade for the treatment of cancer.

If we are not able to enter into and sustain collaboration agreements, we would need to develop additional capabilities in testing, manufacturing, marketing and sales of products, among other areas, and we would need to raise additional funds for the development, testing, and commercialization of our product candidates. If we are not able to enter into successful collaborations or obtain additional funds through other means, we would have to delay or curtail the development and commercialization of certain product candidates.

Similarly, if we are not able to enter into and sustain collaboration agreements with corporate partners who have expertise in testing and commercialization of product candidates, we would need to develop additional capabilities, which would also require additional funds.

We intend to continue to seek support for our funded contracts and collaborations for the development of new vaccines, but our existing agreements are subject to termination and uncertain future funding and there is no certainty that we will be able to enter into new agreements.

In addition to corporate collaborations, we have entered into agreements with government agencies, such as the NIAID, the DHS, the USDA, and the NMRC, to support our vaccine research. These agreements have historically accounted for a substantial portion of our revenues, and we intend to continue entering into these agreements in the future. Our business strategy is partially dependent on maintaining funding from these types of collaborations, as well as, the continued performance by these government agencies of their responsibilities under these agreements. The ability of government agencies to perform under these agreements is dependent upon adequate continued funding of the agencies and their programs. We have no control over the resources and funding government agencies may devote to these agreements, which may be subject to annual renewal and which generally may be terminated by the government agencies at any time. Any significant reductions in the funding of U.S. government agencies or in the funding areas targeted by our business could materially and adversely affect our business, results of operations, and financial condition. If we fail to satisfy our contractual obligations to deliver in the manner required by the agreement, the applicable Federal Acquisition Regulations allow the government to cancel the agreement in whole or in part, and we may be required to perform corrective actions, including but not limited to delivering to the government any uncompleted or partially completed work. The performance of these corrective actions could have a material adverse impact on our financial results in the period or periods affected. Government agencies may fail to perform their responsibilities under these agreements, which could materially impact our financial results.

In addition, our contract related costs and fees, including allocated indirect costs, are subject to audits and adjustments by negotiation between us and the U.S. government. As part of the audit process, the government audit agency verifies that all charges made by a contractor against a contract are legitimate and appropriate. Audits may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees. Any audits of our contract related costs and fees could result in material adjustments to our revenues. In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal year basis even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded and additional funds are normally committed to the contract by the procuring agency as appropriations are made by Congress for future fiscal years. Any failure of such agencies to continue to fund such contracts could have a material adverse effect on our business, results of operations, and financial condition.

We apply for and have received funding from government agencies under Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) grants. Eligibility of public companies to receive

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such grants is based on size and ownership criteria that are under review by the Small Business Administration (SBA). As a result, our eligibility may change in the future and additional funding from this source may not be available.

We depend, and anticipate depending further, on corporate collaborators for the development of our product candidates.

When we sign a collaboration agreement, license agreement or similar agreement with a collaborator to develop a product candidate, we will generally expect them to further the development of the product candidate, which could include the design and conduct of clinical trials, the preparation and filing of documents necessary to obtain regulatory approval, and the manufacturing, sale, marketing and other commercialization of the product if it obtains regulatory approval. We may also grant the collaborator certain rights. For example, under the terms of our collaboration agreement with Novartis, we granted Novartis certain exclusive, worldwide rights in specified intellectual property related to our atonal gene program and atonal adenovectors, as well as non-exclusive, world-wide rights to certain other intellectual property related to our hearing loss and balance disorders program and our adenovector platform related to the atonal gene. Novartis has the right to develop and commercialize any products related to the licensed intellectual property. Our dependence on a corporate collaborator, such as Novartis, subjects us to a number of risks, including:

We may not be able to control the amount and timing of resources that the collaborator devotes to the development or commercialization of product candidates or to their marketing and distribution;
The collaborator may not be successful in its efforts to obtain regulatory approvals in a timely manner, or at all;
The collaborator may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
The collaborator may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
Changes in the collaborator’s business strategy may also adversely affect its willingness or ability to complete its obligations under any arrangement;
Our agreement with the collaborator may fail to provide us with significant protection, or may not be effectively enforced, if a collaborator fails to perform;
The collaboration may be terminated or allowed to expire, which would delay the development and may increase the cost of developing our product candidates;
The collaborator could have the ability to unilaterally terminate agreements, or have extension or renewal rights, in instances that we believe are not commercially reasonable or consistent with our current business strategy; and
The collaborator may not be able to pay us as expected.

Given these risks, the success of our current and future collaborations is highly unpredictable and can have a substantial negative or positive impact on our business. If our collaborations fail, our product development or commercialization of product candidates could be delayed or cancelled, which would negatively impact our business, results of operations and financial condition.

Collaborations might produce conflicts that could delay or prevent the development or commercialization of our potential product candidates and negatively impact our business and financial condition.

An important part of our strategy involves conducting multiple product development programs. We may pursue opportunities in fields that conflict with those of our collaborators. In addition, disagreements with our collaborators could develop over rights to our intellectual property or rights to technology developed with our collaborators. The resolution of such conflicts and disagreements may affect ownership of intellectual property that we believe we are entitled to. In addition, any disagreement or conflict with our collaborators could

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reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators. Such a conflict or disagreement could also lead to delays or termination of collaborative research, development, regulatory approval, or commercialization of various products or could require or result in litigation or arbitration, which would be time consuming, expensive, lead to a diversion of management attention and resources and could have a significant negative impact on our business, financial condition, and results of operations.

Our collaboration agreements may prohibit us from conducting research in areas that may compete with our collaboration products, while our collaborators may not be limited to the same extent. This could negatively affect our ability to develop products and, ultimately, prevent us from achieving a continuing source of revenues.

We anticipate some of our corporate or academic collaborators will be conducting multiple product development efforts within each disease area that is the subject of their collaborations with us. In certain circumstances we have agreed not to conduct independently, or with any third party, certain research and development activities that are competitive with the research and development activities conducted under our collaborations. Therefore, our collaborations may limit the areas of research and development we may pursue alone or with others. Some of our collaborators, however, may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of their collaborations with us. In addition, competing products, either developed by the collaborators or to which the collaborators have rights, may result in their withdrawing support for our product candidates.

We do not currently have any late stage clinical trials in our therapeutic product or vaccine development programs; therefore, we do not have any near-term prospects of generating revenues from the commercial sale of our therapeutic or vaccine products.

On March 29, 2010, we announced that we discontinued our Phase 3 clinical study of TNFerade in patients with locally advanced pancreatic cancer because an interim analysis of clinical data indicated that the trial would not meet its primary endpoint. As a result of discontinuing this trial, we no longer have a late-stage clinical development candidate. While TNFerade has been studied for the treatment of other cancers, there are no ongoing trials, and we have not determined when or if we will pursue development of TNFerade for these other cancers, either on our own or with a collaborator. We do not have any other therapeutic or vaccine late stage clinical programs. Accordingly, we do not have any near-term prospects of generating revenues from the commercial sale of our product candidates in our therapeutic or vaccine programs.

Agreements with government agencies may lead to claims against us under the Federal False Claims Act, and these claims could result in substantial fines and other penalties.

The biopharmaceutical industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions. Our agreements with the U.S. government are subject to substantial financial penalties under the Federal Civil Monetary Penalties Act and the Federal Civil False Claims Act. Under the False Claims Act’s “whistleblower” provisions, private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits, known as qui tam actions, may be filed by private individuals, including present and former employees. The False Claims Act statute provides for treble damages and up to $11,000 per false claim. If our operations are found to be in violation of any of these laws, or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment, or restructuring of our operations could adversely affect our ability to operate our business and our financial results.

We or our collaborators may experience delays in conducting our clinical trials.

Even in the event that one or more of our product candidates advance to clinical trials, those clinical trials may be delayed or prematurely terminated by many factors, including: (i) limited number of, and competition for, suitable patients for the particular clinical trial; (ii) slower than expected rate of patient recruitment and

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enrollment; (iii) failure of patients to complete the trial; (iv) inability to obtain sufficient quantities of acceptable materials for use in clinical trials; (v) delay or failure in reaching agreement on contract terms with prospective study sites or other third-party vendors who are supporting our clinical trials; (vi) inability to reach agreement with the FDA on a trial design that we are able to execute; (vii) difficulty in adequately following up with patients after treatment; and (viii) changes in laws, regulations, regulatory policy, or clinical practices. Our ability to enroll appropriate patients for any of our clinical trials also may be adversely affected by trials being conducted by our competitors for similar disease indications. The failure of any clinical trials to meet applicable regulatory standards, or the standards of the relevant reviewing bodies could cause such trials to be delayed, suspended or terminated, which could further delay the development of any of our product candidates. Any such delays increase our product development costs, with the possibility that we could run out of funding. Delays in one clinical trial also can adversely affect our ability to launch clinical trials for similar or different indications. Consequently, if such delays are significant they could negatively affect our financial results and the commercial prospects for our products.

Additionally, clinical trials may be suspended or terminated at any time by the FDA, an IRB, other regulatory authorities, or by us for a variety of reasons, including safety. Any failure or significant delay in completing clinical trials for our product candidates could harm our financial results and commercial prospects for our product candidates.

Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, and the FDA may not agree with our interpretations, which could delay, limit, or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a trial to be delayed or repeated or a program to be terminated.

If successful large-scale manufacturing of gene-based medicines is not possible, we or our collaborators may be unable to manufacture enough of our product candidates to achieve regulatory approval or market our products.

Few companies to date have shown successful large-scale manufacturing of gene-based medicines, each of which has had significantly more resources than we and it is anticipated that significant challenges will be faced in the scale-up of our manufacturing process for commercial production. There are a limited number of contract manufacturers qualified to perform large-scale manufacturing of gene-based medicines. We or our collaborators may be unable to manufacture commercial-scale quantities of gene-base medicines or receive appropriate government approvals on a timely basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a timely basis or at all would prevent us from achieving our business objectives.

If regulatory approvals are not obtained for a manufacturing facility for our products, we may experience delays, be unable to meet demand, and may lose potential revenues.

Completion of our clinical trials and commercialization of our product candidates require access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We have limited experience manufacturing any of our gene-based products in the volumes that will be necessary to support large-scale clinical trials or commercial sales, and we expect that we will rely on our collaborators for manufacturing capabilities.

