Item 1. Description
of Business
General
Overview
Business We are a biopharmaceutical company
developing therapeutic products based on two distinct core technologies, our NeuGeneÒ
antisense and our AvicineÒ
cancer vaccine. Our principal products will target life-threatening diseases,
with initial applications in cardiovascular disease, pancreatic cancer,
polycystic kidney disease, drug metabolism, and viruses. Currently approved
drugs or other therapies for these diseases often prove to be ineffective or
produce undesirable side effects. Our pre-clinical and clinical studies
indicate that our two core technologies may produce drugs that offer more
effective treatment options and produce significantly fewer side effects than
currently approved products. Our technologies are protected by a strong patent
estate including 74 issued patents and 110 applications pending. Each of our
lead product candidates, Resten-NG™ and
Avicine, will address a large
market estimated to exceed $1 billion worldwide.
Antisense Drugs
(NeuGenes) We have developed third-generation
antisense technology that we believe produces drugs that are more stable,
specific, efficacious, and cost effective than other antisense or ribozyme
compounds. Our NEUGENE compounds are distinguished by a novel backbone
chemistry which replaces the natural or modified backbones of competing
technologies.
NEUGENES are synthetic polymers that block the
function of selected genetic sequences involved in disease processes. Targeting
specific genetic sequences provides for greater selectivity than that available
through conventional drugs. NEUGENES have the potential to provide safe and
effective treatment for a wide range of human diseases.
We have completed pre-clinical studies using our
NEUGENE compounds in the treatment of cardiovascular disease, cancer,
polycystic kidney disease, drug metabolism, inflammation, and infectious
disease. We filed our first antisense Investigational New Drug application
(IND) with the Food and Drug Administration (FDA) for Resten-NG for
cardiovascular restenosis in 1999 and completed both a Phase I and
Phase II clinical trial by late 2002. We have completed three Phase I
trials in drug metabolism and two Phase Ib trials for cancer and polycystic
kidney disease in 2002.
Avicine
Cancer
Vaccine Avicine,
a therapeutic cancer vaccine, represents our most advanced product opportunity,
having completed multi-center Phase II human clinical trials for colorectal
cancer and pancreatic cancer. Cancer vaccines operate under the rationale that
immunization stimulates an immune response that is effective in combating an
existing cancer.
Avicine
is directed against a hormone that is expressed on most cancers and is believed
to promote the growth and spread of cancer.
This hormone is called human chorionic gonadotropin (hCG) and is
normally responsible for stimulating fetal development during pregnancy, but is
also associated with all major types of cancer including colon, pancreas,
prostate, lung and breast.
Avicine has completed six clinical studies in
cancer, involving over 225 patients. From these studies, we believe that the
vaccine is a safe and essentially non-toxic therapy and capable of
producing a specific immune response in most patients. Further, the patients
who mounted an immune response to vaccination appeared to derive a survival
benefit. We intend to investigate further the use of Avicine alone or in conjunction with other approved therapies
in Phase II and Phase III trials.
Strategy We have the experience and, subject to
receiving adequate financing from time to time, resources to initiate drug
discovery and development, and move drug candidates through pre-clinical
development and mid-stage clinical trials (Phase I and Phase II). Our
strategy for the near-term (2 to 3 years) is to license the marketing
rights for our product candidates to pharmaceutical partners during or after
Phase II clinical trials or co-develop product candidates with strategic
partners. In this manner, late-stage
clinical development and marketing will be the responsibility of the partner or
licensee. With adequate resources we may consider assuming greater
responsibility for the late-stage clinical development and marketing
opportunities of future product candidates.
Bringing drug candidates to market involves a
significant commitment of time and resources due to the clinical trial process
required to obtain FDA approval to market products. The timeframe from the
early drug discovery phase to FDA approval can be up to 15 years and the cost
up to $500 million, with only a small percentage of early drug discovery
candidates becoming successful commercial products. Our experience and
resources enable us to initiate drug discovery and development and to move drug
candidates through pre-clinical development, and Phase I and II human clinical
trials. Our near-term strategy is to co-develop products with strategic
partners or to license the marketing rights for our products to pharmaceutical
partners after we complete one or more clinical trials. In this manner, the
costs associated with late-stage clinical development and marketing will be
shared with, or the responsibility of, our strategic partners. To continue drug
discovery and clinical development, we will need to raise additional capital
from time to time and/or generate royalty or other income from our drug
candidates. With additional resources we may consider assuming greater
responsibility for the late-stage clinical development and marketing
opportunities of future product candidates. As outlined under “Risk Factors”,
there are significant risks associated with our business.
This annual report
includes our trademarks and registered trademarks, including NEUGENE, Avicine, Resten-NG and Oncomyc-NG. Each
other trademark, trade name or service mark appearing in this annual report
belongs to its holder.
Clinical Development Program
We are a
biopharmaceutical company developing therapeutic products based on our NEUGENE
antisense technology for the treatment of life-threatening diseases, with
initial applications in cardiovascular disease, cancer, and drug metabolism,
and our Avicine cancer vaccine
with applications in cancer. Currently
approved drugs or other therapies often prove to be ineffective in treating
these diseases or produce undesirable side effects. Our core technologies are
specifically aimed at overcoming these challenges. We currently have products
at various stages of clinical development as summarized below. We will not have
marketable products until our drug candidates complete all required clinical
trials and receive FDA approval.
The following table summarizes
our clinical development program.
Our costs for a clinical
trial for AVI typically range between $300,000 and $500,000 for a Phase I
trial, between $500,000 and $4 million for a Phase II trial and could range
between $5 and $50 million for a Phase III trial. Because the scope, timing and
issues encountered in each trial vary, we cannot predict the exact costs
associated with a particular trial in advance. For the same reasons, we cannot
predict the nature, timing and costs of future studies or trials for a product,
how a product will proceed toward and through Phase III clinical trials and, if
Phase III clinical trials are successful, when and if FDA approval will be
sought and received.
Business Strategy
Our strategy is to:
• reduce risk associated with product development by exploiting two core
technologies;
• select gene targets with broad
or multiple disease applications;
• manage drug discovery, pre-clinical and early to mid-stage clinical
development in-house; and
• co-develop or license products to strategic partners during or after completion
of Phase II clinical trials to enhance value and share the costs of late stage
clinical trials and commercialization.
NEUGENE
Antisense Technology
Technical Overview
Most human diseases arise
from the function or dysfunction of genes within the body, either from
pathogens, such as viruses, or from one’s own genes. The Human Genome Project
has led to the identification of all of the human genes and many gene sequences
have been associated with major human diseases. Using modern methods of chemical
synthesis, drug candidates can be synthesized that recognize selected gene
sequences in a pathogen or disease process. When these compounds bind tightly
to the disease-causing sequence, the genetic process is inhibited, and thus the
pathogen or pathogenic process is disabled. This is called antisense technology
because the sense of the genetic code is blocked.
Antisense compounds are
composed of repeating subunits that are linked together forming a polymer,
referred to as the antisense backbone. Each subunit carries a genetic letter
that pairs with a corresponding letter in the selected gene sequence. Although
the genetic letters are a feature common to all antisense compounds, the
structure of the subunits and the linkage groups that string them together may
differ greatly. These differences in the subunits and the linkages define the
different types of antisense backbones and their corresponding physical and
biological properties. Our NEUGENE technology is distinguished from all other
antisense technologies by the characteristics of our patented antisense
backbone. The subunits which carry the genetic letters on our backbone are
synthetic subunits rather than modified natural materials. In addition, the
linkages used to string the subunits together carry no charge in our backbone.
We believe these differences provide pharmaceutical advantages that are
critical for antisense drug development to meet the challenges of broad
clinical utility.
The first generation of
antisense compounds had backbones composed of natural genetic materials and
linkages. These natural compounds were degraded or broken down by enzymes in
the blood and within cells and had difficulty crossing cellular membranes to
enter the cells that contained their genetic target. Modified or second
generation backbones were developed to resist degradation by enzymes and to
enter tissues and cells more efficiently. The most common of these types, the
phosphorothioate backbones used by ISIS Pharmaceuticals, Inc., Genta
Incorporated, and others, use natural or modified DNA subunits linked together
by a charged linkage. After extensive investigation, we concluded that these
early product candidates lacked the pharmaceutical properties desirable for
broad clinical utility. We abandoned development of similar backbone
chemistries in 1988 and subsequently developed a novel backbone chemistry
designed to address these drawbacks.
NEUGENE
Technology
We have developed and patented a new class of antisense compounds,
known as NEUGENES, which have a backbone of synthetic subunits carrying each
genetic letter, with
each subunit linked together by a patented uncharged linkage group. We
believe our principal competitive advantage in the antisense area is the chemical
structure of the NEUGENE backbone. It was developed specifically to have the
following pharmaceutical properties:
• STABILITY: Biological stability is
principally determined by the degree of resistance to enzymatic degradation.
Because the NEUGENE backbone is a unique synthetic structure, there are no
enzymes found in man to degrade it. Our NEUGENE drugs have been shown to be
completely stable in our human clinical trials.
• EFFICACY AND SPECIFICITY: Efficacy refers
to the efficiency with which antisense compounds block selected gene targets.
In direct comparisons with other technologies, our NEUGENE compounds exhibited
significantly better efficacy in inhibition of targeted genetic sequences and
substantially greater specificity.
• DELIVERY: To reach their targets,
antisense compounds must cross tissue and cellular barriers, including cellular
and nuclear membranes. Our extensive research in the last four years has shown
that NEUGENE antisense compounds achieve functional delivery in a variety of animal
models and in human clinical trials.
• SAFETY: Our Phase I human clinical trial
results indicate that NEUGENE antisense agents have an excellent safety
profile, even at doses in vast excess of those anticipated for our initial
human therapeutic applications.
Near-term Product Development -
Cardiovascular Disease and Cancer
The first application of
our antisense technology is designed to treat diseases involving abnormal cell
division, such as cancer and certain cardiovascular and inflammatory diseases,
including restenosis, polycystic kidney disease and chronic graft rejection.
The NEUGENE target for these diseases is the genetic component named c-myc. We
have finished pre-clinical development of three NEUGENE drugs; Resten-NG,
Oncomyc-NG, and AVI-4126 based on this target. In late 1999, we filed an IND,
and initiated a Phase I clinical trial for cardiovascular restenosis and
cancer. These Phase I safety studies in 32 patients completed in April 2000
showed these compounds to be safe and essentially non-toxic.
Pre-clinical studies with
Resten-NG indicated that it was both more effective and less toxic than other
compounds currently in clinical development for restenosis, a frequent
complication that follows balloon angioplasty for coronary artery disease. Our
studies also indicated significant preservation of vessel passageways and
prevention of arterial wall thickening following catheter delivery of
Resten-NG. We commenced Phase II human clinical trials in cardiovascular
restenosis in June 2000 and finished this study in late 2002.
Restenosis, the blockage
of the arteries following balloon angioplasty, affects 100,000 to 200,000
people per year in the United States and its occurrence is unpredictable. We
believe Resten-NG, with its combination of potency and lack of toxicity, may be
useful as a preventative measure in the more than one million balloon
angioplasty procedures performed worldwide each year.
We have finished pre-clinical development of our second and third
NEUGENE drugs, Oncomyc-NG, for cancer indications and AVI-4126, for polycystic
kidney disease (PKD). We have finished a pilot Phase Ib trial with Oncomyc-NG
in patients with different types of
cancer and a Phase Ib clinical trial in patients with PKD. Both trials
were initiated in 2001 and finished in 2002.
Our second NEUGENE antisense target for clinical development is
Cytochrome P450 3A4 (CYP3A4). This gene target codes for a liver enzymes
responsible for the metabolism (break down) of drugs in the body. By blocking
this gene expression, the liver cannot make the CYP3A4 enzyme and drugs that
are metabolized by this enzyme stay active in the body much longer. The CYP3A4
enzyme controls the break down of about half of all current FDA approved drugs.
We have finished extensive pre-clinical studies on this NEUGENE agent and moved
into Phase Ib clinical studies in fall 2001. Phase I safety studies finished in
late 2001 and efficacy studies finished in the first and fourth quarters of 2002.
This approach has the potential to improve the effectiveness and/or lower the
toxicity of many existing drugs, including those with large proven markets.
The broad applicability of our antisense platform has allowed us to
initiate pre-clinical and clinical development of NEUGENE drugs for several
other indications as outlined in the following table.
The table below
summarizes our broader development program for NEUGENE:
NEUGENE ANTISENSE DEVELOPMENT PROGRAM
Cancer
Immunotherapy
Cancer is the second leading cause of death in the United States with
an incidence of 1,500 deaths per day. There are approximately eight million
Americans living with a history of cancer, and over 500,000 new cases are
diagnosed annually. Lung, prostate, breast and colorectal cancers are the four
most common types of cancer, accounting for over 50% of all new diagnoses. In
2000, the market opportunities for drugs to treat each of these cancer types
were estimated to be in excess of $1 billion annually.