Before we or our collaborators can begin commercial manufacturing of any of our product candidates, we or our collaborators must obtain regulatory approval of the manufacturing facility and process. Manufacturing of our proposed products must comply with the FDA’s current Good Manufacturing Practices (cGMP) requirements and non-U.S. regulatory requirements. The cGMP requirements govern quality control and documentation policies and procedures. In complying with cGMP and non-U.S. regulatory requirements, we will be obligated to expend time, money, and effort in production, record keeping, and quality control to assure the product meets applicable specifications and other requirements. We or our collaborators must also pass a preapproval inspection before FDA approval. Significant capital will likely need to be expended on the development of manufacturing capacity for a product candidate even before we know if the FDA will approve the product for commercialization. Furthermore, if we or our collaborators fail to comply with these requirements, our product candidates would not be approved. If we or our collaborators fail to comply with

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these requirements after approval, we would be subject to possible regulatory action (including warning letters, restrictions on the product, product recalls, suspension or withdrawal of approval, seizures, injunctions, civil fines, and criminal sanctions), and we may be limited in the jurisdictions in which we are permitted to sell our products. The FDA and non-U.S. regulatory authorities also have the authority to perform unannounced periodic inspections of our manufacturing facility to ensure compliance with cGMP and non-U.S. regulatory requirements.

We rely on a limited number of suppliers for some of our manufacturing materials. Any problems experienced by any of these suppliers could negatively impact our operations.

We rely on third-party suppliers and vendors for some of the materials used in the manufacture of our product candidates. Some of these materials are available from only one supplier or vendor. For supply of early clinical trial materials, we rely on one supplier, Life Technologies Corporation, for its cell culture medium and another supplier, Lonza, for custom buffers. The cell culture medium is used to grow the cells within which our product candidates are produced. We do not currently have supply agreements with any of these suppliers. Any significant problem experienced by one of our suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. We have limited experience with alternative sources of raw materials. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations.

We face substantial competition from other companies and research institutions that are developing products to treat the same diseases that our product candidates target, and we may not be able to compete successfully.

We compete with pharmaceutical and biotechnology companies pursuing other forms of treatment for the diseases our product candidates target. We may also face competition from companies that may develop competing technology internally or acquire it from the government, universities, and other research institutions. As these companies develop their technologies, they may develop proprietary positions, which may prevent or limit our product commercialization efforts.

Some of our competitors are established companies with greater financial and other resources than ours. Our competitors may succeed in:

Identifying important genes or delivery mechanisms before we do;
Developing products or product candidates earlier than we do;
Forming collaborations before we do or precluding us from forming collaborations with others;
Obtaining approvals from the FDA or other regulatory agencies, for such products more rapidly than we do;
Developing and validating manufacturing processes more rapidly than we do;
Obtaining patent protection to other intellectual property rights that would limit or preclude our ability to use our technologies or develop products; or
Developing products that are safer or more effective than those we develop or propose to develop.

While we seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us.

In addition, with the March 2010 enactment of the BPCIA, our products may face competition from “biosimilar” products that are approved via an abbreviated process on the basis of a showing that the product is similar to our approved product. The BPCIA provides periods of exclusivity during which abbreviated applications may not be submitted to, or approved by, FDA, but the statute then allows approval by an abbreviated pathway and, if certain standards are met, a finding by FDA that the biosimilar product is interchangeable with the reference product. If competitors are able to obtain marketing approval for biosimilars under an abbreviated regulatory approval process in the U.S. or Europe, our products may become

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subject to additional competition with the attendant pricing pressure. We also could face increased litigation with respect to the validity and/or scope of patents relating to our products.

If we are unable to adequately protect our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to compete with us.

Our commercial success will depend, in part, on obtaining patent protection for our products and other technologies and successfully defending these patents against third party challenges. Our patent position, like that of other biotechnology firms, is highly uncertain and involves complex legal and factual questions. The laws, rules, and regulations affecting biotechnology patent protection in the U.S. and other countries are uncertain and are currently undergoing review and revision. Changes in, or different interpretations of, patent laws in the U.S. and other countries might allow others to use our discoveries or to develop and commercialize our products without any compensation to us.

Our ability to develop and protect a proprietary position based on biotechnological innovations and technologies involving genes and gene delivery systems, methods of use, production, formulations, and the like is particularly uncertain. The U.S. Patent and Trademark Office, as well as patent offices in other countries, have often required that patent applications concerning biotechnology-related inventions be limited or narrowed substantially. Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. In addition, other companies or institutions possess issued patents and have filed and will file patent applications that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene therapy products that are the same as or similar to the subject matter of our patent applications. For example, while we have pending patent applications pertaining to particular adenovectors that cannot reproduce themselves and adenovectors modified to alter cell binding characteristics, we are aware of issued patents and pending patent applications of other companies and institutions relating to the same subject matter. Patents and patent applications of third parties may have priority over our issued patents and our pending or yet to be filed patent applications. Proceedings before the U.S. Patent and Trademark Office and other patent offices to determine who properly lays claim to inventions are costly and time consuming, and we may not win in any such proceedings.

The issued patents we already have or may obtain in the future may not provide commercially meaningful protection against competitors. Other companies or institutions may challenge our or our collaborators’ patents in the United States and in other countries. In the event a company, institution, or researcher infringes upon our or our collaborators’ patent rights, enforcing these rights may be difficult, expensive, and/or time consuming, with no guarantee that our or our collaborators’ patent rights will be upheld. Others may be able to design around these patents or develop unique products providing effects similar to our products. In addition, our competitors may legally challenge our patents and they may be considered invalid. In addition, various components used in developing gene therapy products, such as particular genes, vectors, promoters, cell lines, and construction methods, used by others and by us, are available to the public. As a result, we are unable to obtain patent protection with respect to such components, and third parties can freely use such components. Third parties may develop products using such components that compete with our potential products. Also, with respect to some of our patentable inventions, we or our collaborators have decided not to pursue patent protection outside the United States. Accordingly, our competitors could develop, and receive non-U.S. patent protection for, gene therapies or technologies for which we or our collaborators have or are seeking U.S. patent protection. Our competitors may be free to use these gene therapies or technologies outside the U.S. in the absence of patent protection.

We also rely to a limited extent on trade secrets to protect our technology. However, trade secrets are difficult to protect. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent the disclosure or use of our trade secrets. In addition, other companies or institutions may independently develop substantially equivalent information and techniques.

If our potential products conflict with intellectual property rights of competitors, universities, or others, then we may be prevented from developing those product candidates.

Other companies and institutions have issued patents and have filed or will file patent applications that may issue into patents that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene and gene-based therapy products used in or similar to our product candidates and technologies. For

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example, we are aware of issued patents and pending patent applications relating to gene delivery for oncology applications, including through the use of adenovectors. It could be alleged that our development of our TNFerade oncology product candidate conflicts with these patents. We also are aware of other issued patents and pending patent applications that relate to various aspects of our manufacture of our product candidates and systems, including TNFerade, and it could be alleged that our manufacture of these product candidates conflicts with these patents. We have not conducted freedom to use patent searches on all aspects of our product candidates or potential product candidates, and we may be unaware of relevant patents and patent applications of third parties. In addition, the freedom to use patent searches that have been conducted may not have identified all relevant issued patents or pending patent applications that could issue into patents, particularly in view of the characterizations of the subject matter of issued patents and pending patent applications, as well as the fact that pending patent applications can be maintained in secrecy for a period of time and, in some circumstances, until issuance as patents.

An issued patent gives rise to a rebuttable presumption of validity under U.S. law and under the laws of some other countries. The holder of a patent to which we or our collaborators do not hold a license could bring legal actions against our collaborators or us for damages or to stop us or our collaborators from using the affected technology, which could limit or preclude our ability to develop and commercialize our product candidates. If any of our potential products are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to develop and commercialize the potential products or, at the discretion of the competitor or third party, to stop development and commercialization of the potential products. Since we have concentrated our resources on developing only a limited number of products, the inability to market one of our products would disproportionately affect us as opposed to a competing company with many products in development.

We believe there will be significant litigation in our industry regarding intellectual property rights. Many of our competitors have expended and are continuing to expend significant amounts of time, money, and management resources on intellectual property litigation. If we become involved in litigation, it could consume a substantial portion of our resources and could adversely affect our business, financial condition, and results of operations, even if we ultimately are successful in such litigation, in view of our limited resources.

If we lose our rights to use intellectual property we license from others, or those rights are not enforceable, then our ability to develop and commercialize our product candidates will be harmed.

We rely, in part, on licenses to use some technologies material to our business. For example, to create our product candidates we combine our adenovectors with genes intended to produce therapeutic proteins. In most instances we do not own the patents or patent applications that cover these genes and certain methods of use thereof which underlie these licenses. For these genes, we do not control the enforcement of the patents. We rely upon our licensors to properly prosecute and file those patent applications and defend and enforce any issued patents.

While many of the licenses under which we have rights provide us with exclusive rights in specified fields, the scope of our rights under these and other licenses may be subject to dispute by our licensors or third parties. In addition, our rights to use these technologies and practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the license agreement or in certain other circumstances. In addition, some of our licenses require us to achieve specific development milestones.

The legal proceedings to obtain, enforce, and defend patents, and litigation of third-party claims of intellectual property infringement could require us to spend money and could impair our operations.

Our success will depend, in part, on our ability to obtain patent protection for our products and processes, both in the United States and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and can involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields.

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Protecting intellectual property rights can be expensive and time consuming. Litigation may be necessary to enforce patents issued to us or to determine the scope and validity of third party proprietary rights. Moreover, if a competitor were to file a patent application claiming technology also invented by us, we would have to participate in an interference proceeding before the U.S. Patent and Trademark Office to determine the priority of invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to challenge third-party patent rights to allow us or our licensees to commercialize products based on our technologies. Litigation could result in substantial costs and diversion of management efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed, or require us to cease using some technologies.

Our products and processes may infringe, or be found to infringe, patents not owned or controlled by us. Patents held by others may require us to alter our products or processes, obtain licenses, or stop activities. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patent. In addition, we may be required to obtain licenses, redesign our products or processes to avoid infringement, or pay money damages. As a result, our business may suffer if we are not able to obtain licenses at all or on commercially reasonable terms to us or we are required to redesign our products or processes to avoid infringement.

Adverse events in the field of gene therapy may negatively affect regulatory approval or public perception of our products or product candidates.

Most of our product candidates under development could be broadly described as recombinant DNA therapies. A number of clinical trials are being conducted by other biotechnology and pharmaceutical companies involving related therapies, including compounds similar to, or competitive with, our product candidates. The announcement of adverse results from these clinical trials, such as serious adverse events and unexpected side effects attributable to the treatment, or any response by the FDA or other similar regulatory authority to such clinical trials, may impede the timing of our clinical trials, delay or prevent us from obtaining regulatory approval, impede our ability to secure additional funding, or negatively influence public perception of our product candidates. As a result, these conditions could harm our business and results of operations and depress the value of our stock.

The commercial success of our product candidates will depend, in part, on public acceptance of the use of gene therapies for the prevention or treatment of human disease. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapy products and could cause a decrease in the demand for any products we may develop.

Our product candidates involve new technologies and therapeutic approaches in the field of gene therapy, which is a new and evolving field. As discussed above, no gene therapy product has received regulatory approval in the U.S., and adverse events in this field may negatively affect public perception of our product candidates. Even if our product candidates attain regulatory approval, our success will depend upon the medical community, patients, and third-party payers accepting gene therapy products in general, and our product candidates in particular, as medically useful, cost-effective, and safe. In particular, our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments they are already familiar with and for which greater clinical data may be available. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend our products for a variety of reasons, including the reimbursement policies of government and third-party payers. Furthermore, third-party payers, such as health insurance plans, may be reluctant to authorize and pay for new forms of treatment they may deem expensive and less proven than existing treatments. Even if gene therapy products, and our product candidates in particular, are accepted by the medical community and third-party payers, the public in general, or patients in particular, may be uncomfortable with new therapies, including our product candidates and it could take substantial time for them to accept gene therapy products as a viable treatment alternative, if ever. If gene therapy and our product candidates do not gain widespread acceptance, we may be unable to generate significant revenues, if any, which would adversely affect our results of operations. In addition, even if our product candidates achieve market acceptance, we may not be

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able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our product candidates or that render them obsolete.

We use hazardous chemicals and radioactive and biological materials in our business; any liability or disputes relating to improper handling, storage, or disposal of these materials could be time consuming and costly.

Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials, and also produce hazardous waste products. Hazardous chemicals used in our processes include, but are not limited to, flammable solvents such as methanol and ethanol, toxic chemicals such as ethidium bromide and formaldehyde, and corrosive chemicals such as acetic acid and sodium hydroxide. We also use several radioactive compounds, including phosphorous-32, carbon-14, sulfur-35, phosphorous-33, iodine-125, hydrogen-3, and chromium-51.

Hazardous biological materials used in our research and development activities include human and animal cell lines and viruses, such as adenoviruses and animals infected with human viruses. Some of the biological material may be novel, including viruses with novel properties. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling, and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets.

Although we have general liability insurance, these policies contain exclusions from insurance against claims arising from pollution from chemical or radioactive materials. Our collaborators are working with these types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. Although we believe we are currently in compliance with all applicable environmental and occupational health and safety regulations, compliance with environmental laws and regulations may be expensive and current or future environmental regulations may impair our research, development, or production efforts.

Our revenue is exclusively derived from our collaboration agreements, which can result in significant fluctuation in our revenue from period to period, and our past revenue is therefore not necessarily indicative of our future revenue.

Our revenue is exclusively derived from our collaboration agreements with corporate and government partners, under which we may receive grants, milestone payments based on clinical progress, regulatory progress or net sales achievements, royalties, manufacturing revenue or payment for our development activities on behalf of third parties. Significant variations in the timing of receipt of cash payments and our recognition of revenue can result from the timing of clinical, regulatory or sales events which result in milestone payments and the timing and success of the commercial launch of new products by our collaboration partners. The amount of our revenue derived from collaboration agreements in any given period will depend on a number of unpredictable factors, including our ability to find and maintain suitable collaboration partners, the timing of the negotiation and conclusion of collaboration agreements with such partners, whether and when we or our collaboration partner achieve clinical, regulatory and sales milestones, whether the collaboration is exclusive or whether we can seek other partners, the timing of regulatory approvals in one or more major markets and the market introduction of new products or generic versions of the approved product, as well as other factors.

If third party payers do not provide payment or reimbursement for our products, those products will not be widely accepted, which would have a negative impact on our business, results of operations and financial conditions.

Even if a product of ours receives regulatory approval, our success will depend, in part, on the extent to which reimbursement will be available from third party payers such as government health administration authorities, private health insurers, managed care programs, and other organizations. Third party payers are

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increasingly challenging the price and cost-effectiveness of medical products and services, and that is expected to continue. Therefore, significant uncertainty exists as to the pricing approvals for, and the payment or reimbursement status of, newly approved healthcare products. Additional federal or state health care legislation may be adopted in the future and any products that we seek to commercialize may not be considered cost-effective and limitations on the amount of reimbursement for our products could be imposed. Adequate third party insurance coverage may not be available for us to establish and maintain price levels that are sufficient for realization of an appropriate return on our investment in product development. Moreover, the existence or threat of cost control measures, including a reduction in reimbursement rates could cause potential corporate collaborators to be less willing or able to pursue research and development programs related to our product candidates. We cannot be certain that, if and when our products become commercialized, the pertinent reimbursement amounts or formulary status for our products will be sufficient to enable us to market and sell our products.

Our business involves animal testing and changes in laws, regulations, accepted clinical procedures, or social pressures could restrict our use of animals in testing and adversely affect our research and development efforts.

Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations, or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us or our partners by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts.

In addition, preclinical animal studies conducted by us or third parties on our behalf may be subject to the United States Department of Agriculture regulations for certain animal species. Failure to comply with applicable regulations could extend or delay clinical trials conducted for our drug candidates.

Our common stock is at risk for delisting from the NASDAQ Stock Market. If it is delisted, our stock price and the liquidity of our common stock would be impacted.

On May 12, 2010, we received a notice from the Nasdaq Stock Market (NASDAQ) stating that the minimum bid price of our common stock was below $1.00 per share for 30 consecutive business days and that we were therefore not in compliance with the minimum bid price requirement for continued listing set forth in Marketplace Rule 5450. The notification letter stated that we would be afforded 180 calendar days, or until November 8, 2010, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock would have had to meet or exceed $1.00 per share for at least ten consecutive business days during the 180 calendar day grace period. In order to obtain additional time to seek to regain compliance with the minimum bid price requirement, on November 1, 2010 we applied to transfer our common stock to the NASDAQ Capital Market, and such transfer was declared effective as of November 8, 2010. On November 9, 2010, NASDAQ notified us that we would have an additional 180 days, or until May 9, 2011, to regain compliance with the minimum bid price rule while listed on the NASDAQ Capital Market. NASDAQ may, in its discretion, require our common stock to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that we have demonstrated an ability to maintain long-term compliance. If we do not regain compliance with the minimum bid price requirement by May 9, 2011, NASDAQ will provide written notification to us that our common stock will be delisted. At that time, we may appeal NASDAQ’s delisting determination to a NASDAQ Listing Qualifications Panel.

Delisting from NASDAQ would adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest, and fewer business development opportunities.

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We are seeking stockholder approval of a reverse stock split of our common stock for the purpose of maintaining the listing of our common stock on the NASDAQ Capital Market, but we may not obtain stockholder approval or it may not have the desired result.

We have scheduled a special meeting of our stockholders to seek stockholder approval of a reverse stock split of our common stock for the purpose of raising the per share trading price of our common stock and maintaining the listing of our common stock on the NASDAQ Capital Market. However, there is no assurance that our stockholders will approve the reverse stock split, or even if they do, that it will have the desired result and that we will be able to maintain our listing on the NASDAQ Capital Market. Even if we effect the reverse stock split and maintain our listing, our stock may still have a relatively low trading price, which could hinder our ability to attract institutional or other potential investors. Furthermore, the price per share of our common stock after the reverse stock split may not reflect the reverse stock split and the price per share following the effective time of the reverse stock split may not be maintained for any period of time following the reverse stock split. For example, based on the closing price of our common stock on February 18, 2011 of $0.48 per share, if the one-for-ten reverse stock split was implemented, there can be no assurance that the post-split trading price of our common stock would be $4.80, or even that it would remain above the pre-split trading price. In many cases, the market price of a company’s shares declines after a reverse stock split. Accordingly, the total market capitalization of our common stock following a reverse stock split may be lower than before the reverse stock split. Similarly, the trading liquidity of the Company’s common stock could be adversely affected by the reduced number of shares outstanding after a reverse stock split.

Our stock price could continue to be highly volatile and investors may not be able to resell their shares at or above the price they paid for them.

The market price of our common stock, like that of many other life sciences companies, has been and is likely to continue to be highly volatile. During 2010, our stock price ranged from $0.44 to $3.17. The following factors, among others, could have a significant impact on the market price of our common stock:

Results of our preclinical studies and future clinical trials or announcements regarding our plans for future studies or trials, or those of our competitors;
Evidence or lack of evidence of the safety or efficacy of our potential products or those of our competitors;
Announcement by us or our competitors of technological innovations or new products;
Developments concerning our patent or other proprietary rights or those of our competitors, including litigation and challenges to our proprietary rights;
Geopolitical developments, natural or man-made disease threats, or other events beyond our control;
U.S. and foreign governmental regulatory actions;
Changes or announcements in reimbursement policies;
Period-to-period fluctuations in our operating results;
Market conditions for life science stocks in general;
Changes in the collective short interest in our stock;
Changes in estimates of our performance by securities analysts; and
Our cash balances, need for additional capital, and access to capital.

We are at risk of securities class action litigation due to our expected stock price volatility.

In the past, stockholders have brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because of the decline in our share price since the discontinuation of the PACT trial and because life science companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. To date, we have not been subject

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to class action litigation. However, in the future we may be the target of this litigation. Securities litigation could result in substantial costs, divert our management’s attention and resources, and could seriously harm our business.

We depend on our key technical and management personnel to advance our technology, and the loss of these personnel could impair the development of our products.

We rely, and will continue to rely, on our key management and scientific staff, all of whom are employed at will. The loss of key personnel or the failure to recruit necessary additional qualified personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions, and other organizations for qualified personnel. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. If we do not succeed in retaining and recruiting necessary personnel or developing this expertise, our business could suffer significantly.

We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:

Establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new majority of the board;
Authorizing the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt;
Prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
Limiting the ability of stockholders to call special meetings of the stockholders;
Prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and
Establishing 90 to 120 day advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at stockholder meetings.

We have adopted a stockholder rights plan that may discourage, delay, or prevent a merger or acquisition that is beneficial to our stockholders.

In November 2001, our Board of Directors adopted a stockholder rights plan that may have the effect of discouraging, delaying, or preventing a merger or acquisition beneficial to our stockholders by diluting the ability of a potential acquirer to acquire us. Pursuant to the terms of our plan, when a person or group (except under certain circumstances) acquires 20 percent or more of our outstanding common stock or ten business days after commencement or announcement of a tender or exchange offer for 20 percent or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 20 percent or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirer’s rights would not become exercisable for our shares of common stock at a discount, the potential acquirer would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may

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deter a potential acquirer from acquiring us. As a result, either by operation of the plan or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.

The issuance of debt or equity securities could adversely affect our common stockholders.