The principal therapy available for patients with advanced forms of
cancer traditionally has been chemotherapy. Chemotherapeutic approaches produce
considerable toxic and
undesirable side effects and historically have done little to influence
patient survival.
Immunotherapy with vaccines or antibodies is among the newer strategies
being investigated for treating cancer. Historically, vaccines were developed
and used to induce an immune response in order to prevent a disease. In
contrast, therapeutic vaccines are administered when the patient already has
the disease.
For a therapeutic vaccine to be effective in fighting a disease such as
cancer, it is necessary to first identify a specific target associated with
cancer cells. The more selective the target associated with cancer is, the
greater the likelihood that the stimulated immune response will be effective at
fighting cancer growth. The identification of a unique hormone associated with
most cancers led to the development of our vaccine approach.
Avicine Therapeutic Cancer Vaccine
Technical Overview
Avicine, our therapeutic cancer vaccine, is designed to
produce an immune response against a well-known hormone, human chorionic
gonadotropin (hCG), that was found to be associated with most cancers. The hCG
hormone is produced during pregnancy and plays a central role in fostering the
development of the fetus. Through extensive research, scientists found that hCG
is also present in most cancers and is believed to promote cancer growth like it
promotes fetal growth.
The hCG component
(antigen) in Avicine is a small
peptide from this hormone. The peptide is joined to a carrier, diphtheria
toxoid, to enhance the immune response. Diphtheria toxoid was selected since
most of the world’s population has been vaccinated against it and there is
significant experience with it as a vaccine component in man. The combination
stimulates an immune response to the hCG peptide which recognizes the hormone
and eliminates it from the body. This means that in vaccinated individuals, the
hCG hormone could not function in pregnancy nor in cancer. If this hormone
promotes cancer like it promotes fetal development, then immunized cancer
patients may have improved survival. Avicine
is based on this premise.
Avicine Clinical Trials
We have completed three
Phase I clinical trials using Avicine
in 87 patients with cancer. Overall, these studies showed Avicine to be safe and essentially
non-toxic, and to be effective in stimulating an immune response to hCG in most
patients. Moreover, apparent survival benefits and some tumor regressions were
noted.
Colorectal Cancer Trials
A multicenter Phase II
study of Avicine was conducted in
77 patients with advanced colorectal cancer in 1997-1999. The objectives of
this trial were to determine whether administration of Avicine would induce an immune response in patients with
metastatic colorectal cancer, and to measure safety and efficacy in these
patients. Overall, 51 of the 77 patients responded to our vaccine by producing
antibodies to hCG. The patients that were antibody responders had a median
survival of 42 weeks. Patients who did not respond had a median survival of
just 17 weeks.
Further analysis of the
multicenter Phase II data showed that patients who produced antibodies to both
targets on the hCG peptide had a median survival of 66 weeks. Camptosar®, the
current standard of care for treating advanced colorectal cancer patients,
produces a median survival of 37-40 weeks.
Overall, these clinical
data suggest that the patients who received Avicine
and responded by making hCG antibodies had improved median survival compared to
patients treated with chemotherapeutic drugs. Avicine was found to be safe and did not exhibit the toxicity
associated with cytotoxic drug treatment in each of the study arms.
Pancreatic Cancer Trials
We have completed two
Phase II trails in pancreatic cancer, the first of which was a pilot Phase II
study using Avicine in 10
patients with advanced pancreatic cancer. In this study, the median survival
was approximately 33 weeks. Patients with advanced pancreatic cancer are
currently treated with chemotherapy and have a median survival of approximately
18 to 25 weeks.
Based on these results we
conducted a second multi-center trial with 53 patients with pancreatic
cancer. Patients were randomized to two
arms, treatment with Avicine
alone or Avicine in combination
with Eli Lilly’s drug Gemzar. Historically, patients treated with Gemzar
exhibit a median survival of about 23 weeks and a 15% one-year survival rate.
This study was completed in late 2001 and showed that median survival in both
of the treatment arms were essentially equivalent to Gemzar. Importantly,
patients treated with Avicine
alone showed less toxicity compared to patients receiving Gemzar. The one-year
survival in the Avicine alone arm
was similar to Gemzar at about 15% while the combination of the two drugs
showed 30% survival at one year, a statistically significant improvement.
Our clinical trial
experience with Avicine is
summarized in the following table.
AVICINE CLINICAL TRIALS
We have drawn the
following conclusions from completing 6 clinical trials with Avicine. First, this vaccine is safe and essentially non-toxic. Second, Avicine stimulates an immune response to
hCG in cancer patients that is effective at functionally eliminating the
biological effects of hCG. Third, cancer patients that responded to the vaccine
had benefits compared to chemotherapy due to less toxicity, improved survival,
or both. Based upon these conclusions, we believe that Avicine has as good a chance of approval following Phase III
trials as any new drug in cancer development.
Collaborative
Agreements
We believe that our cancer vaccine and antisense technologies are
broadly applicable for the potential development of pharmaceutical products in
many therapeutic areas. To exploit our core technologies as fully as possible,
our strategy is to enter into collaborative development agreements with major
pharmaceutical companies for all cancer applications with our vaccine, and
agreements directed at specific molecular targets for our NEUGENE antisense
technology. It is anticipated that NEUGENE antisense collaborative research
agreements may
provide us with some funding for internal programs aimed at discovering
and developing antisense compounds to inhibit the production of additional
molecular targets. Partners in antisense may be granted options to obtain
licenses to co-develop and to market drug candidates resulting from their
collaborative research programs. We intend to retain manufacturing rights to
our antisense products. There can be no assurance, however, that we will be
able to enter into collaborative research agreements with large pharmaceutical
companies on terms and conditions satisfactory to us. The agreements described
in this “Collaborative Agreements” section are generally only cancelable for
nonperformance, including failure to make any payments and, in some cases, failure
to commercially exploit the technology. There is no assurance the proposed
products will be successfully developed under these collaborative arrangements
or we will receive any of the potential payments noted herein.
SuperGen
Alliance
In April 2000, we entered into an alliance with SuperGen, Inc.
(“SuperGen”) for shared development and marketing rights for Avicine. Under the terms of the
agreement, SuperGen and AVI will share equally clinical development and FDA
registration costs going forward and share profit equally from product sales in
the United States. Our share of such costs are expected to approximate $10
million over the next two to three years and up to $15 million in the aggregate
with development expected to take at least three to four years. We will be
responsible for the manufacturing of Avicine
and SuperGen will be responsible for marketing and sales. In May 2000, we
received a $20 million equity investment from SuperGen and could receive
additional payments of up to $80 million based upon achievement of clinical
commercialization milestones. Those payments include the following milestone
payments, plus certain payments based on product sales (i) $2.5 million in
SuperGen stock or cash, upon each completion of a Phase III trial for the pharmaceutical
product containing Avicine or a
derivative thereof as an active ingredient and (ii) acceptance by the FDA or
New Drug Application (“NDA”) and (iii) $5 million in SuperGen stock or cash,
upon the date the first commercial sale of a pharmaceutical product containing
Avicine or a derivative thereof
as an active ingredient occurs within the United States. Commercialization cash
milestone payments occur at the following annual sales levels: $100 million,
$250 million, $500 million and $1 billion. Payments to AVI occur at the first
achievement of these sales levels and increase from $10 million to $25 million
in $5 million increments, with a maximum of one milestone payment per year.
Unless terminated earlier, our agreement with SuperGen expires upon the
earlier of (i) the date upon which a generic version of the product is first
sold in the U.S. by someone other than SuperGen or (ii) the date which is 15
years after the date of regulatory approval of Avicine in the United States, subject to certain extension
rights.
Abgenix
Alliance
We previously entered an alliance with Abgenix, Inc. (“Abgenix”) for
the development of human monoclonal antibodies for cancer. As part of that
alliance, we licensed from Abgenix, Inc. the use of Abgenix XenoMouse technology
for the production of human monoclonal antibodies against hCG. At this time, we
have determined not to pursue products incorporating this licensed technology.
We estimate the remaining costs to fulfill our obligations to Abgenix is not
material in amount.
NEUGENE
Alliances
We anticipate that NEUGENE antisense collaborative research agreements
may provide us with funding for internal programs aimed at discovering and
developing antisense compounds to inhibit the production of additional
molecular targets. Partners in antisense
may be granted options to obtain licenses to co-develop and to market
drug candidates resulting from their collaborative research programs. We
currently have a research alliance with XTL Biopharmaceuticals Ltd. for
pre-clinical development of Hepatitis B and C antisense drugs. If this program
moves into clinical development stages, XTL and we will negotiate a joint
venture development and marketing agreement with XTL under basic terms
previously set forth. None of these agreements obligate us to spend any
particular amounts in exploiting products. We expect to expend approximately $3
million on clinical development efforts over the next two years related to
these products.
Exelixis
Agreement
In April 2001, we entered into an alliance with Exelixis Inc.
(“Exelixis”) for functional genomics and antisense drug development. Under the
terms of the agreement, Exelixis will apply its expertise in genetic model
systems to discover, validate and screen novel targets suitable for inhibition
by antisense therapeutics. We will design and synthesize NEUGENE morpholinos
for use as drugs and conduct preclinical and clinical studies on antisense drug
candidates arising from the collaboration. We expect to expend approximately $3
million over the next two years in developing products under the agreement and
up to $10 million in the aggregate. The collaborative research project and our
obligations to supply PMOs to Exelixis under the agreement expires April 30,
2006. Except as noted, we and Exelixis will jointly own, and Exelixis has an
option to co-develop with us, certain antisense products that arise from the
alliance.
In the event we and Exelixis co-fund the development of any antisense
therapeutic and/or commercialization of any product, the parties will jointly
have a worldwide, co-exclusive license and will equally share profits with
respect to any such co-funded product in lieu of royalties. Product is defined
by our agreement with Exelixis as any human therapeutic or prophylactic product
which received regulatory approval that contains or comprises our antisense
therapeutic.
Under our agreement with Exelixis, an “Exelixis Product” is defined as,
and is deemed to exist when we decide to terminate the development of a
co-funded antisense therapeutic and/or commercialization of a particular
co-funded product that is being co-funded by Exelixis, and Exelixis assumes the
costs and obligations of the continued development of the co-funded antisense therapeutic
and/or commercialization of such co-funded product (Exelixis Product”).
Similarly, an AVI product is one that is developed by us and not co-funded by
Exelixis (“AVI Product”).
Generally, a 3% or 5% royalty on net sales is payable by the developing
party on products covered by the agreement that are not jointly developed. Generally, a party’s right to receive
royalties expires on a country-by-country basis upon the later of (i) 12 years
from the first commercial sale of such product in that country; or (ii)
expiration of the last to expire Exelixis patent or AVI patent in such country
claiming the antisense therapeutic in such AVI product or the manufacture, use
or sale of such product.
Medtronic
Agreement
In May 2001, we entered into a licensing arrangement with Medtronic,
Inc. (“Medtronic”) wherein Medtronic received exclusive rights for certain
antisense compounds, for use in conjunction with Medtronic devices, to combat
vascular disease, including restenosis. We also entered into a supply agreement
to provide product to Medtronic. Under an investment agreement, we received a
$10 million equity investment from Medtronic
International, Ltd. (then Medtronic Asset Management, Inc.)(“MIL”). In the
future, we could receive certain milestone payments, license royalties
and proceeds from rights to acquire our securities. Based on certain technology
milestones being met or waived by MIL, MIL has the right to
acquire up to $42.5 million of our securities based on fixed prices
ranging from $7.10 to $10.00 per share for 3,352,113 shares ($32.5 million of
the total) and the balance to be paid based on market prices at the times the
purchase rights mature. We requested and received confidential treatment from
the SEC for certain information, related to the nature and timing of product
development and introduction under the milestones triggering additional
payments or purchase rights and royalty payments (product pricing information),
due to the potential adverse impact the disclosure of such information may have
if known in advance by competitors developing similar products. We have some
ongoing obligations under the various agreements as to assisting Medtronic in
developing its product and manufacturing the product when developed.
We plan to market the initial products for which we obtain regulatory
approval, through co-development and marketing arrangements with strategic
partners such as Medtronic or other licensing arrangements with larger
pharmaceutical companies. Implementation of this strategy will depend on many
factors, including the market potential of any products we develop and our
financial resources. We do not expect to establish a direct sales capability
for therapeutic compounds for at least the next several years. The timing of
our entry into marketing arrangements or other licensing arrangements will
depend on successful product development and regulatory approval within the
regulatory framework established by the Federal Food, Drug and Cosmetics Act.
Although the implementation of initial aspects of our marketing strategy may be
undertaken before this process is completed, the development and approval
process typically is not completed in less than three to five years after the
filing of an IND application and our marketing strategy therefore may not be
implemented for several years.