We have historically raised capital through the issuance of equity securities, and in the future we expect to issue either debt or equity securities to raise additional capital. We have on file an effective shelf registration statement that allows us to raise up to $150.0 million from the sale of common or preferred stock or warrants for the purchase of common or preferred stock. We may also choose to issue either debt or equity securities in offerings not made pursuant to our shelf registration statement. The issuance of debt or equity securities could adversely affect the voting power of holders of our common stock, and reduce the likelihood that our common stockholders will receive dividend payments and payments upon liquidation. The issuance of debt or equity securities could also decrease the market price of our common stock or have terms and conditions that could discourage a takeover or other transaction that might involve a premium price for our shares or that our stockholders might believe to be in their best interests.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We currently lease 42,900 square feet for our corporate offices and research and development laboratories located at 65 West Watkins Mill Road in Gaithersburg, Maryland. The term of the lease expires on October 31, 2014. We have additional space within our Gaithersburg, Maryland facilities that can be utilized to accommodate future growth. We currently believe the Gaithersburg facility is sufficient to meet our present needs.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

ITEM 4. REMOVED AND RESERVED

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since our initial public offering of common stock on December 12, 2000, our common stock has been traded in the over-the-counter market and is included for quotation on the NASDAQ Global Market under the symbol GNVC. Set forth below is the range of high and low closing sale prices for our common stock as reported on the NASDAQ Global Market through November 7, 2010 and on the NASDAQ Capital Market as of November 8, 2010, for the two most recent years:

   
  HIGH   LOW
First Quarter 2010   $ 3.17     $ 0.78  
Second Quarter 2010   $ 0.76     $ 0.4465  
Third Quarter 2010   $ 0.65     $ 0.44  
Fourth Quarter 2010   $ 0.6150     $ 0.4525  
First Quarter 2009   $ 0.77     $ 0.35  
Second Quarter 2009   $ 1.09     $ 0.42  
Third Quarter 2009   $ 0.90     $ 0.64  
Fourth Quarter 2009   $ 1.20     $ 0.74  

As of February 28, 2011, there were approximately 168 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (DTC), which is the single record holder for shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners.

We have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future. We did not repurchase any of our equity securities during the last fiscal year.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

STOCK PERFORMANCE GRAPH

The following graph shows the cumulative total return to our stockholders for our Common Stock from December 31, 2005 through December 31, 2010 as compared to an overall stock market index, the NASDAQ Composite Index, and a peer group index, the NASDAQ Pharmaceutical Index. The returns were calculated assuming $100 was invested on December 31, 2005 in our Common Stock and in each index and all dividends were reinvested. No cash dividends have been declared on our Common Stock. The information contained in the Stock Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any past or future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate it by reference into any such filing.

The following graph is presented in accordance with Securities and Exchange Commission requirements. Stockholders are cautioned against drawing any conclusions from the data contained therein, as past results are not necessarily indicative of future performance.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among GenVec, Inc., the NASDAQ Composite Index
and the NASDAQ Pharmaceutical Index

[GRAPHIC MISSING]

* $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

     
  GenVec, Inc.
  NASDAQ
Composite
  NASDAQ
Pharmaceutical
12/31/05   $ 100.00     $ 100.00     $ 100.00  
12/31/06   $ 145.45     $ 111.74     $ 101.61  
12/31/07   $ 89.09     $ 124.67     $ 94.58  
12/31/08   $ 26.06     $ 73.77     $ 87.40  
12/31/09   $ 72.73     $ 107.12     $ 95.29  
12/31/10   $ 33.94     $ 125.93     $ 101.44  

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ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected financial data for each of the years in the five-year period ended December 31, 2010. The information below should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.

         
  YEARS ENDED DECEMBER 31,
SUMMARY STATEMENT OF OPERATIONS:   2010   2009   2008   2007   2006
     (in thousands, except per share data)
Revenue from strategic alliances and research contracts   $ 16,467     $ 13,857     $ 15,121     $ 14,047     $ 18,923  
Operating expenses:  
Research and development     20,936       24,689       33,830       26,030       29,569  
General and administrative     8,152       7,179       7,968       9,349       9,604  
(Gain)/Loss on disposal of assets           (7 )      (3 )      5        
Total operating expenses     29,088       31,861       41,795       35,384       39,173  
Operating loss     (12,621 )      (18,004 )      (26,674 )      (21,337 )      (20,250 ) 
Other income (expense), net     347       (358 )      611       2,629       978  
Net loss   $ (12,274 )    $ (18,362 )    $ (26,063 )    $ (18,708 )    $ (19,272 ) 
Basic and diluted net loss per share   $ (0.10 )    $ (0.19 )    $ (0.31 )    $ (0.25 )    $ (0.30 ) 
Shares used in computing of basic and diluted net loss per share     126,709       97,074       82,779       74,132       64,038  

         
  DECEMBER 31,
SUMMARY BALANCE SHEET DATA:   2010   2009   2008   2007   2006
     (in thousands)
Cash, cash equivalents, and short-term investments   $ 35,170     $ 10,961     $ 17,357     $ 23,660     $ 34,373  
Working capital     31,689       7,002       11,728       17,478       29,880  
Total assets     39,432       13,443       22,767       28,348       40,168  
Current portion of debt                 807       789       754  
Long-term debt, less current portion                       807       1,601  
Accumulated deficit     (244,265 )      (231,991 )      (213,629 )      (187,566 )      (168,858 ) 
Total stockholders' equity     32,420       7,636       13,091       18,110       30,791  

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report. See “Item 1A: Risk Factors” regarding certain factors known to GenVec that could cause reported financial information not to be necessarily indicative of future results, including discussions of the risks related to the development, regulatory approval, manufacture, proprietary protection of our product candidates, and their market success relative to alternative products.

OVERVIEW

GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, Merial, and the U.S. Government to support a portfolio of product programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss, balance disorders, and cancer; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus type 2 (HSV-2), dengue fever, influenza, malaria, and human immunodeficiency virus (HIV). In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).

Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene that causes production of an antigen, which then stimulates the desired immune reaction by the body.

Our research and development activities yield product candidates that utilize our technology platform and we believe represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and development of novel treatments for hearing loss and balance disorders. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

In partnership with our collaborators we have multiple vaccines in development. These programs are funded by third-parties and utilize our core adenovector technology. GenVec has grant-supported preclinical programs to develop vaccine candidates for the prevention of RSV and HSV-2. In addition, we have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to develop a HIV vaccine and an influenza virus vaccine. We also have programs with the U.S. Naval Medical Research Center to develop vaccines for dengue fever and malaria. In the field of animal health, we are working with Merial to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.

Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs.

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An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. However, we believe that we have sufficient operating capital to continue our current research, development and collaborative activities for at least 36 months.

Our research and development expenses were $20.9 million, $24.7 million, and $33.8 million for the years ended December 31, 2010, 2009, and 2008, respectively. These expenses were divided between our research and development platforms in the following manner:

     
  Years ended December 31,
(in millions)   2010   2009   2008
TNFerade   $ 8.1     $ 13.5     $ 21.3  
Vaccines     6.5       10.4       11.6  
Hearing     6.1       0.5       0.1  
Other Clinical Programs     0.2       0.3       0.8  
Total   $ 20.9     $ 24.7     $ 33.8  

TNFerade.  We are evaluating our TNFeradeTM biologic (TNFerade) for use in the treatment of cancer. Using our core adenovector technology, TNFerade stimulates the production of tumor necrosis factor alpha (TNFα), a known anti-tumor protein in cells of the tumor. In March 2010, we discontinued a Phase 3 pivotal trial for first-line treatment of inoperable, locally advanced pancreatic cancer (known as PACT) based on results of an interim analysis. The interim data strongly suggested that the trial would not achieve the statistical significance required to form the basis for approval of a biological license application in the population chosen for study, thereby warranting discontinuing the trial.

TNFerade is also being evaluated for possible use in the treatment of other types of cancer. Clinical trials have been conducted and encouraging results have previously been reported in studies for esophageal cancer, head and neck cancer, rectal cancer, and soft tissue sarcomas.

We believe that identifying an appropriate partner for TNFerade represents the best path forward in the development of the product.

GenVec has incurred $112 million of expenses on the development of this product candidate since the commencement of this program in 1999. Costs since the commencement of this program include research, development, clinical trials, clinical supply costs, and an allocation of corporate general and administrative expenses.

Vaccines.  Under our corporate and government funded vaccine programs, GenVec continues to develop vaccine candidates against malaria, HIV, RSV, HSV-2, and other infectious diseases, as well as an animal health vaccine for FMD. Since commencement of these vaccine development programs in 2002, GenVec has incurred approximately $102 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded under our agreements with our various sponsors. We have recently entered into a collaboration with Merial to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.

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To date, none of our proprietary or collaborative programs has resulted in a commercial product; therefore, we have not received any revenues or royalties from the sale of products. We have funded our operations primarily through public and private placements of equity securities, payments received under collaborative programs with public and private entities, and debt financings.

We have incurred operating losses each year since inception and, as of December 31, 2010, had an accumulated deficit of approximately $244.3 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative activities. Research and development expenses consist primarily of salaries and related personnel costs, sponsored research costs, patent costs, technology access fees, clinical trial costs, and other expenses related to our product development and research programs. General and administrative expenses consist primarily of compensation and benefit expenses for executive, finance and other administrative personnel, facility costs, professional fees, business development costs, insurance premiums, and other general corporate expenditures.

We have taken steps to lower our operating costs in order to increase our efficiency. We expect that lowering costs, in addition to what we expect will be increased revenues in 2011 from funded collaborations, can provide us with at least 36 months of operating capital from the balance sheet date, subject to changes in the progress of our research, development, clinical, manufacturing, and commercialization activities.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates using authoritative pronouncements, historical experience, and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Significant accounting policies are more fully described in Note 2 of the “Notes to Financial Statements” included in this Annual Report on Form 10-K.

We have discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, refer to Note 2 of the “Notes to Financial Statements”.

We believe the following accounting policies to be critical because they require significant estimates or judgment on the part of management:

Revenue Recognition.  Revenue is recognized when all four of the following criteria are met (1) a contract is executed, (2) the contract price is fixed and determinable, (3) delivery of the service or products have occurred, and (4) collectability of the contract amounts is considered probable.

Our collaborative research and development agreements can provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront nonrefundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved in achieving the milestone; and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.

Research and development revenue from cost-reimbursement and cost-plus fixed fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors (e.g. indirect rate estimates) are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted

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to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.