Manufacturing
We believe we have developed proprietary manufacturing techniques that
will allow large-scale, synthesis and purification of NEUGENES. Because our
NEUGENE compounds are based upon a flexible backbone chemistry, we believe that
NEUGENE synthesis will be more cost-effective than competing technologies. We
have recently established a Good Manufacturing Practices, or GMP, manufacturing
facility at our Corvallis, Oregon facility. Our GMP facility should provide
sufficient manufacturing capacity to meet our clinical trial requirements for
the foreseeable future and allow us to produce products incorporating our
technology. Our GMP facility is subject to FDA inspection and regulation.
We currently intend to retain manufacturing rights for all products
incorporating our patented antisense technology, whether sold directly by us or
through collaborative agreements with industry partners. We have also contracted
with GMP facilities to produce our vaccine for current clinical trial studies.
In March 1993, we moved to our present laboratory facilities. This
facility and the laboratory procedures followed by us have not been formally
inspected by the FDA and will have to be approved as products move from the
research phase through the clinical testing phase and into commercialization.
See “Drug Approval Process and Other Governmental Regulations.”
Marketing
Strategy
We plan to market initial products, when developed, and for which we
obtain regulatory approval, through marketing arrangements or other licensing
arrangements with large pharmaceutical companies. Implementation of this
strategy will depend on many factors, including the market potential of any products
we develop, and our financial resources.
We do not expect to establish a direct sales capability for therapeutic
compounds for at least the next several years. To market products that will
serve a large, geographically diverse patient
population, we expect to enter into licensing, distribution, or
partnering agreements with pharmaceutical companies that have large,
established sales organizations. The timing of our entry into marketing
arrangements or other licensing arrangements with large pharmaceutical
companies will depend on successful product development and regulatory approval
within the regulatory framework established by the Federal Food, Drug and
Cosmetics Act, as amended, and regulations promulgated thereunder. Although the
implementation of initial aspects of our marketing strategy may be undertaken
before this process is completed, the development and approval process
typically is not completed in less than three to five years after the filing of
an IND application and our marketing strategy therefore may not be implemented
for several years. See “Drug Approval Process and Other Governmental
Regulation.”
Patents
and Proprietary Rights
We have developed or acquired a comprehensive body of intellectual
rights. The proprietary nature of, and
protection for, our product candidates, processes and know-how are important to
our business. We plan to prosecute and
aggressively defend our patents and proprietary technology. Our policy is to
patent the technology, inventions, and improvements that are considered
important to the development of our business. We also depend upon trade
secrets, know-how, and continuing technological innovation to develop and
maintain our competitive position.
We own 74 patents covering various aspects of our current technology
platforms and future development technologies. We have 110 additional pending
patent applications relating to our NEUGENE, Avicine,
and other technologies. We intend to protect our proprietary technology with
additional filings as appropriate. Some of our patents on core technologies
expire as early as 2008, including for NEUGENES; however, based on patented
improvements and additional support to such core patents, we believe our patent
protection for those products and other products would extend beyond
2020.
We have also acquired certain product/technology licenses from The Ohio
State University and Dr. Vernon Stevens. These properties include exclusive
royalty-bearing licenses covering the composition, manufacturing and use of Avicine in all fields of use, including
treating and preventing cancer, with the exception of fertility regulation. Our
proprietary rights also include the unrestricted use of vaccine technology for
non-hormonal cancer applications. We
enjoy the right to commercialize any new intellectual property relating to our
licensed subject matter including access and use of all new experimental data
resulting from Dr. Stevens’ research. Our licenses have been granted for a
period of 30 years or 10 years from the expiration of the last issued patent,
whichever comes later. Under these licensing agreements, we have the right to
sublicense our products and technology throughout the world. For such rights,
we are obligated to pay the licensors minimum annual royalties of $60,000
through the third quarter of 2001 and $55,000 thereafter. Subject to such
minimums, the royalties are 5% of net sales of products from licensed
technology in the United States and Canada; 2% of net sales in countries of the
“European Economic Community”; and 25% of any royalties received by us for
sublicenses in the United States, the “European Economic Community” or in
Korea, subject to certain maximums.
We have licensed certain technology from the Public Health Service (and
others) which technology supplements and supports certain of our core
technology. We have certain obligations and minimum royalties under those
agreements which costs are not deemed material to our business.
There can be no assurance that any patents we apply for will be granted
or that patents held by us will be valid or sufficiently broad to protect our
technology or provide a significant competitive advantage. Additionally, we
cannot provide assurance that practice of our
patents or proprietary technology will not infringe third-party
patents.
Drug
Approval Process and Other Government Regulation
The United States system of new drug approvals is the most rigorous in
the world. According to the Pharmaceutical Research and Manufacturers of
America, it costs an average of $500 million and takes an average of almost 15
years from the discovery of a compound to bring a new pharmaceutical to market.
For every 5,000 to 10,000 chemically synthesized molecules screened, only 250
are ever issued an IND for testing in humans and only one will obtain FDA
approval.
Drug Discovery
In the initial stages of drug discovery before a compound reaches the
laboratory, tens of thousands of potential compounds are randomly screened for
activity against an assay assumed to be predictive for particular disease
targets. This drug discovery process can take several years. Once a company
locates a screening lead, or starting point for drug development, isolation and
structural determination may begin. The development process results in numerous
chemical modifications to the screening lead in an attempt to improve its drug
properties. After a compound emerges from the above process, the next steps are
to conduct further preliminary studies on the mechanism of action, further in
vitro (test tube) screening against particular disease targets and, finally,
some in vivo (animal) screening. If the compound passes these barriers, the
toxic effects of the compound are analyzed by performing preliminary
exploratory animal toxicology. If the results are positive, the compound
emerges from the basic research mode and moves into the pre-clinical phase.
Preclinical Testing
During the pre-clinical testing stage, laboratory and animal studies
are conducted to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety. These tests typically take
approximately three and one-half years to complete.
Investigational New Drug Application
During the pre-clinical testing, an IND is filed with the FDA to begin
human testing of the drug. The IND becomes effective if not rejected by the FDA
within 30 days. The IND must indicate the results of previous experiments, how,
where and by whom the new studies will be conducted, the chemical structure of
the compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the compound
is manufactured. In addition, an Institutional Review Board, comprised of
physicians at the hospital or clinic where the proposed studies will be
conducted, must review and approve the IND. Progress reports detailing the
results of the clinical trials must be submitted at least annually to the FDA.
Phase I Clinical Trials
After an IND becomes effective, Phase I human clinical trials can
begin. These tests, involving usually between 20 and 80 patients or healthy
volunteers, typically take approximately one year to complete and cost between
$300,000 and $500,000 per trial. The Phase I clinical studies also determine
how a drug is absorbed, distributed, metabolized and excreted by the body, and
the duration of its action. Phase I trials are not normally conducted for
anticancer product candidates.
Phase II Clinical Trials
In Phase II clinical trials, controlled studies are conducted on
approximately 100 to 300 volunteer patients with the targeted disease. The
preliminary purpose of these tests is to evaluate the effectiveness of the drug
on the volunteer patients as well as to determine if there are any side
effects. These studies generally take approximately two years and cost between
$500,000 and $4 million per trial, and may be conducted concurrently with Phase
I clinical trials. In addition, Phase I/II clinical trials may be conducted to
evaluate not only the efficacy of the drug on the patient population, but also
its safety.
Phase III Clinical Trials
This phase typically lasts about three years, usually involves 1,000 to
3,000 patients and cost between $5 and $50 million per trial. During the Phase
III clinical trials, physicians monitor the patients to determine efficacy and
to observe and report any reactions that may result from long-term use of the
drug.
New Drug Application
After the completion of all three clinical trial phases, if the data
indicate that the drug is safe and effective, a New Drug Application, or NDA,
is filed with the FDA. The NDA must contain all of the information on the drug
gathered to that date, including data from the clinical trials. NDAs are often
over 100,000 pages in length. The average NDA review time for new
pharmaceuticals approved in 1997 was 16.2 months, down from 23 months in 1996.
Marketing Approval
If the FDA approves the NDA, the drug becomes available for physicians
to prescribe. Periodic reports must be submitted to the FDA, including
descriptions of any adverse reactions reported. The FDA may request additional
studies (Phase IV) to evaluate long-term effects.
Phase IV Clinical Trials and Post Marketing Studies
In addition to studies requested by the FDA after approval, these
trials and studies are conducted to explore new indications. The purpose of
these trials and studies and related publications is to broaden the application
and use of the drug and its acceptance in the medical community.
Competition
Companies in the cancer vaccine development area include Progenics
Pharmaceutical, Inc., Corixa Corporation, Biomira Inc. and Bristol Meyers-Squibb.
Several companies are pursuing the development of antisense technology,
including Eli Lilly, Merck, Genta Incorporated, and ISIS Pharmaceuticals. All
of these companies have products in development stages, and, in some cases, are
in human trials with antisense compounds generally similar to our NEUGENE
compounds.
While we believe that none of these companies is likely to introduce an
additional antisense compound into the broad commercial market in the immediate
future, many pharmaceutical and biotechnology companies, including most of
those listed above, have financial and technical resources greater than those
currently available to us and have more established collaborative relationships
with industry partners than we do. We believe that the
combination of pharmaceutical properties of our NEUGENE compounds for
restenosis, cancer, and drug metabolism affords us competitive advantages when
compared with the antisense compounds of competitors.
We can also expect to compete with other companies exploiting
alternative technologies that address the same therapeutic needs as do our
technologies. The biopharmaceutical market is subject to rapid technological
change, and it can be expected that competing technologies will emerge and will
present a competitive challenge to us.
Research
and Development
The Company expensed
$22,413,892, $12,750,901 and $9,268,330 on research and development activities
during the years ended December 31, 2002, 2001 and 2000. Research and development (R&D) expenses
included related salaries, contractor fees, materials, utilities and
allocations of corporate costs. R&D expenses consisted of independent
R&D costs and costs associated with collaborative development arrangements.
In addition, the Company funded R&D at other companies and research
institutions under agreements. Research and development costs are expensed as
incurred.
Employees
As of December 31, 2002, we had 89 employees, 23 of whom hold
advanced degrees. Eighty-one employees are engaged directly in research and
development activities, and eight are in administration. None of our employees
are covered by collective bargaining agreements, and we consider relations with
our employees to be good.
Item 2.
Item 2. Description
of Property
We occupy 50,000 square feet of leased laboratory and office space at
4575 S.W. Research Way, Suite 200, Corvallis, Oregon 97333. The lease on our
space expires in December 2007. Our executive office is located in 2,400 square
feet of leased space at One S.W. Columbia, Suite 1105, Portland, Oregon 97258.
This lease expires July 2004. We believe that our facilities are suitable and
adequate for our present operational requirements for the foreseeable future.
Item 3.
Item 3. Legal Proceedings
As of March 31, 2003, there were no material, pending legal proceedings
to which we are a party. From time to time, we become involved in ordinary,
routine or regulatory legal proceedings incidental to our business.
Item 4.
Item 4. Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the
quarter ended December 31, 2002.
PART II
Item 5.
Item 5. Market for
Common Equity and Related Stockholder Matters
Our Common Stock is quoted on the Nasdaq National Market System
(“Nasdaq NMS”) under the symbol “AVII.”
The following table sets forth the high and low closing sales prices as
reported by Nasdaq NMS for each quarterly period in the two most recent fiscal
years and quarter-to-date for the next fiscal year:
The number of shareholders of record and approximate number of
beneficial holders on March 11, 2003 was 581 and 12,068 respectively. There
were no cash dividends declared or paid in fiscal years 2002 or 2001. We do not
anticipate declaring such dividends in the foreseeable future.
All securities sold during 2002 by us were either previously reported
on our Form 10-Qs filed with the Securities and Exchange Commission or sold
pursuant to Registration statements filed under the Securities Act of 1933.
During 2002, we issued 31,766 shares of common stock to employees at
$4.74 per share for $150,558, under our Employee Stock Purchase Plan. During
2001, we issued 29,419 shares of common stock to employees at $5.61 per share
for $164,988, under our Employee Stock Purchase Plan.
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain historical information of the
Company. The selected financial data as of December 31, 2002 and the year ended
December 31, 2002 have been derived from the Company’s audited financial
statements included elsewhere in this Annual Report on Form 10-K. The selected
financial data as of December 31, 2001, 2000, 1999 and 1998 and for the four
years ended December 31, 2001, 2000, 1999 and 1998 have been derived from the
Company’s financial statements which had previously been audited by Arthur
Andersen LLP (“Arthur Andersen”). Arthur Andersen has not reissued its report
for purposes of this Annual Report on Form 10-K. See Part II, Item 7
Item 7. Management’s
Discussion and Analysis or Plan of Operations
Forward-Looking
Information
This report contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as “believe,”
“anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar
expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. We have based these forward-looking statements
largely on our expectations. Forward-looking statements in this report include,
but are not necessarily limited to, those relating to:
• our intention to introduce new products,
• receipt of any required FDA or other
regulatory approval for our products,
• our expectations about the markets for
our products,
• acceptance of our products, when
introduced, in the marketplace,
• our future capital needs, and
• success of our patent applications.