Clinical Trial Expenses and Research and Development Activities.   We accrue estimated costs for clinical and preclinical studies based on estimates of work performed. We believe this method best aligns our expenses with the efforts we expend. We monitor the progress of the trials and their related activities to the extent possible and adjust the accruals accordingly. Adjustments to accruals are charged to expense in the period in which the facts that give rise to the adjustment become known; all adjustments to date have been inconsequential.

The expenditures necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product candidate.

We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

 
Clinical Phase   Estimated
Completion Date
Phase 1     1 – 3 years  
Phase 2     1 – 4 years  
Phase 3     2 – 5 years  

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

The number of patients that ultimately participate in the trial;
The duration of patient follow-up that seems appropriate in view of the results;
The number of clinical sites included in the trials; and
The length of time required to enroll suitable patient subjects.

We test potential product candidates in preclinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

Stock Based Compensation

We account for stock-based compensation based on the estimated grant date fair value of the stock using the Black-Scholes option-pricing model. The estimated grant date fair value is recognized in earnings over the requisite service period.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures.” This ASU amends Topic 820 and related guidance within U.S. GAAP to require disclosure of the transfers in and out of Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases, sales, issuances and settlements and requires more detailed disclosures regarding valuation techniques and inputs. The Company adopted this standard effective January 1, 2010. The adoption of this standard did not have a material impact on the presentation of our financial statements.

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In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Topic 605. This consensus provides accounting principles and application guidance on how the arrangement should be separated, and the consideration allocated. This guidance changes how to determine the fair value of undelivered products and services for separate revenue recognition. Allocation of consideration under this pronouncement is based on management’s estimate of the selling price for an undelivered items where there is no other means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted. We do not anticipate a material impact on our financial condition and results of operations.

In April 2010, FASB issued ASU No. 2010-17, “Revenue Recognition — Milestone Method,” which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. The ASU is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We have historically followed the milestone method and we do not anticipate a material impact on our financial condition and results of operations.

Other new pronouncements issued but not effective until after December 31, 2010 are not expected to have a significant effect on our financial position or results of operations.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2010 AND 2009

REVENUE

Revenue.  Revenue increased 19% to $16.5 million in 2010 from $13.9 million in 2009. The increase in 2010 is primarily due to increased revenue of $7.5 million generated by our hearing loss and balance disorder program. We entered into a collaboration and license agreement with Novartis in January 2010, which accounted for $3.4 million of revenue in 2010, and a development agreement related to the supply of clinical trial material related to activities under the collaboration agreement in August 2010, which accounted for $4.4 million in revenue in 2010. The two Novartis agreements resulted in increased revenue in 2010 as compared to 2009 when the only work performed for our hearing loss and balance disorder program was performed under a grant from the University of Kansas. Partially offsetting the increased revenue associated with our hearing loss and balance disorder program is decreased revenue of $3.0 million and $2.2 million associated with our HIV and FMD programs, respectively, as compared to the prior year periods due to reduced work scope under each program.

OPERATING EXPENSES

Research and development.  Research and development expenses decreased 15% to $20.9 million in 2010 from $24.7 million in 2009. The decrease is primarily due to lower costs related to the development of TNFerade including personnel, manufacturing costs, patient costs, and professional service costs related to our TNFerade pancreatic clinical trial, due to the termination of the clinical trial in the first quarter of 2010. Stock-based compensation expense included in research and development personnel costs increased approximately $92,000 in 2010 as compared to the prior year. Research and development personnel costs includes no severance expenses for former employees in 2010, a decrease of approximately $193,000 as compared to 2009.

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General and administrative.  General and administrative expenses increased 14% to $8.2 million in 2010 from $7.2 million in 2009. General and administrative expenses were higher in 2010 primarily due to higher professional service cost and facility costs, partially offset by lower depreciation costs. Administrative personnel costs includes severance expenses of approximately $381,000 for former employees, an increase of approximately $278,000 as compared to 2009, and an increase of approximately $76,000 of stock-based compensation expense in 2010 as compared to the prior year.

Gain/Loss on disposal of assets.  There was no gain/loss on the disposal of assets in 2010 and a gain of $7,000 in 2009.

OTHER INCOME (LOSS)

Total other income increased to $347,000 in 2010 from a net loss of $358,000 in 2009.

Interest income was $4,000 in 2010 as compared to $38,000 in the comparable prior year period. The decrease in interest income was due to lower yields earned on our portfolio of investments.

Interest expense for the period ending December 31, 2010 decreased $258,000 as compared to the comparable prior year period due to adjustments in the fair value of the warrant liability associated with our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) in 2010 as compared to the comparable period in 2009. In 2009 there was a net expense of $98,000 resulting from the changes in fair value of the warrant liability as compared to a net income of $130,000 in 2010.

Other income (loss) was income of $213,000 in 2010 as compared to a loss of $268,000 in 2009. In 2010, we received a grant in the amount of $244,000 under the qualifying therapeutic discovery project program under § 48D of the Internal Revenue Code (Code), as added to the Code by section 9023(a) of the Patient Protection and Affordable Care Act of 2010. This income was partially offset by the write down of shelf registration costs of $32,000 in 2010 associated with the 2007 shelf registration statement. The loss in 2009 resulted primarily from the expensing of the remaining $273,000 of deferred financing charges when our CEFF expired on March 15, 2009, partially offset by miscellaneous discounts and interest payments received from the government associated with late payments.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2009 AND 2008

REVENUE

Revenue.  Revenue decreased 8% to $13.9 million in 2009 from $15.1 million in 2008. The decrease in 2009 is primarily due to decreased revenue associated with our agreement with the Department of Homeland Security (DHS) of $3.2 million. The lower revenue under the DHS agreement is a result of the decreased work scope and effort in 2009 as compared to the 2008 period. The decreased revenue associated with our DHS agreement has been partially offset by increased revenue of $2.1 million under our HIV program as compared to the comparable prior year period. This increase is mostly due to the successful completion of the defined process development and quality control activities during 2009 under our HIV agreements.

OPERATING EXPENSES

Research and development.  Research and development expenses decreased 27% to $24.7 million in 2009 from $33.8 million in 2008. The decrease is primarily due to lower costs related to the development of TNFerade including manufacturing and materials costs, patient and data management costs, professional service costs related to our TNFerade pancreatic clinical trial, and decreased personnel costs. Stock-based compensation expense included in research and development personnel costs decreased approximately $331,000 in 2009 as compared to the prior year. This decrease was partially offset by an increase in severance expenses of approximately $193,000 for former employees in 2009 as compared to the prior year. Also contributing to the decreased costs, but to a lesser extent, are decreased pass-through costs associated with our funded programs, most notably pass-through costs associated with our FMD program.

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General and administrative.  General and administrative expenses decreased 10% to $7.2 million in 2009 from $8.0 million in 2008. General and administrative expenses were lower in 2009 primarily due to lower professional service cost and employee costs, partially offset by higher depreciation costs. Administrative personnel costs includes severance expenses of approximately $103,000 for former employees, an increase of approximately $21,000 as compared to 2008, and a decrease of approximately $90,000 of stock-based compensation expense in 2009 as compared to the prior year.

Gain/Loss on disposal of assets.  There was a gain on the disposal of assets of $7,000 in 2009 and a loss of $3,000 in 2008.

OTHER INCOME (LOSS)

Total other income decreased from $611,000 in 2008 to a net loss of $358,000 in 2009.

Interest income was $38,000 in 2009 as compared to $695,000 in the comparable prior year period. The decrease in interest income was due to lower investment balances and lower yields earned on our portfolio.

Interest expense for the period ending December 31, 2009 increased $250,000 as compared to the comparable prior year period due to adjustments in the fair value of the warrant liability associated with our Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge) in 2009 as compared to the comparable period in 2008. In 2009 there was a net expense of $98,000 resulting from the changes in fair value of the warrant liability as compared to a net income of $221,000 in 2008. Partially offsetting this increase in interest expense associated with the warrant liability was lower interest expense associated with our debt obligations due to declining balances on those obligations.

Other income (loss) was a loss of ($268,000) in 2009 as compared to a loss of ($206,000) in 2008. The loss in 2009 resulted primarily from the expensing of the remaining $273,000 of deferred financing charges when our CEFF expired on March 15, 2009, partially offset by miscellaneous discounts and interest payments received from the government associated with late payments. The loss in 2008 is due mainly to the recording of a loss associated with an other-than-temporary decline in the fair value of a marketable equity security acquired in 2007 as consideration for the release of certain security interests in a third party of $218,000, partially offset by miscellaneous discounts and interest payments received from the government associated with late payments.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced significant losses since our inception. As of December 31, 2010 we have an accumulated deficit of $244.3 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

As of December 31, 2010, cash and investments totaled $35.2 million as compared to $11.0 million at December 31, 2009.

For the 12 months ended December 31, 2010, we used net cash of $10.7 million for operating activities. This consisted of a net loss for the period of $12.3 million, which included approximately $0.2 million of non-cash depreciation and amortization and $1.9 million of non-cash stock-based compensation expenses. Net cash was used primarily for the advancement of our hearing program, the advancement and subsequent termination of our TNFerade pancreatic clinical trial and to a lesser extent general and administrative activities.

Net cash used in investing activities during the 12 months ended December 31, 2010 was $0.3 million which was used for property and equipment purchases.

Net cash provided from financing activities during the 12 months ended December 31, 2010 was $35.1 million, which was provided from the issuance of common stock and warrants, net of issuance costs.

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Our contractual commitments and obligations are summarized in the following table:

         
    Payments Due by Period
Contractual Obligations   Total   Less than 1 Year   1 – 3 Years   4 – 5 Years   After
5 Years
     (In thousands)
Operating Leases   $ 3,051     $ 882     $ 1,742     $ 427     $  
Severance agreements     181       181                    
Total contractual obligations   $ 3,232     $ 1,063     $ 1,742     $ 427     $  

Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs.

In February 2007, we filed a $100.0 million shelf registration statement on Form S-3 (the 2007 shelf registration statement), with the Securities and Exchange Commission. The shelf registration was declared effective February 12, 2007 and allowed us to obtain financing through the issuance of any combination of common stock, preferred stock, warrants, or debt securities.

On June 11, 2008, pursuant to the 2007 shelf registration statement, we completed a registered direct offering to various investors of 11,258,279 shares of common stock and warrants to purchase 2,251,653 shares of common stock. Proceeds of this offering, net of offering costs, totaled $15.7 million. During the year ended December 31, 2010, individual investors exercised a portion of these warrants and purchased 47,820 shares of common stock for gross proceeds to the Company of $96,000. The shares of common stock issuable upon exercise of the remaining warrants have been registered on the 2010 shelf registration statement.

On May 29, 2009, pursuant to the 2007 shelf registration statement, we completed a registered direct offering to an institutional investor for the sale of 9,615,385 shares of common stock and warrants to purchase 9,615,385 shares of common stock. Proceeds of this offering, net of offering costs, totaled $5.5 million. During the year ended December 31, 2010, the institutional investor exercised a portion of these warrants and purchased 2,500,000 shares of common stock for gross proceeds to the Company of $2.1 million. The shares of common stock issuable upon exercise of the remaining warrants have been registered on the 2010 shelf registration statement.

On August 31, 2009, pursuant to the 2007 shelf registration statement, we completed a registered direct offering to an institutional investor of 8,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock. Proceeds of this offering, net of offering costs, totaled $5.5 million. During the year ended December 31, 2010, the institutional investor exercised all of these warrants for gross proceeds to the Company of $3.3 million.

On February 1, 2010, pursuant to the 2007 shelf registration statement, we completed a registered direct offering to various investors of 14,000,000 shares of common stock and warrants to purchase 4,200,000 shares of common stock. The shares of common stock and warrants were offered in units consisting of one share of common stock and 0.3 warrants to purchase one share of common stock at a per unit price of $2.00. The warrants, which have a term of five years and an exercise price of $2.75 per share, have been valued using the Black-Scholes pricing model as of the closing date and have been accounted for in permanent equity. The estimated fair market value of the warrants at the date of issuance was $5.0 million. Proceeds of this offering, net of offering costs, totaled $26.1 million. The shares of common stock issuable upon exercise of the remaining warrants have been registered on the 2010 shelf registration statement. There were no warrants that were issued in connection with this transaction that were exercised during 2010.

On February 11, 2010, we filed with the Securities and Exchange Commission a $150 million shelf registration statement on Form S-3, which we later amended on May 13, 2010 (the 2010 shelf registration statement). The 2010 shelf registration statement was declared effective May 20, 2010 and allows us to issue any combination of common stock, preferred stock, or warrants to purchase common stock or preferred stock.

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On May 12, 2010, we received a notice from the Nasdaq Stock Market (NASDAQ) stating that the minimum bid price of our common stock was below $1.00 per share for 30 consecutive business days and that we were therefore not in compliance with the minimum bid price requirement for continued listing set forth in Marketplace Rule 5450. The notification letter stated that we would be afforded until November 8, 2010 to regain compliance. In order to obtain additional time to seek to regain compliance, we transferred our common stock to the NASDAQ Capital Market effective November 8, 2010. On November 9, 2010, NASDAQ notified us that we would have an additional 180 days, or until May 9, 2011, to regain compliance with the minimum bid price requirements. To regain compliance, the closing bid price of our common stock will have had to meet or exceed $1.00 per share for at least ten consecutive business days prior to May 9, 2011. If we do not regain compliance with the minimum bid price requirement by May 9, 2011, NASDAQ will provide written notification to us that our common stock will be delisted. At that time, we may appeal NASDAQ’s delisting determination to a NASDAQ Listing Qualifications Panel.

On March 4, 2011, the Company filed and mailed a proxy statement relating to a special meeting to be held on April 5, 2011 for the purpose of voting on a one-for-ten reverse stock split. The purpose of the stock split is for raising the per share trading price of our common stock and to maintain the listing of our common stock on the NASDAQ Capital Market.

On January 13, 2010 we entered into a research collaboration and license agreement with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under the terms of the Agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. Concurrent with entry into the agreement with Novartis, we sold 1,869,158 shares of our common stock to Novartis Pharma AG in a private placement for $1.07 per share of common stock, which represents an aggregate purchase price of approximately $2.0 million and was calculated based on the average of the closing price for the common stock on the NASDAQ Global Market for the 30 consecutive trading days ending on the fifth trading day prior to the sale of the shares. The purchase of the shares of common stock by Novartis Pharma AG was undertaken in partial consideration for the rights granted under the research collaboration and license agreement. Due to the pricing formula used in the sale of the common stock, a discount of approximately $1.3 million has been recorded against the upfront license payment and the value of stock associated with this sale is recorded in equity at $3.3 million.

Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. We have also taken and are continuing to take steps to lower our operating costs in order to increase our efficiency. These steps included our announcement on January 29, 2009 that we eliminated 22 positions. We currently estimate we will use approximately $5.0 to $7.0 million of cash in the 12 months ending December 31, 2011. Our estimate includes approximately $1.1 million in contractual obligations reflected in the table above, as well as $0.3 million for capital expenditures. Based on this estimate we have sufficient resources to fund our operations for at least 36 months from the balance sheet date.

Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements in whole or in part, and how such arrangements would affect our development plan or capital requirements. If we seek strategic alliances, licenses, or other alternative arrangements, such as arrangements with collaborative partners or others, we may need to relinquish rights to certain of our existing or future technologies, product candidates, or products we would otherwise seek to develop or commercialize on our own, or to license the rights to our technologies, product candidates, or products on terms that are not favorable to us. We also will continue to look for government sponsored research collaborations and grants to help offset future anticipated losses from operations, as we expect to continue to rely on government funding for a significant portion of our revenues for the next few years and, to a lesser extent, interest income. If we are unable to advance the development of our product candidates through collaborations, or if our current operating capital is not sufficient to fund our operations, we may need to access the capital markets for financing or enter into strategic alliances or licensing arrangements. If we determine to pursue and are successful in raising additional funds through the issuance of equity securities, investors will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of

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our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock.

OFF-BALANCE SHEET OBLIGATIONS

We had no off-balance sheet obligations other than in connection with our operating leases, which are disclosed in the contractual commitments table above during 2010.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk.

As of December 31, 2010, we had cash and cash equivalents and short-term investments of $35.2 million as follows:

 
Cash and cash equivalents   $ 35.0 million  
Short-term investments   $ 0.2 million  

Our exposure to market risk is confined to cash and cash equivalents, which consist of instruments having original maturities of three months or less, and our short-term investment portfolio. The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. Our cash flow and earnings are subject to fluctuations due to changes in interest rates in our investment portfolio.

We maintain a short-term investment portfolio of investment grade government agency notes, corporate stock, and corporate bonds. The securities in our short-term investment portfolio are not leveraged, are classified as available-for-sale, and are subject to minimal interest rate risk, due to their predominantly short-term nature. These securities, classified as available-for-sale, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) included in stockholders’ equity. We currently do not hedge interest rate exposure on our investment portfolio. While we do not believe an increase in market rates of interest would have any significant negative impact on the realizable value of our investment portfolio, changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flow and results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted in a separate section of this report. See “Index to Financial Statements” on Page F-1 for a list of the financial statements being filed herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act), as of December 31, 2010. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that: (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this assessment, management has concluded that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.

KPMG LLP, an independent registered public accounting firm that audited and reported on our financial statements included in this annual report, has also audited the effectiveness of our internal control over financial reporting as of December 31, 2010 as stated in its report which is included herein immediately preceding our audited financial statements.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information required by this item, with the exception of information on our executive officers, which appears under “Executive Officers of the Registrant,” in Part I of the Form 10-K, is incorporated by reference to our Proxy Statement relating to the 2011 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to our Proxy Statement relating to the 2011 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item, with the exception of information relating to compensation plans under which equity securities of the Registrant are authorized for issue, which appears below, is incorporated by reference to our Proxy Statement relating to the 2011 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

Equity Compensation Plan Information

The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans as of December 31, 2010:

     
  (a)   (b)   (c)
Plan category   Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
  Weighted-average
exercise price of
outstanding options,
warrants and rights
  Number of securities
remaining available
for future issuance
under equity
compensation
plans (excluding securities reflected in
column (a))
Equity compensation plans approved by security holders     22,254,693     $ 1.72       7,821,628  
Equity compensation plans not approved by security holders                  
Total     22,254,693     $ 1.72       7,821,628  
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to our Proxy Statement relating to the 2011 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to our Proxy Statement relating to the 2011 Annual Meeting of Stockholders to be filed pursuant to General Instruction G(3) to Form 10-K.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 
(a)  

(1)

Financial Statements — See “Index to Financial Statements” on page F-1 below for a list of the financial statements being filed herein.

    

(2)

Financial Statement Schedules — All financial statement schedules are omitted because they are not applicable, not required under the instructions, or all the information required is set forth in the financial statements or notes thereto.

    

(3)

Exhibits — The Exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this report.

 
EXHIBIT
NUMBER
  DESCRIPTION
  3.1      Amended & Restated Certificate of Incorporation of the Company.(6)
  3.1(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company.(12)
  3.1(b)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company.(14)
  3.1(c)   Certificate of Designations of the Series A Junior Participating Preferred Stock.(6)
  3.1(d)   Certificate of Amendment to the Certificate of Designations of the Series A Junior Participating Preferred Stock.(12)
3.2   Amended & Restated Bylaws of the Company.(12)
4.1   Specimen Common Stock Certificate.(1)
4.2   Rights Agreement dated as of September 7, 2001 between the Company and American Stock Transfer & Trust Company, the form of Certificate of Designations of Series A Junior Participating Preferred Stock attached as Exhibit A thereto, the form of Rights Certificate attached as Exhibit B thereto, and the form of Summary of Rights attached as Exhibit C thereto.(3)
4.3   Amendment No. 1, dated August 21, 2003, to the Rights Agreement dated September 7, 2001.(4)
4.4   Registration Rights Agreement, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Company.(8)
4.5   Warrant, dated as of March 15, 2006 by and between Kingsbridge Capital Limited and the Company.(8)
4.6   Form of Warrant(15).
4.7   Form of Warrant(16).
4.8   Form of Warrant(18).
10.1    Form of Indemnification Agreement for Directors and Officers.*(1)
10.2    2002 Stock Incentive Plan as amended and forms of agreements thereunder.*(9)
10.3    Amendment to the GenVec, Inc. 2002 Stock Incentive Plan.*(20)
10.4    Amended and Restated 1993 Stock Incentive Plan and forms of agreements thereunder.*(2)
10.5    2000 Employee Stock Purchase Plan, and form of agreement thereunder.*(1)
10.6    Amended and Restated 2000 Director Option Plan.*(5)
10.7    License Agreement dated May 31, 1996 between Scios, Inc. and the Company.(1)
10.8    Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the Company and Cornell Research Foundation, Inc.(6)
10.9    Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Company.(1)
10.10   Amendment to Lease Agreement between MOR BENNINGTON LLP and the Company dated March 11, 2009.(10)