Forward-looking statements are subject to risks and uncertainties,
certain of which are beyond our control. Actual results could differ materially
from those anticipated as a result of the factors described in the “Risk
Factors” and detailed in our other Securities and Exchange Commission filings,
including among others:
• the effect of regulation by the FDA and
other governmental agencies,
• delays in obtaining, or our inability to
obtain, approval by the FDA or other regulatory authorities for our products,
• research and development efforts,
including delays in developing, or the failure to develop, our products,
• the development of competing or more
effective products by other parties,
• the results of pre-clinical and clinical
testing,
• uncertainty of market acceptance of our
products,
• problems that we may face in
manufacturing, marketing, and distributing our products,
• our inability to raise additional capital
when needed,
• delays in the issuance of, or the failure
to obtain, patents for certain of our products and technologies, and
• problems with important suppliers and
business partners.
Because of these risks and uncertainties, the forward-looking events
and circumstances discussed in this report or incorporated by reference might
not transpire. Factors that cause actual results or conditions to differ from
those anticipated by these and other forward-looking statements include those
more fully described in the “Risk Factors” section and elsewhere in this
report.
Overview
From our inception in 1980, we have devoted our resources primarily to
fund our research and development efforts. We have been unprofitable since
inception and, other than limited interest and grant revenue, we have had no
material revenues from the sale of products or from other sources, and we do
not expect material revenues for at least the next 12 months. We expect to
continue to incur losses for the foreseeable future as we continue to expand
our research and development efforts and enter additional collaborative
efforts. As of December 31, 2002, our accumulated deficit was $116,578,058.
Results
of Operations
Year
Ended December 31, 2002 Compared with Year Ended December 31, 2001. Revenues, from license fees, grants and research
contracts, increased from $706,102 in 2001 to $836,784 in 2002, primarily due
to increases in research contracts revenues,
partially offset by decreases in grants revenues. Operating expenses
increased from $16,108,718 in 2001 to $26,177,833 in 2002 due to increases in
research and development and regulatory affairs staffing and increased expenses
associated with outside collaborations and pre-clinical and clinical testing of
the Company’s technologies which increased from $12,750,901 in 2001 to
$22,413,892 in 2002. Approximately $10,000,000 of this increase was due to
outside contractor GMP manufacturing costs of NEUGENESÒ for
Phase III clinical trials and potential commercial launch of the Resten-NG™
product. The Company expects to move NEUGENEÒ
manufacturing in-house to the Company’s recently completed GMP manufacturing
facility, substantially reducing such manufacturing costs. Additionally,
general and administrative costs increased from $3,357,817 in 2001 to
$3,763,941 in 2002 to support the research expansion, and to continue to
broaden the Company’s investor and public relations efforts. Net interest
income decreased from $1,000,530 in 2001 to $460,258 in 2002 due to reductions
in market interest rates and earnings on decreased cash balances. In 2001 and
2002, the Company recorded non-cash write-downs of $12,523,088 and $4,478,260,
respectively, on short-term securities-available-for-sale that had an other
than temporary impairment in accordance with generally accepted accounting
principles.
Year
Ended December 31, 2001 Compared with Year Ended December 31, 2000. Revenues, from license fees, grants and research
contracts, decreased from $1,297,338 in 2000 to $706,102 in 2001 primarily due
to the receipt of a one-time $1,000,000 fee for expansion of a license for
diagnostic applications during the first quarter of 2000, which was offset by
increases of $408,764 in grants and research contracts revenues in 2001.
Operating expenses increased from $11,538,632 in 2000 to $16,108,718 in 2001
due to increases in research and development and regulatory affairs staffing
and increased expenses associated with outside collaborations and pre-clinical
and clinical testing of the Company’s technologies which increased from
$9,268,330 in 2000 to $12,750,901 in 2001. Additionally, general and
administrative costs increased from $2,270,302 in 2000 to $3,357,817 in 2001 to
support the research expansion, and to continue to broaden the Company’s
investor and public relations efforts. Net interest income decreased from
$1,001,338 in 2000 to $1,000,530 in 2001 due to reductions in market interest
rates, which were slightly offset by earnings on increased cash balances. In
the third quarter of 2001, the Company recorded a non-cash write-down of
$12,523,088 on short-term securities-available-for-sale that had an other than
temporary impairment in accordance with generally accepted accounting principles.
Liquidity
and Capital Resources
We have financed our operations since inception primarily through
equity sales totaling $102,429,628, from grants and contract research funding
of $3,681,441 from various sources, and $1,480,432 from shared development
funding on Avicine with SuperGen.
We expect to continue to incur losses as we expand our research and development
activities and related regulatory work and increase our collaborative efforts.
For 2003, we expect our expenditures for operations, including our
collaborative efforts, and our GMP facilities to be approximately $17 to $18
million. That number could increase if we undertake additional collaborative
efforts. However, if need be in 2003, we could reduce our expenditures because
the vast majority of our costs are variable. Our expenditures for 2004 are
expected to be greater than or equal to the 2003 estimate. Those estimated
expenditures include amounts necessary to fulfill our obligations under our
various collaborative, research and licensing agreements during 2003.
Because of the cost (up to $500 million) and timeframe (up to 15 years)
traditionally associated with developing a potential drug or pharmaceutical
product to where FDA approval for human sales is received, our business
strategy is to develop our products to initial Phase III human clinical trials
and look for third parties to fund completion of
development of the product and market the product through strategic
partnerships, license agreements or other relationships, such as our research
and development agreement and license agreement with Medtronic. We also look
for collaborative and other efforts, such as our relationship with Exelixis, to
utilize other technology to increase the potential variety and reduce the cost
of identifying products. We currently use this strategy to limit the potential
cost we would incur in developing a product. Our expected costs under our
various contracts and for various drug development products can be estimated
for the next year or two, but not much beyond that due to the uncertainty of
clinical trial results, research results and when we will find a partner to
develop a potential drug.
Because of the various factors noted above and the expectation that,
until we establish revenue sources, we will license to, or jointly develop our
prospective products with, strategic partners, we review, at least annually,
each research program and clinical trial, based on results and progress during
the prior year and estimate our needs for that program or trial for the coming
year, making adjustments based on the progress of the program during the year.
We do not set long-term development budgets or development schedules for
bringing our products to market or track our research costs on a product basis,
other than against the current budgeted amount.
We do not expect any material revenues in 2003 or 2004 from our
business activities. We expect that our cash requirements for the balance of
calendar 2003 will be satisfied by existing cash resources. Our cash, cash
equivalents and short-term securities were $19,293,645 at December 31, 2002,
compared with $25,597,121 at December 31, 2001. The decrease of $6,303,476 was
primarily due to total expenditures of $23,493,926, including $20,262,859 used
in operations and $3,231,067 used for purchases of property and equipment and
patent related costs, offset by the receipt of $21,321,060 in net proceeds from
a private equity financing and $656,650 from the exercise of options and
warrants. This private equity financing with several institutional investors
closed on March 25, 2002. The Company sold
3,070,671 shares of common stock at $7.50 per share. Investors also received a
warrant for the purchase of 614,139 common shares for $10.50 per share. These
warrants are immediately exercisable and expire in March 2006. Our short-term securities represent investments in
commercial paper and common stock. The Company’s investment in common stock is
in SuperGen, Inc. with a fair market value of $1,625,608 at December 31, 2002,
compared with $6,412,868 at December 31, 2001. In 2002, the Company
recorded write-downs of $4,478,260 for an other than temporary impairment on
the value of the SuperGen investment in accordance with accounting principles
generally accepted in the United States. The fair market value of the SuperGen
investment was above cost by $729,956 at December 31, 2002. The Company reviews
the fair market value of its short-term securities in relation its cost basis
of the securities at each balance sheet date. If a decline in fair market value
below the cost basis is judged to be other than temporary, the cost basis of
the security is written down to fair value as a new cost basis and the amount
of the write-down is included in earnings as an impairment charge. SuperGen’s common stock has historically been
volatile and accordingly the actual return we could achieve from this
investment, if liquidated, may vary widely. To fund our operations beyond 2003,
we will need to raise additional capital. We will continue to look for
opportunities to finance our ongoing activities and operations through
accessing corporate partners or the public equity markets, as we currently have
no credit facility, nor do we intend to seek one.
In May 2001, the Company entered into a license
and development agreement with Medtronic relating to the Company’s antisense
compounds which may have application in the treatment of vascular disease. The
Company also entered into a separate stock purchase agreement with Medtronic
International, Ltd. (then Medtronic Asset Management, Inc.) for $10,000,000 in
cash in exchange for 1,408,451 shares of AVI common stock and a warrant to
purchase 3,000,000 shares of AVI common stock at $10.00 per share. Closing of
the transaction occurred during the second quarter of 2001.
In July 2000, the Company completed a secondary offering for 3,000,000
shares of common stock at $7.25 per share. Net proceeds were $19,861,571. In addition,
representatives’ warrants to purchase 300,000 shares of AVI common stock were
issued to the underwriters of the secondary offering.
In April 2000, the Company entered into an
alliance with SuperGen for shared development and marketing rights for Avicine. Under the terms of the agreement, AVI and
SuperGen will equally share in future clinical development and FDA registration
costs as well as in profits from product sales in the United States.
Additionally, AVI may receive up to $80 million from SuperGen from meeting
clinical and commercialization benchmarks.
In addition, pursuant to a separate private
placement, the Company received from SuperGen $5,000,000 in cash and 347,826
registered shares of SuperGen common stock in exchange for 1,684,211 shares of
AVI common stock and a warrant to purchase 1,665,878 shares of AVI common
stock, subject to anti-dilution provisions. Closing of the transaction occurred
during the third quarter of 2000.
The Company’s off-balance sheet arrangements are limited to operating
leases and rents on certain facilities and equipment and are expensed as
incurred. As of December 31, 2002, the future annual minimum rental payments
required under non-cancelable leases total $909,000 in 2003, $906,000 in 2004,
$892,000 in 2005, $918,000 in 2006 and $906,000 in 2007.
Our future expenditures and capital requirements depend on numerous
factors, most of which are difficult to project beyond the short term,
including without limitation, the progress of our research and development programs,
the progress of our pre-clinical and clinical trials, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, our ability to
establish collaborative arrangements and the terms of any such arrangements,
and the costs associated with commercialization of our products. Our cash
requirements are expected to continue to increase each year as we expand our
activities and operations. There can be no assurance, however, that we will
ever be able to generate product revenues or achieve or sustain profitability.
New Accounting
Pronouncements
See Note 2 of Notes to Financial Statements included under
Part III, Item 15.
Critical Accounting
Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to valuation
of investments and revenue recognition. We base our estimates on historical
experience and on various other assumptions. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies and the related judgments and estimates
affect the preparation of our financial statements.
Valuation
of Investments Investments in marketable securities are recorded at fair value each
period with changes recorded to other comprehensive income. We periodically
evaluate our investments for other than temporary impairments as defined by applicable
SEC guidance. In 2002, we determined the investment in SuperGen had an other
than temporary impairment, and accordingly, was written down by $4,478,260. The
write down amount was based upon the approximate recent monthly trading average
of $2 per share. SuperGen’s stock has historically been volatile, and
accordingly, the actual liquidity we could achieve from this investment, if
liquidated, may vary widely.
Revenue
Recognition Revenue is recorded from research contracts and grants as the services are
performed and payment is reasonably assured. Upfront, nonrefundable fees and
other fees associated with license and development arrangements are recognized
as revenue ratably over the performance period. Revenue associated with
performance milestones under license and development arrangements is recognized
based upon the achievement of the milestones, as defined in the respective
agreements. Fees received from SuperGen pursuant to our Avicine shared
development arrangement are netted against research and development expense
since the Company and SuperGen share equally in all clinical development and
FDA registration costs. Revenue from license and development arrangements has
been insignificant to date.
Long-Lived Asset Impairment
We regularly evaluate long-lived assets
and certain identified intangible assets for impairment in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” which requires us to review
our long-lived assets and certain identifiable intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset might not be recoverable and exceeds its fair value. Recoverability
is assessed utilizing an un-discounted cash flow analysis and if less then the
carrying value is compared to the fair value for assessing impairment. Based on this analysis, we did not recognize
an impairment on long-lived assets during the year ended December 31, 2002. If
circumstances related to our long-lived assets change, we may record an
impairment charge in the future.
Factors
Affecting Future Operating Results
We do not provide forecasts of our future financial performance. While
we are optimistic about our long-term prospects, the following factors should
be considered in evaluating our outlook. If the possibilities described as
risks below actually occur, our operating results and financial condition would
likely suffer and the trading price of our common stock may fall, causing a
loss of some or all of an investment in our common stock.
Our
products are in an early stage of development and may not be determined to be
safe or effective.
We are only in the early stages of clinical development with our
NEUGENE antisense pharmaceutical products. We have devoted almost all of our
time to research and development of our technology and products, protecting our
proprietary rights and establishing strategic alliances. Our proposed products
are in the pre-clinical or clinical stages of development and will require
significant further research, development, clinical testing and regulatory
clearances. We have no products available for sale and we do not expect to have
any products available for sale for several years. Our proposed products are
subject to development risks. These risks include the possibilities that any of
the products could be found to be ineffective or toxic, or could fail to
receive necessary regulatory clearances. Although we have obtained favorable
results in Phase II trials using Avicine
to treat colorectal and pancreatic cancer patients, we may not obtain similar
or more favorable results in a Phase III clinical trial. We have not received
any significant revenues from the sale of products and we may not successfully
develop marketable products that will increase sales and, given adequate
margins, make us profitable. Third parties may develop superior or equivalent,
but less expensive, products.
We have
incurred net losses since our inception, and we may not achieve or sustain
profitability.
We incurred a net loss of $26.9 million in 2001 and of $29.4 million in
2002, including in 2001 a $12.5 million non-cash write-down and in 2002 a $4.5
million non-cash write-down of investment securities in accordance with SEC
accounting rules. As of December 31, 2002, our accumulated deficit was $116.6
million. Our losses have resulted principally from expenses incurred in
research and development of our technology and products and from selling,
general and administrative expenses that we have incurred while building our
business infrastructure. We expect to continue to incur significant operating
losses in the future as we continue our research and development efforts and
seek to obtain regulatory approval of our products. Our ability to achieve
profitability depends on our ability to raise additional capital, complete
development of our products, obtain regulatory approvals and market our
products. It is uncertain when, if ever, we will become profitable.
If we
fail to attract significant additional capital, we may be unable to continue to
successfully develop our products.
Since we began operations, we have obtained operating funds primarily
by selling shares of our company. Based on our current plans, we believe that
current cash balances will be sufficient to meet our operating needs for the
current fiscal year. Furthermore, the actual amount of funds that we will need
will be determined by many factors, some of which are beyond our control. These
factors include the success of our research and development efforts, the status
of our pre-clinical and clinical testing, costs relating to securing regulatory
approvals and the costs and timing of obtaining new patent rights, regulatory
changes, competition and technological developments in the market. We may need
funds sooner than currently anticipated.
We anticipate that we may need to obtain additional funds during or at
the end of the current fiscal year. If necessary, potential sources of
additional funding include strategic relationships, public or private sales of
shares of our common stock or debt or other arrangements. We may not obtain
additional funding when we need it on terms that will be acceptable to us or at
all. If we raise funds by selling additional shares of our common stock or
securities convertible into our common stock, the ownership interest of our
existing shareholders will be diluted. If we are unable to obtain financing
when needed, our business and future prospects would be materially adversely
affected.
If we
fail to receive necessary regulatory approvals, we will be unable to
commercialize our products.
All of our products are subject to extensive regulation by the United
States Food and Drug Administration, or FDA, and by comparable agencies in
other countries. The FDA and comparable agencies require new pharmaceutical
products to undergo lengthy and detailed clinical testing procedures and other
costly and time-consuming compliance procedures. Avicine has completed three Phase I and three Phase II studies
and is ready to start a Phase III trial. Our first NEUGENE antisense drug,
Resten-NG, completed Phase I trials in late 2001 and a Phase II trial in 2002.
We initiated two additional Phase Ib studies in 2001 for cancer and polycystic
kidney disease and completed three Phase I trials on drug metabolism. Except
for clinical trials underway or ready to start, we may not initiate additional
trials when predicted or at all, or complete our clinical trials that are
started or in a timely fashion. We do not know when or if we will be able to
submit our products for regulatory review. Even if we submit a new drug
application, there may be delays in obtaining regulatory approvals, if we
obtain them at all. Sales of our products outside the United States will also
be subject to regulatory requirements governing clinical trials and product
approval. These requirements vary from country to country and could delay
introduction of our products in those countries. We cannot assure you that any
of our products will receive marketing approval from the FDA or comparable
foreign agencies.
We may
fail to compete effectively, particularly against larger, more established
pharmaceutical companies, causing our business to suffer.
The biotechnology industry is highly competitive. We compete with
companies in the United States and abroad that are engaged in the development
of pharmaceutical technologies and products. They include: biotechnology,
pharmaceutical, chemical and other companies; academic and scientific
institutions; governmental agencies; and public and private research
organizations.
Many of these companies and many of our other competitors have much
greater financial and technical resources and production and marketing
capabilities than we do. Our industry is characterized by extensive research
and development and rapid technological progress. Competitors may successfully
develop and market superior or less expensive products which render our
products less valuable or unmarketable.
We have limited operating experience.
We have engaged solely in
the development of pharmaceutical technology. Although some of our management
have experience in biotechnology company operations, we have limited experience
in manufacturing or selling pharmaceutical products. We also have only limited
experience in negotiating and maintaining strategic relationships, and in
conducting clinical trials and other later-stage phases of the regulatory
approval process. We may not successfully engage in some or all of these
activities.
We have limited manufacturing capability.
While we believe that we
can produce materials for clinical trials and produce products for human use at
our recently completed GMP manufacturing facility, we may need to, expand our
commercial manufacturing capabilities for products in the future if we elect
not to or cannot contract with others to manufacture our products. This
expansion may occur in stages, each of which would require regulatory approval,
and product demand could at times exceed supply capacity. We have not selected
a site for any expanded facilities and do not know what the construction cost
will be for such facilities and whether we will have the financing needed for
such construction. We do not know if or when the FDA will determine that such
facilities comply with Good Manufacturing Practices. The projected location and
construction of any facilities will depend on regulatory approvals, product
development, pharmaceutical partners and capital resources, among other
factors. We have not obtained regulatory approvals for any productions
facilities for our products, nor can we assure investors that we will be able
to do so.
If we
lose key personnel or are unable to attract and retain additional, highly
skilled personnel required for our activities, our business will suffer.
Our success will depend to a large extent on the abilities and
continued service of several key employees, including Drs. Denis Burger,
Patrick Iversen, David Mason and Dwight Weller. We maintain key man life
insurance in the amount of $1,000,000 for Dr. Burger and $500,000 for each of
Drs. Iversen and Weller. The loss of any of these key employees could
significantly delay the achievement of our goals. Competition for qualified
personnel in our industry is intense, and our success will depend on our
ability to attract and retain highly skilled personnel. To date, we have been successful
in attracting and retaining key personnel. We are not aware of any key
personnel who plan to retire or otherwise leave the Company in the near future.
Asserting,
defending and maintaining our intellectual property rights could be difficult
and costly, and our failure to do so will harm our ability to compete and the
results of our operations.
Our success will depend on our existing patents and licenses, and our
ability to obtain additional patents in the future. We have been issued 74
patents and have filed an additional 110 patent applications in the United
States, Canada, Europe, Australia and Japan. We license the composition,
manufacturing and use of Avicine
in all fields, except fertility regulation from The Ohio State University, and
we license other patents for certain complementary technologies from others.
Some of our patents on core technologies expire as early as 2008,
including for NEUGENES; however, based on patented improvements and additions
to such core patents, we believe our patent protection for those products and
other products would extend beyond 2020.
We cannot assure investors that our pending patent applications will
result in patents being issued in the United States or foreign countries. In
addition, the patents which have been or will be issued may not afford
meaningful protection for our technology and products. Competitors may develop
products similar to ours which do not conflict with our patents. Others may
challenge our patents and, as a result, our patents could be narrowed or
invalidated. The patent position of biotechnology firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the
United States Patent and Trademark Office (USPTO), or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
biotechnology patents. In addition, there is a substantial backlog of
biotechnology patent applications at the USPTO and the approval or
rejection of patents may take several years.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action to protect our proprietary rights and, despite our
best efforts, we may be sued for infringing on the patent rights of others. We
have not received any communications or other indications from owners of
related patents or others that such persons believe our products or technology
may infringe their patents. Patent litigation is costly and, even if we
prevail, the cost of such litigation could adversely affect our financial
condition. If we do not prevail, in addition to any damages we might have to
pay, we could be required to stop the infringing activity or obtain a license.
Any required license may not be available to us on acceptable terms, or at all.
If we fail to obtain a license, our business might be materially adversely
affected.
To help protect our proprietary rights in unpatented trade secrets, we
require our employees, consultants and advisors to execute confidentiality
agreements. However, such agreements
may not provide us with adequate protection if confidential information is used
or disclosed improperly. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further, others may independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to our trade secrets.
If our strategic relationships are
unsuccessful, our business could be harmed.
Our strategic relationships with SuperGen, Medtronic, Exelixis and
others are important to our success. The development, improvement and marketing
of many of our key therapeutic products are or will be dependent on the efforts
of our strategic partners. For example, under the SuperGen relationship, we may
fail to achieve clinical and sales milestones; Avicine may fail to achieve regulatory approval; Avicine may not be commercially
successful; SuperGen may fail to perform its obligations under our agreements,
such as failing to devote sufficient resources to marketing Avicine; and our agreements with
SuperGen may be terminated against our will. Similarly, under the Medtronic
relationship, we are dependent on Medtronic to achieve clinical and other
milestones, to obtain regulatory approval and to commercially exploit our
antisense compounds, including Resten-NG, in certain treatments of vascular
disease; which products may not be developed or, if developed may not be
commercially successful; if Medtronic fails to perform its obligations under
our agreements, such as failing to devote sufficient resources to development
or to market such products. We may also need additional future funding, including
for operations, product development and our other activities. We may receive
additional funding from our strategic partners, including SuperGen and
Medtronic, under existing agreements. We may not receive any additional
payments from SuperGen or Medtronic and those relationships may not be
commercially successful. The transactions contemplated by our agreements with
strategic partners, including the equity purchases and cash payments, are
subject to numerous risks and conditions.
The occurrence of any of these events could severely harm our business.
Our near-term strategy is to co-develop products with strategic
partners or to license the marketing rights for our products to pharmaceutical
partners after we complete one or more Phase II clinical trials. In this
manner, the extensive costs associated with late-stage clinical development and
marketing will be shared with, or the responsibility of, our strategic
partners.
To fully realize the potential of our products, including development,
production and marketing, we may need to establish other strategic
relationships.
We have
limited sales capability and may not be able to successfully commercialize our
products.
We have been engaged solely in the development of pharmaceutical
technology. Although some of our management have experience in biotechnology
company operations, we have limited experience in manufacturing or selling
pharmaceutical products. We also have only limited experience in negotiating
and maintaining strategic relationships, and in conducting clinical trials and
other later-stage phases of the regulatory approval process. To the extent we
rely on strategic partners to fully commercialize our products, we will be
dependent on their efforts. We may not successfully engage in any of these
activities.
We may
be subject to product liability lawsuits and our insurance may not be adequate
to cover damages.
We believe we carry adequate insurance for the product development
research we currently conduct. In the future, when we have products available
for commercial sale and use, the use of our products will expose us to the risk
of product liability claims. Although we intend to obtain product liability
insurance coverage, product liability insurance may not continue to be
available to us on acceptable terms and our coverage may not be sufficient to
cover all claims against us. A product liability claim, even one without merit
or for which we have substantial coverage, could result in significant legal
defense costs, thereby increasing our expenses, lowering our earnings and,
depending on revenues, potentially resulting in additional losses.
Continuing
efforts of government and third party payers to contain or reduce the costs of
health care may adversely affect our revenues and future profitability.
In addition to obtaining regulatory approval, the successful
commercialization of our products will depend on our ability to obtain
reimbursement for the cost of the product and treatment. Government
authorities, private health insurers and other organizations, such as health
maintenance organizations are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in
the United States, the growth of healthcare organizations such as HMOs, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products. The cost
containment measures that healthcare providers are instituting and any
healthcare reform could affect our ability to sell our products and may have a
material adverse effect on our operations. Reimbursement in the United States or
foreign countries may not be available for any of our products, any
reimbursement granted may be reduced or discontinued, and limits on
reimbursement available from third-party payors may reduce the demand for, or
the price of, our products. The lack or inadequacy of third-party
reimbursements for our products would have a material adverse effect on our
operations. Additional legislation or regulation relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future
that adversely affects our products and our business.
If we
fail to establish strategic relationships with larger pharmaceutical partners,
our business may suffer.
We do not intend to conduct late-stage (Phase III) human clinical
trials ourselves. We anticipate entering into relationships with larger
pharmaceutical companies to conduct later pharmaceutical trials and to market
our products and we also plan to continue to use contract manufacturing for
late stage clinical and commercial quantities of our products. We may be unable
to enter into corporate partnerships which could impede our ability to bring
our products to market. Any such corporate partnerships, if
entered, may not be on favorable terms and may not result in the successful
development or marketing of our products. If we are unsuccessful in
establishing advantageous clinical testing, manufacturing and marketing
relationships, we are not likely to generate significant revenues and become
profitable.