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EXHIBIT
NUMBER
  DESCRIPTION
10.11   Salary Continuation Agreement between the Company and Paul H. Fischer dated October 15, 2002.*(6)
10.12   Amendment to Salary Continuation Agreement between the Company and Paul H. Fischer dated December 9, 2008.*(10)
10.13   Change in Control Agreement between the Company and Paul H. Fischer dated October 15, 2002.*(6)
10.14   Amendment to Change in Control Agreement between the Company and Paul H. Fischer dated December 9, 2008.*(10)
10.15   Salary Continuation Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(11)
10.16   Amendment to Salary Continuation Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(10)
10.17   Change in Control Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(11)
10.18   Amendment to Change in Control Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(10)
10.19   Form of Salary Continuation Agreement between the Company and other executive officers and senior staff dated October 15, 2002.*(6)
10.20   Form of Amendment to the Salary Continuation Agreement between the Company and other executive officers and senior staff dated December 9, 2008.*(10)
10.21   Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003.(7)
10.22   Agreement with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health for the supporting the transfer of the Company’s manufacturing processes dated September 30, 2006.+(13)
10.23   Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated January 30, 2007.+(23)
10.24   Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated August 30, 2007.+(24)
10.25   Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated November 9, 2007.(25)
10.26   Agreement with the United States Department of Homeland Security for development of adenovector-based foot and mouth vaccine, dated February 12, 2010.(19)
10.27   Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(17)
10.28   License Agreement, dated May 26, 1993, between the Company and ARCH Development Corporation.+(19)
10.29   License Agreement, as amended, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company.+(19)
10.30   Letter Amendment, dated September 21, 1999, to the License Agreement, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company.+(19)
10.31   First Amendment, dated December 31, 2001, as amended, to the License Agreement, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company.+(19)

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EXHIBIT
NUMBER
  DESCRIPTION
10.32   Second Amendment, dated January 20, 2005, as amended, to the License Agreement, dated May 26, 1993, between Dana Farber Cancer Institute, Inc., ARCH Development Corporation and the Company.+(19)
10.33   Amended and Restated License Agreement, dated May 23, 1998, between the Company and the Cornell Research Foundation.+(1)
10.34   Amendment to Amended and Restated License Agreement, dated March 18, 2002, between the Company and the Cornell Research Foundation.+(6)
10.35   Agreement for the Supply of Services related to Development Materials, dated August 4, 2010, between Novartis Pharma AG and GenVec, Inc.+(21)
10.36   Agreement, dated November 3, 2009, between GenVec, Inc. and SAIC-Frederick, Inc.+(22)
10.37   Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates, dated Setpember 20, 2010.+ (filed herewith)
10.38   Form of Investor Purchase Agreement.(15)
10.39   Form of Investor Purchase Agreement.(16)
10.40   Form of Investor Purchase Agreement.(18)
23.1    Consent of Independent Registered Public Accounting Firm. (filed herewith)
24.1    Power of Attorney. (filed herewith)
31.1    Rule 13a-14(a) Certification by Chief Executive Officer. (filed herewith)
31.2    Rule 13a-14(a) Certification by Chief Financial Officer. (filed herewith)
32.1    Rule 13a-14(b) Certification by Chief Executive Officer pursuant to 18 United States Code Section 1350. (filed herewith)
32.2    Rule 13a-14(b) Certification by Chief Financial Officer pursuant to 18 United States Code Section 1350. (filed herewith)

* Compensatory plan, contract or arrangement.
+ Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Commission pursuant to our application for confidential treatment.
(1) Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-47408) declared effective by the Securities and Exchange Commission on December 12, 2000.
(2) Incorporated by reference from our Registration Statement on Form S-8 (File No. 333-55590) filed with the Securities and Exchange Commission on February 14, 2001.
(3) Incorporated by reference from our Registration Statement on Form 8-A (File No: 0-24469) filed with the Securities and Exchange Commission on September 26, 2001.
(4) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on August 22, 2003.
(5) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 29, 2002.
(6) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 31, 2003.
(7) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2004.
(8) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2006.
(9) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 17, 2008.

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(10) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 16, 2009.
(11) Incorporated by reference from our Current Report on Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on September 19, 2006.
(12) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 10, 2003.
(13) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2006.
(14) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 14, 2007.
(15) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 6, 2008.
(16) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on May 28, 2009.
(17) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 19, 2010.
(18) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 27, 2010.
(19) Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 10, 2010.
(20) Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 18, 2010.
(21) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 6, 2010.
(22) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2010.
(23) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on May 10, 2007.
(24) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2007.
(25) Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 8, 2008.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
  GENVEC, INC.
Date: March 11, 2011  

By:

/s/ PAUL H. FISCHER
Paul H. Fischer, Ph.D.
President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

   
  TITLE   DATE
/s/ PAUL H. FISCHER, PH.D.
Paul H. Fischer, Ph.D.
  President, Chief Executive Officer
and Director
(Principal Executive Officer)
  March 11, 2011
/s/ DOUGLAS J. SWIRSKY
Douglas J. Swirsky
  Sr. Vice President, Chief Financial Officer, Treasurer & Secretary
(Principal Financial and Accounting Officer)
  March 11, 2011
/s/ WAYNE T. HOCKMEYER, PH.D.*
Wayne T. Hockmeyer, Ph.D.
  Director   March 11, 2011
/s/ ZOLA P. HOROVITZ, PH.D.*
Zola P. Horovitz, Ph.D.
  Director   March 11, 2011
/s/ WILLIAM N. KELLEY, M.D.*
William N. Kelley, M.D.
  Director   March 11, 2011
/s/ KEVIN M. ROONEY*
Kevin M. Rooney
  Director   March 11, 2011
/s/ MARC R. SCHNEEBAUM*
Marc R. Schneebaum
  Director   March 11, 2011

 

*By:

/s/ DOUGLAS J. SWIRSKY

Douglas J. Swirsky, attorney-in-fact

    

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
GenVec, Inc.:

We have audited GenVec, Inc.’s (“the Company’s”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). GenVec, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, GenVec, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of GenVec, Inc. as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 11, 2011 expressed an unqualified opinion on those financial statements.

/s/ KPMG LLP

McLean, Virginia
March 11, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
GenVec, Inc.:

We have audited the accompanying balance sheets of GenVec, Inc. (“the Company”) as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010. 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 the standards of the Public Company Accounting Oversight Board (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 GenVec, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), GenVec, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

McLean, Virginia
March 11, 2011

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GENVEC, INC.
  
BALANCE SHEETS

   
  As of December 31,
(in thousands, except per share data)   2010   2009
ASSETS
                 
Current assets:
                 
Cash and cash equivalents   $ 35,002     $ 10,887  
Short-term investments (Note 3)     168       74  
Accounts receivable, net     3,211       1,442  
Prepaid expenses and other     242       331  
Total current assets     38,623       12,734  
Property and equipment, net (Note 4)     743       687  
Other assets     66       22  
Total assets   $ 39,432     $ 13,443  
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Current liabilities:
                 
Accounts payable   $ 1,134     $ 1,096  
Accrued clinical trial expenses     809       1,195  
Accrued other expenses (Note 5)     2,910       2,838  
Unearned revenue     2,081       603  
Total current liabilities     6,934       5,732  
Unearned revenue     78       75  
Total liabilities     7,012       5,807  
Commitments (Notes 7)
                 
Stockholders' equity (Note 8)
                 
Preferred stock, $0.001 par value, 5,000 shares authorized in 2010 and 2009; none issued and outstanding in 2010 and 2009            
Common stock, $0.001 par value; 200,000 shares authorized in 2010 and 2009; 129,082 and 106,336 shares issued and outstanding in 2010 and 2009     129       106  
Additional paid-in capital     276,460       239,519  
Accumulated other comprehensive income (Notes 3 and 10)     96       2  
Accumulated deficit     (244,265 )      (231,991 ) 
Total stockholders' equity     32,420       7,636  
Total liabilities and stockholders' equity   $ 39,432     $ 13,443  

 
 
See accompanying notes to financial statements.

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GENVEC, INC.
  
STATEMENTS OF OPERATIONS

     
  Years ended December 31,
(in thousands, except per share data)   2010   2009   2008
Revenue from strategic alliances and research contracts (Note 6)   $ 16,467     $ 13,857     $ 15,121  
Operating expenses:
                          
Research and development     20,936       24,689       33,830  
General and administrative     8,152       7,179       7,968  
Gain on disposal of assets           (7 )      (3 ) 
Total operating expenses     29,088       31,861       41,795  
Operating loss     (12,621 )      (18,004 )      (26,674 ) 
Other income (loss):
                          
Interest income     4       38       695  
Interest expense, net of change in fair value of warrants     130       (128 )      122  
Other     213       (268 )      (206 ) 
Total other income (loss), net     347       (358 )      611  
Net loss   $ (12,274 )    $ (18,362 )    $ (26,063 ) 
Basic and diluted net loss per share   $ (0.10 )    $ (0.19 )    $ (0.31 ) 
Shares used in computation of basic and diluted net loss per share     126,709       97,074       82,779  

 
 
See accompanying notes to financial statements.

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GENVEC, INC.
  
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

           
 
  
  
Common Stock
  Additional
Paid-in
Capital
  Accumulated
Other
Comprehensive
Income (Loss)
  Accumulated
Deficit
  Total
(in thousands)   Shares   Amount
Balance, December 31, 2007     75,353     $ 75     $ 205,746     $ (145 )    $ (187,566 )    $ 18,110  
Comprehensive loss:
                                                     
Net loss                             (26,063 )      (26,063 ) 
Unrealized change in investments, net                       105             105  
Total comprehensive loss                                   (25,958 ) 
Common stock and warrants issued under shelf registration, net     11,258       11       15,653                   15,664  
Common stock issued under
CEFF
    1,715       2       3,000                   3,002  
Deferred financing charge resulting from stock issued under CEFF                 (24 )                  (24 ) 
Deferred financing charge resulting from warrant issued under
CEFF
                51                   51  
Common stock issued under stock benefit plans     97             120                   120  
Stock-based compensation                 2,126                   2,126  
Balance, December 31, 2008     88,423     $ 88     $ 226,672     $ (40 )    $ (213,629 )    $ 13,091  
Comprehensive loss:
                                                     
Net loss                             (18,362 )      (18,362 ) 
Unrealized change in investments, net                       42             42  
Total comprehensive loss                                   (18,320 ) 
Common stock and warrants issued under shelf registration, net     17,615       18       11,033                   11,051  
Common stock issued under stock benefit plans     298             108                   108  
Stock-based compensation                 1,706                   1,706  
Balance, December 31, 2009     106,336     $ 106     $ 239,519     $ 2     $ (231,991 )    $ 7,636  
Comprehensive loss:
                                                     
Net loss                             (12,274 )      (12,274 ) 
Unrealized change in investments, net                       94             94  
Total comprehensive loss                                   (12,180 ) 
Common stock and warrants issued under shelf registration, net     22,417       22       34,882                   34,904  
Common stock issued under stock benefit plans     329       1       185                   186  
Stock-based compensation                 1,874                   1,874  
Balance, December 31, 2010     129,082     $ 129     $ 276,460     $ 96     $ (244,265 )    $ 32,420  

 
 
See accompanying notes to financial statements.