We use
hazardous substances in our research activities
We use organic and
inorganic solvents and reagents in our clinical development that are
customarily used in pharmaceutical development and synthesis. Some of those
solvents and reagents we use, such as methylene chloride, isopropyl alcohol,
ethyl acetate and acetane, may be classified as hazardous substances, are
flammable and, if exposed to human skin can cause anything from irritation to
severe burns. We receive, store, use and dispose of such chemicals in
compliance with all applicable laws with containment storage facilities and
contained handling and disposal safeguards and procedures. We are routinely
inspected by federal, state and local governmental and public safety agencies
regarding our storage, use and disposal of such chemicals, including the
federal Occupational, Safety and Health Agency (“OSHA”), the Oregon Department
of Environmental Quality (“DEQ”) and local fire departments, without any
material noncompliance issues in such inspections. Further, our usage of such
chemicals is limited and falls below the reporting thresholds under
federal law. Based on our limited use of such chemicals, the nature of such
chemicals and the safeguards undertaken by the Company for storage, use and
disposal, we believe we do not have any material exposure for toxic tort
liability. Further, the cost of such compliance is not a material cost in our
operating budget. While we do not have toxic tort liability insurance at this
time, we believe our current insurance coverage is adequate to cover most
liabilities that may arise from our use of such substances. If we are wrong in
any of our beliefs, we could incur a liability in certain circumstances that
would be material to our finances and the value of an investment in our
securities.
Risks Related to Share Ownership
Our
right to issue preferred stock, our classified Board of Directors and Oregon
Anti-Takeover laws may delay a takeover attempt and prevent or frustrate any
attempt to replace or remove the then
current management of the Company by shareholders.
Our authorized capital
consists of 200,000,000 shares of common stock and 20,000,000 shares of
preferred stock. Our board of directors, without any further vote by the
shareholders, has the authority to issue preferred shares and to determine the
price, preferences, rights and restrictions, including voting and dividend
rights, of these shares. The rights of the holders of shares of common stock
may be affected by the rights of holders of any preferred shares that our board
of directors may issue in the future. For example, our board of directors may
allow the issuance of preferred shares with more voting rights, higher dividend
payments or more favorable rights upon dissolution, than the shares of common
stock or special rights to elect directors.
In addition, we have a “classified” board of directors, which means
that only one-half of our directors are eligible for election each year.
Therefore, if shareholders wish to change the composition of our Board of
Directors, it could take at least two years to remove a majority of the
existing directors or to change all directors. Having a classified board of
directors may, in some cases, delay mergers, tender offers or other possible
transactions which may be favored by some or a majority of our shareholders and
may delay or frustrate action by shareholders to change the then current Board
of Directors and management.
The Oregon Control Share Act and Business Combination Act may limit
parties who acquire a significant amount of voting shares from exercising
control over us for specific periods of time. These acts may lengthen the
period for a proxy contest or for a person to vote their
shares to elect the majority of our Board and change management.
Our stock price is volatile and may
fluctuate due to factors beyond our control.
Historically, the market price of our stock has been highly volatile as
reflected in the table in Part II, Item 5 of this report. The following types
of announcements could have a significant impact on the price of our common
stock: positive or negative results of testing and clinical trials by ourselves
or competitors; delays in entering into corporate partnerships; technological
innovations or commercial product introductions by ourselves or competitors;
changes in government regulations; developments concerning proprietary rights,
including patents and litigation matters; public concern relating to the
commercial value or safety of any of our products; or general stock market
conditions.
Further, the stock market has in recent months experienced and may
continue to experience significant price and volume fluctuations. These
fluctuations have particularly affected the market prices of equity securities
of many biopharmaceutical companies that are not yet profitable. Often, the
effect on the price of such securities is unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations may
adversely affect the ability of a shareholder to dispose of his or her shares
at a price equal to or above the price at which the shares were purchased.
The
significant number of our shares of Common Stock eligible for future sale may
cause the price of our common stock to fall.
We have outstanding
26,562,666 shares of common stock as of December 31, 2002 and all are eligible
for sale under Rule 144 or are otherwise freely tradeable, except for
38,251 shares, which are awaiting registration. In addition:
• Our employees and others hold options to buy a total of 3,668,581
shares of common stock at December 31, 2002. The shares of common stock to be
issued upon exercise of these options, have been registered, and therefore may
be freely sold when issued;
• There are outstanding warrants to buy
10,903,684 shares of common stock at December 31, 2002. The shares issuable
upon exercise of 4,416,814 warrants are registered. These shares may be freely
sold when issued. The holders of warrants covering 400,000 shares have
incidental registration rights to have the shares issuable upon the exercise of
their warrants registered. Once registered, those shares may be freely sold
when issued, for so long as the registration statement is effective and
current. The remaining warrants have no registration rights.
• We may issue options to purchase up to an additional 1,103,770 shares
of common stock at December 31, 2002 under our stock option plans, which also
will be fully saleable when issued.
• We are authorized to sell up to 181,046 shares of common stock under
our Employee Stock Purchase Plan to our full-time employees, nearly all of whom
are eligible to participate.
• Besides issuing Medtronic a warrant for 3,000,000 shares of our Common
Stock, we have also granted certain contractual rights to Medtronic to purchase
(i) an additional 352,113 shares of our Common Stock at a price of $7.10
per share (“First Purchase Right”) and (ii) the right to purchase up to
$7,500,000 of our Common Stock based on the average closing sales price for the
five days preceding the commitment to purchase. Medtronic’s obligations to
purchase are subject to certain technology milestones being met, or if not met,
being waived by Medtronic and any required regulatory or shareholder
approvals. Medtronic may
require us to register these shares upon the exercise of such purchase rights.
Once registered, those shares may be freely sold when issued, for so long as
the registration statement is effective and current.
Sales of substantial
amounts of shares into the public market could lower the market price of our
common stock.
We do not expect to pay dividends in the foreseeable future.
We have never paid
dividends on our shares of common stock and do not intend to pay dividends in
the foreseeable future. Therefore, you should only invest in our common stock
with the expectation of realizing a return through capital appreciation on your
investment. You should not invest in our common stock if you are seeking
dividend income.
Item 7A.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
Due to the short-term nature of our interest bearing assets we believe
that our exposure to interest rate market risk is not significant.
Item 8.
Item 8. Financial
Statements
All information required by this item begins on page in item 15 of
Part IV of this Report and is incorporated into this item by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On May 15, 2002, AVI BioPharma, Inc. (“AVI”) dismissed Arthur Andersen
LLP as its independent public accountants. On May 21, 2002, AVI engaged KPMG
LLP (“KPMG”) as its new independent public accountants. AVI’s Board of
Directors (“Board”) approved the dismissal. All members of the Board’s Audit
Committee, except one, participated in the decision to dismiss Arthur Anderson
at AVI’s May 15, 2002 Board meeting. The engagement of KPMG was approved by
AVI’s Board. The absent Audit Committee member was notified of the change
following the meeting and ratified the change. Shareholder ratification of the
change will be submitted to AVI’s shareholders at the next AVI shareholder
meeting.
None of Arthur Andersen’s reports on AVI’s consolidated financial
statements for the fiscal
years ended December 31, 2000 and 2001 contained an adverse opinion or
disclaimer of opinion, nor was any such report qualified or modified as to
uncertainty, audit scope or accounting principles. The Company filed a current report on Form 8-K with the SEC on
May 22, 2002 as amended by filings with the SEC on May 31, 2002 and June 10,
2002 (collectively, the "Form 8-K").
During the fiscal years ended December 31, 2000 and 2001 and through
May 15, 2002, there were no disagreements between AVI and Arthur Andersen on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreements, if not
resolved to Arthur Andersen’s satisfaction, would have caused them to make
reference to the subject matter of the disagreements in connection with their
reports on AVI’s consolidated financial statements for such years or such
period, and there were no reportable events as set forth in Item 304(a)(1)(v)
of Regulation S-K.
During the fiscal years ended December 31, 2000 and 2001 and through
May 21, 2002, AVI did not consult KPMG regarding the application of accounting
principles to any specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on the AVI’s financial statements,
or any other matters or reportable events as set forth in Items 304(a)(2)(i)
and (ii) of Regulation S-K.
PART III
Item 10.
Item 10. Directors
and Executive Officers of the Registrant
Information regarding our directors and executive officers required by
this item is included in our definitive proxy statement for our 2003 annual
meeting of shareholders to be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this Annual Report and is
incorporated herein by reference.
Item 11.
Item 11. Executive
Compensation
The information required by this item is included in our definitive
proxy statement for our 2003 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this Annual Report and is incorporated herein by reference.
Item 12.
Item 12. Security
Ownership of Certain Beneficial Owners and Management
The information required by this item is included in our definitive
proxy statement for our 2003 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this Annual Report and is incorporated herein by reference.
Item 13.
Item 13. Certain
Relationships and Related Transactions
The information required by this item is included in our definitive
proxy statement for our 2003 annual meeting of shareholders to be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this Annual Report and is incorporated herein by reference.
Item 14.
Item 14. Controls and
Procedures
Disclosure Controls and Procedures
Within the 90 days prior to the date of
this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934. Based on their review of
our disclosure controls and procedures, the President and Chief Executive
Officer and the Chief Financial Officer have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to us that is required to be included in our periodic SEC
filings.
Internal Controls and Procedures
There were no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 15.
Item 15. Exhibits,
Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
Financial
Statements
The following financial statements of the Company and the Report of
KPMG LLP, Independent Auditors, are included in Part IV of this Report on the
pages indicated:
Report of KPMG LLP,
Independent Auditors
Report of
Arthur Andersen, Independent Auditors
Balance Sheets
Statements
of Operations
Statements of
Shareholders’ Equity
Statements
of Cash Flows
Notes to Financial
Statements
Financial
Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
Exhibits
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
Exhibit
No.
Description
3.1
Third
Restated Articles of Incorporation of AntiVirals Inc.(1)
3.2
Bylaws
of AntiVirals Inc.(1)
3.3
First
Amendment to Third Restated Articles of Incorporation(4)
3.4
Amendment
to Article 2 of the Company’s Third Restated Articles of Incorporation(11)
4.1
Form
of Specimen Certificate for Common Stock.(1)
4.2
Form
of Warrant for Purchase of Common Stock.(1)
4.3
Form
of Warrant Agreement.(1)
4.4
Form
of Representative’s Warrant.(1)
4.5
Form of Warrant
Agreement between AntiVirals Inc. and ImmunoTherapy Shareholders(3)
4.6
Form
of Common Stock Purchase Warrant.(5)
10.1
Stock Incentive Plan(as amended through May 11, 2000.(1)
10.2
Employment
Agreement with Denis R. Burger, Ph.D. dated November 4, 1996.(1)
10.3
Employment
Agreement with Alan P. Timmins dated November 4, 1996.(1)
10.4
Employment
Agreement with Dwight Weller, Ph.D. dated November 4, 1996.(1)
10.5
Technology
Transfer Agreement between Anti-Gene Development Group and AntiVirals Inc.,
dated February 9, 1992.(1)
10.6
Amendment
to Technology Transfer Agreement between Anti-Gene Development Group and
AntiVirals Inc. dated January 20, 1996.(1)
10.7
License
and Option Agreement between Anti-Gene Development Group and AntiVirals Inc.,
dated February 9, 1993.(1)
10.8
Commercial
Lease between Research Way Investments, Landlord, and AntiVirals Inc.,
Tenant, dated June 15, 1992.(1)
10.9
Lease
between Benjamin Franklin Plaza, Inc., Landlord, and AntiVirals Inc.,
Tenant, dated June 17, 1992.(1)
10.10
First
Amendment to Lease between Benjamin Franklin Plaza, Inc., Landlord, and
AntiVirals Inc., Tenant, dated July 24, 1995.(1)
10.11
Employment
Agreement with Patrick L. Iversen, Ph.D. dated July 14, 1997.(2)
10.12
ImmunoTherapy
Corporation 1997 Stock Option Plan(3)
10.13
Form of Employment
Agreement with Jeffrey Lillard(3)
10.14
Promissory Note dated
June, 1998 made by the Lillard Family Trust to AntiVirals Inc.(3)
10.15
Oregon Deed of Trust
Security Agreement and Fixture Filing dated June, 1998, granted by the
Lillard Family Trust to Fidelity National Title Company of Oregon, as
trustee, for the benefit of AntiVirals Inc.(3)
10.16
License Agreement
between ImmunoTherapy Corporation and Ohio State University, dated March 12,
1996(3)
10.17
License Agreement
between ImmunoTherapy Corporation and Ohio State University, dated December
26, 1996(3)
10.18
Amendment to License
Agreement between ImmunoTherapy Corporation and Ohio State University, dated
September 23, 1997(3)
10.19
Agreement and Plan of
Reorganization and Merger dated as of February 2, 1998, among AntiVirals
Inc., AntiVirals Acquisition Corporation and ImmunoTherapy Corporation(3)
10.20
First Amendment to Plan
of Reorganization and Merger dated as of May 27, 1998, among AntiVirals Inc.,
AntiVirals Acquisition Corporation and ImmunoTherapy Corporation(3)
10.21
Second Amendment to
Plan of Reorganization and Merger dated as of August 4, 1998, among
AntiVirals Inc., AntiVirals Acquisition Corporation and ImmunoTherapy
Corporation(3)
10.22
Form of Escrow
Agreement among AntiVirals Inc., the Escrow Indemnitors and Jeffrey Lillard(3)
10.23
Purchase Agreement,
dated December 15, 1999, by and between AVI BioPharma, Inc. and certain
Investors(5)
10.24
Registration Rights
Agreement, dated December 15, 1999, by and between AVI BioPharma, Inc. and
certain Investors(5)
10.25
Purchase Agreement, dated
December 16, 1999, by and between AVI BioPharma, Inc. and certain Investors(5)
10.26
Registration Rights
Agreement, dated December 16, 1999, by and between AVI BioPharma, Inc. and
certain Investors(5)
10.27
Subscription Agreement,
dated December 1, 1999, by and between SuperGen, Inc. and AVI BioPharma,
Inc.(5)
10.28
2000 Amendment to
Technology Transfer Agreement between Anti-Gene Development Group and AVI
BioPharma, Inc.(6)
10.29
United States of
America Sales, Distribution, and Development Agreement, dated April 4, 2000,
between SuperGen, Inc. and AVI BioPharma, Inc.(7)
10.30
Common Stock and
Warrant Purchase Agreement, dated April 4, 2000, between SuperGen, Inc. and
AVI BioPharma, Inc.(7)
10.31
Registration Rights
Agreement, dated April 14, 2000, between SuperGen, Inc. and AVI BioPharma,
Inc.(7)
10.32
2000 Employee Share
Purchase Plan(8)
10.33
Employment Agreement with Mark M. Webber dated May
11, 2000.(9)
10.34
Employment Agreement with David H. Mason, Jr. dated
November 1, 2000.(9)
10.35
Lease Agreement with Spieker Partners, LP dated May
8, 2001.(9)
10.36*
Investment Agreement dated May 22, 2001 between the
Company and Medtronic Asset Management, Inc.(9)
10.37
Warrant dated June 20, 2001 issued to Medtronic
Asset Management, Inc.(9)
10.38
Registration Rights Agreement dated June 20, 2001
between the Company and Medtronic Asset Management, Inc.(9)
10.39*
License and Development Agreement dated June 20,
2001 between the Company and Medtronic, Inc.(9)
10.40*
Supply Agreement dated June 20, 2001 between the
Company and Medtronic, Inc.(9)
10.41
Securities Purchase Agreement dated March 25, 2002
between the Company and certain purchasers(“SPA”(10)
10.42
Form
of Warrant issued by the Company to certain purchasers under the SPA(10)
10.43
Registration
Rights Agreement dated March 25, 2002 between the Company and certain
purchasers(10)
10.44
Equity Incentive Plan(11)
23.0
Consent
of KPMG LLP
99.0
Certification
of CEO and CFO Pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to Exhibits to Registrant’s
Registration Statement on Form SB-2, as amended and filed with the Securities
and Exchange Commission on May 29, 1997 (Commission Registration No.
333-20513).
(2) Incorporated by reference to Exhibits to Registrant’s
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997, and
filed with the Securities and Exchange Commission on March 30, 1998.
(3) Incorporated by reference to Exhibits to Registrant’s
Registration Statement on Form S-4, as amended, and filed with the Securities
and Exchange Commission on August 7, 1998 (Commission Registration No.
333-60849).
(4) Incorporated by reference to Exhibits to Registrant’s
current report on Form 8-K, as filed with the Securities and Exchange
Commission on September 30, 1998 (Commission Registration No. 000-22613).
(5) Incorporated by reference to Exhibits to Registrant’s
Registration Statement on Form S-3, as amended, and filed with the Securities
and Exchange Commission on December 21, 1999 (Commission Registration No.
333-93135).
(6) Incorporated by reference to Exhibits to Registrant’s
Registration Statement on Form S-1 and filed with the Securities and Exchange
Commission on June 16, 2000 (Commission Registration No. 333-39542).
(7) Incorporated by reference to Exhibits to Registrant’s
Registrations Statement on Form S-3, and filed with the Securities and Exchange
Commission on September 15, 2000 (Commission Registration No. 333-45888).
(8) Incorporated by reference to Appendix A to
Registrant’s Definitive Proxy Statement on Form 14-A, as amended, filed with
the Securities and Exchange Commission on April 12, 2000.
(9) Incorporated by reference to Exhibits to Registrant’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, and
filed with the Securities and Exchange Commission on August 14, 2001, as
amended on April 23, 2002.
(10) Incorporated by reference to Exhibits to Registrant’s
current report on Form 8-K, as filed with the Securities and Exchange
Commission on April 2, 2002.
(11) Incorporated by reference to appendixes to
Registrant’s Definitive Proxy Statement on Schedule 14-A, as filed with the
Securities and Exchange Commission on April 11, 2002.
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K
during the quarter ended December 31, 2002.
(c) Exhibits. See
Item 15 (a) above.
(d) Financial
Statement Schedules. See Item 15 (a)
above.
* A Confidential Treatment Request for certain information in this
document has been filed with the Securities and Exchange Commission. The
information for which treatment has been sought has been deleted from such
exhibit and the deleted text replaced by an asterisk (*).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in their capacities indicated on March 31, 2003:
Signature
Title
/s/ DENIS R. BURGER, PH.D.
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Denis R. Burger, Ph.D.
/s/ ALAN P. TIMMINS
President, Chief Operating Officer
and Director
Alan P. Timmins
/s/ MARK M. WEBBER
Chief Financial Officer and Chief Information
Officer
(Principal Financial and Accounting Officer)
Mark M. Webber
/s/ PATRICK L. IVERSEN, PH.D.
Senior Vice President of Research and Development
and Director
Patrick L. Iversen, Ph.D.
/s/ DWIGHT D. WELLER, PH.D.
Senior Vice President of Chemistry and Manufacturing
and Director
Dwight D. Weller, Ph.D.
/s/ BRUCE L.A. CARTER, PH.D.
Director
Bruce L.A. Carter, Ph.D.
/s/ JOHN W. FARA, PH.D.
Director
John W. Fara, Ph.D.
/s/ ANDREW J. FERRARA
Director
Andrew J. Ferrara
/s/ JAMES B. HICKS, PH.D.
Director
James B. Hicks, Ph.D.
/s/ JOSEPH RUBINFELD, PH.D.
Director
Joseph Rubinfeld, Ph.D.
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Denis R. Burger,
certify that:
1. I
have reviewed this annual report on Form 10-K of AVI BioPharma, Inc. (the
“Registrant”);
2. Based
on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this annual report;
4. The
Registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed
such disclosure controls and procedures to ensure that material information
relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated
the effectiveness of the Registrant’s disclosure controls and procedures as of
a date within 90 days prior to the filing date of this annual report (the
“Evaluation Date”); and
(c) presented
in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The
Registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation, to the Registrant’s auditors and the audit committee of
Registrant’s board of directors (or persons performing the equivalent
function):
(a) all
significant deficiencies in the design or operation of internal controls which
could adversely affect the Registrant’s ability to record, process, summarize
and report financial data and have identified for the Registrant’s auditors any
material weaknesses in internal controls; and
b) any fraud,
whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal controls; and
6. The
Registrant’s other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By:
/s/ Denis
R. Burger
Denis R. Burger,
Chief Executive Officer and
Chairman
of the Board
(Principal Executive Officer)
See also the certification pursuant to Section 906 of the Sarbanes
Oxley Act of 2002, which is also attached to this report.
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark M. Webber,
certify that:
1. I
have reviewed this annual report on Form 10-K of AVI BioPharma, Inc. (the
“Registrant”);
2. Based
on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this annual report;
4. The
Registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed
such disclosure controls and procedures to ensure that material information
relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated
the effectiveness of the Registrant’s disclosure controls and procedures as of
a date within 90 days prior to the filing date of this annual report (the “Evaluation
Date”); and
(c) presented
in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The
Registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation, to the Registrant’s auditors and the audit committee of
Registrant’s board of directors (or persons performing the equivalent
function):
(a) all
significant deficiencies in the design or operation of internal controls which
could adversely affect the Registrant’s ability to record, process, summarize
and report financial data and have identified for the Registrant’s auditors any
material weaknesses in internal controls; and
b) any fraud,
whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal controls; and
6. The
Registrant’s other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By:
/s/ Mark
M. Webber
Mark M. Webber,
Chief Financial Officer and Chief
Information Officer
(Principal Financial and
Accounting
Officer)
See also the certification pursuant to Section 906 of the Sarbanes
Oxley Act of 2002, which is also attached to this report.
Independent Auditors’ Report
To
the Board of Directors and Shareholders of
AVI BioPharma, Inc.
We
have audited the accompanying balance sheet of AVI BioPharma, Inc. (an Oregon corporation in the development
stage) as of December 31, 2002, and the related statements of operations,
shareholders’ equity and cash flows for the year ended December 31, 2002 and
for the period from July 22, 1980 (inception) through December 31, 2002.
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 audit. The
financial statements of AVI BioPharma, Inc. as of December 31, 2001 and for
each of the years in the two-year period ended December 31, 2001 and for the
period from July 22, 1980 (inception) through December 31, 2001, were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated
February 21, 2002. Our opinion on the statements of operations, stockholders’
equity and cash flows, insofar as it relates to the amounts included for the
period from July 22, 1980 (inception) through December 31, 2001, is based
solely on the report of the other auditors.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. 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 audit provides a
reasonable basis for our opinion.
In
our opinion, based on our audit and the report of other auditors, the 2002
financial statements referred to above present fairly, in all material
respects, the financial position of AVI
BioPharma, Inc. as of December 31, 2002, and the results of its
operations and its cash flows for the year ended December 31, 2002 and for the
period from July 22, 1980 (inception) through December 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America.
/s/
KPMG LLP
Portland,
Oregon
February
14, 2003
THIS REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLY
ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM.
Report of Independent Public
Accountants
To
the Board of Directors and Shareholders of
AVI BioPharma, Inc.
We
have audited the accompanying balance sheet of AVI BioPharma, Inc. (an Oregon corporation in the development
stage) as of December 31, 2001, and the related statements of operations,
shareholders’ equity and cash flows for each of the two years in the period
ended December 31, 2001 and for the period from inception (July 22, 1980)
to December 31, 2001. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of AVI
BioPharma, Inc. as of December 31, 2001, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2001 and for the period from inception (July 22, 1980) to
December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
AVI
BIOPHARMA, INC.
(A
Development Stage Company)
BALANCE
SHEETS
See accompanying
notes to financial statements.
AVI
BIOPHARMA, INC.
(A
Development Stage Company)
STATEMENTS
OF OPERATIONS
See accompanying
notes to financial statements.
AVI BIOPHARMA, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying
notes to financial statements.
AVI
BIOPHARMA, INC.
(A
Development Stage Company)
STATEMENTS
OF CASH FLOWS
See accompanying
notes to financial statements.
AVI BioPharma, Inc.
(A Development
Stage Company)
NOTES TO FINANCIAL
STATEMENTS
1. ORGANIZATION AND
NATURE OF BUSINESS:
AVI
BioPharma, Inc. (the Company or AVI) was incorporated in the State of Oregon on
July 22, 1980. The mission of the Company is to develop and commercialize
improved therapeutic products based upon antisense and cancer immunotherapy
technology.
Through
May 1993, the financial statements included the combined accounts of the
Company and ANTI-GENE DEVELOPMENT GROUP, a limited partnership (AGDG or
the Partnership) founded in 1981 and registered in the State of Oregon.
Substantially all income generated and proceeds from the Partnership unit sales
through that date have been paid to the Company under the terms of research and
development contracts entered into by the Partnership and the Company.
Significant transactions between the Company and the Partnership through that
date have been eliminated.
In
March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1,
1993, each partner could elect to exchange each unit held or unit warrant held
for 1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. Total shares and warrants to purchase
shares issued in the exchange offer were 1,632,950 and 381,700, respectively.
Effective
May 19, 1993, the Company and the Partnership entered into a Technology
Transfer Agreement wherein the Partnership conveyed all intellectual property
then in its control to the Company. As part of the conveyance, the Company
tendered to the Partnership for liquidation all partnership units received
pursuant to the exchange offer and received a 49.37 percent undivided interest
in the intellectual property. The Company then purchased the remaining
undivided interest in the intellectual property for rights to payments of
4.05 percent of gross revenues in excess of $200 million, from sales of
products, which would, in the absence of the Technology Transfer Agreement,
infringe a valid claim under any patent transferred to the Company. The Company
also granted to the Partnership a royalty-bearing license to make, use and sell
small quantities of product derived from the intellectual property for research
purposes only.
In March 2000, the Company and AGDG amended the
Technology Transfer Agreement to give to AGDG and Gene Tools LLC, related
organizations, exclusive, non royalty-bearing rights to in vitro diagnostic
applications of the intellectual property. In consideration for this amendment,
Gene Tools paid the Company $1 million and reduced the royalty that the Company
would pay to AGDG under the Technology Transfer Agreement on future sales of
therapeutic products from 4.05% to 3.00%.
The
remaining net assets of the Partnership, $176,642 of cash, were no longer
combined with those of the Company in May 1993. Under the terms of the
Technology Transfer Agreement, the Partnership ceased active sales of
partnership units and income generating activities and no longer will enter
into research and development contracts with the Company. The Partnership
currently exists primarily for the purpose of collecting potential future
payments from the Company as called for in the Technology Transfer Agreement.
Beginning
in 1991, the Company changed its fiscal year from a fiscal year ending on
October 31, to a calendar year. The new fiscal year was adopted
prospectively.
2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
items subject to such estimates and assumptions include the valuation of
marketable securities, carrying amount of property, plant and equipment, and
valuation allowance for deferred income tax assets.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less from the date of purchase to be cash equivalents. The
Company held cash equivalents of $10,384,963 and $11,069,451 as of December 31,
2002 and 2001, respectively.
Short-Term Securities-Available-For-Sale
The Company accounts for its short-term securities
in accordance with Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115).
In the second quarter of 2002, the Company recorded a non-cash write-down of
$2,686,956 on its investment in SuperGen, Inc. that had an other than temporary
impairment as defined of SEC accounting rules. In the third quarter of 2002,
the Company recorded a non-cash write-down of $1,791,304 on its investment in
SuperGen, Inc. that had an other than temporary impairment as defined by SEC accounting rules. These write-downs had the effect of writing the
investment down to $2 per share, the approximate recent monthly trading average
for this security. The Company continues to classify its investment securities
as available-for-sale and, accordingly, such investment securities are stated
on the balance sheet at their fair market value. At December 31, 2002 and 2001,
the Company’s investments in marketable securities had gross unrealized gains
of $729,956 and $1,038,956, respectively. The unrealized difference between the
cost and the fair market value of these securities has been reflected as a
separate component of shareholders’ equity. At December 31, 2002 and 2001,
these short-term securities represent investments in commercial paper of
$7,038,156 and $8,114,802, respectively, and common stock. The Company’s
investment in common stock is in SuperGen, Inc., a related party, with a fair
market value of $1,625,608 and $6,412,868 at December 31, 2002 and 2001,
respectively.
Property and Equipment
Property
and equipment is stated at cost and depreciated over the estimated useful lives
of the assets, generally five years, using the straight-line method.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life of the asset.
Amounts
included in property and equipment are as follows:
Patent Costs
Patent
costs consist primarily of legal and filing fees incurred to file patents on
proprietary technology developed by the Company. Patent costs are amortized on
a straight-line basis over the shorter of the estimated economic lives or
the legal lives of the patents, generally 17 years.
Revenue
Recognition
The Company records revenue from research contracts and grants as the
services are performed and payment is reasonably assured. Upfront,
nonrefundable fees and other fees associated with license and development
arrangements are recognized as revenue ratably over the performance period.
Revenue associated with performance milestones under license and development
arrangements is recognized based upon the achievement of the milestones, as
defined in the respective agreements. Fees received from SuperGen, Inc.
pursuant to our Avicine shared development arrangement are netted against
research and development expense since the Company and SuperGen, Inc. share
equally in all clinical development and FDA registration costs. To date revenue
from license and development arrangements has not been significant.
Research and Development
Research
and development (R&D) expenses include related salaries, contractor fees,
materials, utilities and allocations of corporate costs. R&D expenses
consist of independent R&D costs and costs associated with collaborative
development arrangements. In addition, we fund R&D at other companies and
research institutions under agreements. Research and development costs are
expensed as incurred.
Income Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”
(SFAS 109). Under SFAS 109, deferred tax assets and liabilities are
recorded based on the tax effected difference between the tax bases of assets
and liabilities and their carrying amount for financial reporting purposes,
referred to as temporary differences, using enacted marginal income tax rates.
Net Loss Per Share
Basic EPS is calculated using the weighted average number of common
shares outstanding for the period and diluted EPS is computed using the
weighted average number of common shares and dilutive common equivalent shares
outstanding. Given that the Company is in a loss position, there is no
difference between basic EPS and diluted EPS since the common stock equivalents
would be antidilutive.
* The following common
stock equivalents are excluded from earnings per share calculation as their
effect would have been antidilutive:
Stock-based Compensation
The Financial
Accounting Standards Board (FASB) has issued SFAS 123, which defines a fair
value based method of accounting for an employee stock option and similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by Accounting Principles Board Opinion
No. 25 (APB 25). Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income (loss) and earnings (loss)
per share, as if the fair value based method of accounting defined in SFAS 123
had been adopted. In December 2002, the FASB issued SFAS 148 “Accounting for
Stock-Based Compensation - Transition and Disclosure.” SFAS 148 amends SFAS 123
for certain transition provisions for companies electing to adopt the fair
value method and amends SFAS 123 for certain financial statement disclosures,
including interim financial statements. The Company adopted SFAS 148 in
December 2002. The Company has elected to account for its stock-based
compensation plans (which are described in Note 3) under APB 25. The
Company has computed, for pro forma disclosure purposes, the impact on net loss
and net loss per share if the Company had accounted for its stock-based
compensation plans in accordance with SFAS 123 as follows:
No stock-based employee
compensation is included in net loss for any of the periods presented since all
of the options were granted at the fair market value of the Company’s common
stock on the date of grant. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. Additional awards are
anticipated in future years.
The value of all options granted during 2002, 2001 and
2000 using the Black-Scholes options pricing model as prescribed by
SFAS 123 used the following weighted average assumptions for grants:
Using
the Black-Scholes methodology, the total value of options granted during
2002, 2001 and 2000 was $4,843,213, $476,638 and $6,310,098, respectively,
which would be amortized on a pro forma basis over the vesting period of the
options (typically four years). The weighted average fair value of options
granted during 2002, 2001 and 2000 was $4.27, $5.14 and $6.07, respectively.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130 (SFAS 130),
“Reporting Comprehensive Income (Loss),” establishes standards for reporting
and display of comprehensive income. Comprehensive income (loss) includes all
changes in the equity of an enterprise that results from transactions and other
economic events of the period other than transactions with shareholders. SFAS No.
130 became effective during 1998. The Company’s only component of “other
comprehensive income (loss)” is unrealized gain (loss) on short-term securities
available-for-sale.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS 141, “Business Combinations,” and
SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interest method will be prohibited
on a prospective basis only. SFAS 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of this Statement. SFAS 142 became effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 141 and SFAS 142 did
not have a significant impact on the Company’s financial condition or results
of operations.
In August 2001, the FASB approved SFAS 143, “Accounting for Asset
Retirement Obligations,” which will be effective beginning fiscal year 2003.
SFAS 143 addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. In October 2001, the FASB approved SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” which
supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of” and the accounting and reporting
provisions of APB 30, “Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions” for the disposal of a segment
of a business. SFAS 144 retains many of the fundamental provisions of SFAS 121,
but resolves certain implementation issues associated with that Statement. SFAS
144 became effective beginning in fiscal 2002. The Company does not expect the
adoption of SFAS 143 to have a significant impact on its financial condition or
results of operations. The adoption of SFAS 144 did not have a significant
impact on the Company’s financial condition or results of operations.
In July 2002, the FASB approved SFAS 146, “Accounting for Costs
Associated with Exit or Disposal Activities.”
SFAS 146 addresses the financial accounting and reporting for
obligations associated with an exit activity, including restructuring, or with
a disposal of long-lived assets. Exit activities include, but are not limited
to, eliminating or reducing product lines, terminating employees and contracts
and relocating plant facilities or personnel.
SFAS 146 specifies that a company will record a liability for a cost
associated with an exit or disposal activity only when that liability is
incurred and can be measured at fair value. Therefore, commitment to an exit
plan or a plan of disposal expresses only management’s intended future actions
and, therefore, does not meet the requirement for recognizing a liability and
the related expense. SFAS 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
The Company does not anticipate that the adoption of SFAS 146 will have a
material effect on its financial position or results of operations.
In November 2002, the EITF reached a
consensus on Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” EITF No. 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which the vendor will perform multiple revenue
generating activities. EITF No. 00-21 will be effective for interim periods
beginning after June 15, 2003. The Company does not expect the application of
the provisions of EITF No. 00-21 to have a material effect on its financial
position, results of operations or cash flows.
3. LIQUIDITY:
The Company is in the development stage. Since its
inception in 1980 through December 31, 2002, the Company has incurred
losses of approximately $117 million, substantially all of which resulted from
expenditures related to research and development, general and administrative
expenses, non-cash
write-downs in 2002 of $4,478,260 and in 2001 of $12,523,088 on short-term
securities-available-for-sale that had an other than temporary impairment as
defined by SEC accounting rules and a
one-time charge of $19,545,028 for acquired in-process research and
development reflecting the acquisition of ImmunoTherapy Corporation. The Company has not generated any material
revenue from product sales to date, and there can be no assurance that revenues
from product sales will be achieved. Moreover, even if the Company does achieve
revenues from product sales, the Company nevertheless expects to incur
operating losses over the next several years.
The financial statements have been prepared
assuming that the Company will continue as a going concern. The Company’s
ability to achieve a profitable level of operations in the future will depend
in large part on its completing product development of its cancer vaccine,
antisense and/or drug delivery products, obtaining regulatory approvals for
such products and bringing these products to market. During the period required
to develop these products, the Company will require substantial financing.
There is no assurance that such financing will be available when needed or that
the Company’s planned products will be commercially successful. For 2003, the Company expects
expenditures for operations, including collaborative efforts and GMP facilities
to be approximately $17 to $18 million. The decrease from 2002 expenditures is
due to a substantial reduction in the use of an outside GMP manufacturing
contractor. Expenditures for 2003 could
increase if the Company undertakes additional collaborative efforts. However, if necessary, the Company’s
management has the ability to curtail expenditures because the vast majority of
costs are variable.
The
likelihood of the long-term success of the Company must be considered in
light of the expenses, difficulties and delays frequently encountered in the
development and commercialization of new pharmaceutical products, competitive
factors in the marketplace as well as the burdensome regulatory environment in
which the Company operates. There can be no assurance that the Company will
ever achieve significant revenues or profitable operations.
4. SHAREHOLDERS’
EQUITY:
In
December 1999, the Company completed a private offering with institutional
investors and an equity sale to SuperGen, Inc., as a prospective corporate
partner. In the private offering, 1,857,147 shares of common stock and 628,573
warrants to purchase common stock at $4.025 per share were issued. All of the warrants
issued in connection with the private placement are currently exercisable and
expire in five years from closing. Net proceeds of $5,808,003 were received
from the private placement. In the equity sale to SuperGen, Inc., 1,000,000
shares were issued in exchange for net proceeds of $5,247,000 in cash and
securities including 100,000 shares of SuperGen Inc.’s common stock. Subsequent
to December 31, 1999, the shares received from SuperGen, Inc. were registered
and have no restrictions.
In April 2000, the Company entered into an
alliance with SuperGen, Inc. for shared development and marketing rights for
Avicine. Under the terms of the agreement, AVI and SuperGen, Inc. will equally
share in future clinical development and FDA registration costs as well as in
profits from product sales in the United States. Additionally, AVI may receive
up to $80 million from SuperGen, Inc. from meeting commercialization
benchmarks. In addition, pursuant to a separate private placement, the Company
received from SuperGen, Inc. $5,000,000 in cash and 347,826 registered shares
of SuperGen, Inc. common stock in exchange for 1,684,211 shares of AVI common
stock and a warrant to purchase 1,665,878 shares of AVI common stock, subject
to anti-dilution provisions. Closing of the transaction occurred during the
third quarter of 2000.
In July 2000, the Company completed a secondary offering for 3,000,000
shares of common stock at $7.25 per share. Net proceeds were $19,861,571. In
addition, representatives’ warrants to purchase 300,000 shares of AVI common
stock were issued to the underwriters’ of the secondary offering
In May 2001, the Company entered into a license
and development agreement with Medtronic, Inc. relating to the Company’s
antisense compounds which may have application in the treatment of vascular
disease. The agreement provides for milestone payments and license