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GENVEC, INC.
  
STATEMENTS OF CASH FLOWS

     
  Years ended December 31,
(in thousands)   2010   2009   2008
Cash flows from operating activities:
                          
Net loss   $ (12,274 )    $ (18,362 )    $ (26,063 ) 
Adjustments to reconcile net loss to net cash used in operating activities:
                          
Depreciation and amortization     238       1,057       941  
Non-cash adjustments for premiums and discounts on investments           12       (7 ) 
Non-cash charges for stock-based compensation     1,874       1,706       2,126  
Non-cash realized loss on marketable security                 218  
Change in fair value of warrants     (130 )      98       (221 ) 
Change in accounts receivable     (1,769 )      649       (335 ) 
Change in accounts payable and accrued expenses     (146 )      (1,150 )      296  
Change in unearned revenue     1,481       (1,990 )      482  
Change in other assets and liabilities, net     45       1,023       (1,110 ) 
Net cash used in operating activities     (10,681 )      (16,957 )      (23,673 ) 
Cash flows from investing activities:
                          
Purchases of equipment     (294 )      (177 )      (409 ) 
Purchases of investment securities           (1,001 )      (6,007 ) 
Proceeds from sale and maturity of investment securities           4,000       19,230  
Net cash provided by (used in) investing activities     (294 )      2,822       12,814  
Cash flows from financing activities:
                          
Proceeds from issuance of common stock subject to redemption, net of issuance costs                 2,906  
Proceeds from issuance of common stock and warrants, net of issuance costs     35,090       11,159       15,785  
Principal payments of long-term debt obligations           (452 )      (806 ) 
Net cash provided by financing activities     35,090       10,707       17,885  
Increase (decrease) in cash and cash equivalents     24,115       (3,428 )      7,026  
Beginning balance of cash and cash equivalents     10,887       14,315       7,289  
Ending balance of cash and cash equivalents   $ 35,002     $ 10,887     $ 14,315  
Supplemental disclosures of cash flow information:
                          
Cash paid for interest   $     $ 37     $ 94  
Supplemental disclosures of non-cash activities:
                          
Fair value of warrants granted under Kingsbridge CEFF   $ 3     $ 133     $ 35  
Change in the fair value of interest rate swap   $     $ (19 )    $ (19 ) 

 
 
See accompanying notes to financial statements.

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GENVEC, INC.
  
NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BUSINESS DESCRIPTION

GenVec, Inc. (GenVec, we, our, or the Company) is a biopharmaceutical company using differentiated, proprietary technologies to create superior therapeutics and vaccines. A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, Merial, and the U.S. Government to support a portfolio of product programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss, balance disorders, and cancer; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus type 2 (HSV-2), dengue fever, influenza, malaria, and human immunodeficiency virus (HIV). In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).

Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene that causes production of an antigen, which then stimulates the desired immune reaction by the body.

Our research and development activities yield product candidates that utilize our technology platform and we believe represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders suggests delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis), on the discovery and development of novel treatments for hearing loss and balance disorders. There are currently no effective treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.

In partnership with our collaborators we have multiple vaccines in development. These programs are funded by third-parties and utilize our core adenovector technology. GenVec has grant-supported preclinical programs to develop vaccine candidates for the prevention of RSV and HSV-2. In addition, we have a collaboration with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH) to develop a HIV vaccine and an influenza virus vaccine. We also have programs with the U.S. Naval Medical Research Center to develop vaccines for dengue fever and malaria. In the field of animal health, we are working with Merial to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.

Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs.

An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

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GENVEC, INC.
  
NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BUSINESS DESCRIPTION  – (continued)

As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. However, we believe our current cash and investments and committed and expected revenues from our collaborators and strategic alliances are expected to be sufficient to continue our current research, development and collaborative activities for at least 36 months.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) USE OF ESTIMATES

The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Critical accounting policies involved in applying our accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates are also those which are reasonably likely to change from period to period, and would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate to accounting policies for clinical trial accruals, strategic alliances and research contract revenues, and share-based arrangements. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates.

(b) CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid debt instruments, time deposits, and money market funds with original maturities of three months or less.

(c) INVESTMENTS

Our investments consist primarily of corporate stock, and to a lesser extent, bonds, government agency notes, and commercial paper. These investments are classified as available-for-sale securities, which are carried at fair value, with the unrealized holding gains and losses reported as a separate component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

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GENVEC, INC.
  
NOTES TO FINANCIAL STATEMENTS

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

In addition to the available-for-sale investments noted above, we acquired 806,452 common shares of a third party in 2007, as a result of our relinquishment of certain rights. See additional discussion regarding this transaction in Note 3.

(d) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of our financial instruments, as reflected in the accompanying balance sheets, approximate fair value. Financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and a warrant issued in connection with our Committed Equity Financing Facility.

(e) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of assets, which are generally three to five years for equipment and seven years for furniture and fixtures. Leased property meeting certain criteria is capitalized at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Amortization of capitalized leased assets is computed on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. We incur maintenance costs with respect to some of our major equipment. Repair and maintenance costs are expensed as incurred.

(f) REVENUE RECOGNITION

Revenue is recognized when all four of the following criteria are met: (1) a contract is executed, (2) the contract price is fixed and determinable, (3) delivery of the service or products have occurred, and (4) collectability of the contract amounts is considered probable.

Our collaborative research and development agreements can provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront nonrefundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved in achieving the milestone; and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.

Research and development revenue from cost-reimbursement and cost-plus fixed fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors, such as indirect rate estimates, are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.

(g) RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as incurred. Advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting research and development activities are recorded as an asset when the advance payments are made. Capitalized amounts are recognized as expense when the research and development activities are performed; that is, when the goods without alternative future use are acquired or the service is rendered.

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GENVEC, INC.
  
NOTES TO FINANCIAL STATEMENTS

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Research and development costs include internal research and development expenditures (such as salaries and benefits, raw materials, supplies, and allocated facility expenses), contracted services (such as sponsored research, consulting, manufacture of drug supply, and testing services) of proprietary research and development activities and similar expenses associated with collaborative research agreements. These costs are expensed as incurred.

(h) CLINICAL TRIAL EXPENSES

We accrue estimated costs for clinical and preclinical studies based on estimates of work performed. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and based on clinical data collection and management. Costs based on clinical data collection and management are recognized based on estimates of unbilled goods and services received in the reporting period. We monitor the progress of the trials and their related activities and adjust the accruals accordingly. Adjustments to accruals are charged to expense in the period in which the facts that give rise to the adjustment become known. We believe this method best aligns the expenses recorded with the efforts expended. In the event of early termination of a clinical trial, we would accrue an amount based on estimates of the remaining non-cancelable obligations associated with winding down the clinical trial. In March 2010, we discontinued a Phase 3 pivotal trial for first-line treatment of inoperable, locally advanced pancreatic cancer (known as PACT) based on results of an interim analysis. We have accrued $584,000 for the remaining non-cancelable obligations associated with winding down the clinical trial.

(i) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We have significant net operating loss carryforwards to potentially reduce future federal and state taxable income, and research and experimentation tax credit carryforwards available to potentially offset future federal income taxes. Due to the Company’s prior equity transactions, the Company’s net operating loss and research and experimentation credit carryforwards may be limited due to changes in our ownership as defined within Section 382 of the Internal Revenue Code.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making that assessment. We recorded a full valuation allowance against all estimated net deferred tax assets at December 31, 2010 and 2009.

(j) NET LOSS PER SHARE

Basic earnings per share is computed based upon the net loss available to common stock stockholders divided by the weighted average number of common stock shares outstanding during the period. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share only when the effect of the inclusion would be dilutive. For the years ended December 31, 2010, 2009 and 2008 approximately 5.6 million, 5.4 million, and 4.3 million common stock equivalent shares associated with our stock option plans

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GENVEC, INC.
  
NOTES TO FINANCIAL STATEMENTS

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

and unvested restricted shares and approximately 14.0 million, 16.4 million, and 2.8 common stock equivalent shares associated with our warrants, respectively, were excluded from the denominator in the diluted loss per share calculation as their inclusion would have been antidilutive.

(k) COMPREHENSIVE INCOME (LOSS)

Comprehensive Income (loss) consists of net loss and unrealized holding gains and losses from available-for-sale securities. We report comprehensive income (loss) on the “Statements of Stockholders’ Equity and Comprehensive Income (Loss)”, and accumulated other comprehensive income (loss) on the “Balance Sheets.” Other information regarding comprehensive income (loss) is contained in Note 10.

(l) STOCK-BASED COMPENSATION

We use the modified prospective method to account for stock-based compensation. Under this method, we measure stock-based compensation expense based on the grant date fair value of the awards which is then recognized over the period during which service is required to be provided. We estimate grant date fair value using the Black-Scholes option-pricing model. Stock-based compensation cost that has been included in expense from continuing operations amounted to $1.9 million, $1.7 million, and $2.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.

(m) LONG-LIVED ASSETS

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as necessary.

(n) COMMITMENTS AND CONTINGENCIES

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

(o) RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (the FASB) issued A Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures.” This ASU amends Topic 820 and related guidance within U.S. GAAP to require disclosure of the transfers in and out of Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases, sales, issuances and settlements and requires more detailed disclosures regarding valuation techniques and inputs. The Company adopted this standard effective January 1, 2010. The adoption of this standard did not have a material impact on the presentation of our financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Topic 605. This consensus provides accounting principles and application guidance on how the arrangement should be separated, and the consideration allocated. This guidance changes how to determine the fair value of undelivered products and services for separate revenue recognition. Allocation of consideration under this pronouncement is based on management’s estimate of the selling price for an undelivered items where there is no other means to determine the fair value of that undelivered item. This new approach is

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GENVEC, INC.
  
NOTES TO FINANCIAL STATEMENTS

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application permitted. We do not anticipate a material impact on our financial condition and results of operations.

In April 2010, FASB issued ASU No. 2010-17, “Revenue Recognition — Milestone Method,” which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. The ASU is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We have historically followed the milestone method and we do not anticipate a material impact on our financial condition and results of operations.

Other new pronouncements issued but not effective until after December 31, 2010 are not expected to have a significant effect on our financial position or results of operations.

(3) FAIR VALUE MEASUREMENTS

We adopted a new accounting standard that defines fair value and establishes a framework for fair value measurements effective January 1, 2008 for financial assets and liabilities and effective January 1, 2009 for non-financial assets and liabilities. This standard establishes a three-level hierarchy for fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

The following table presents information about assets and liabilities recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2010: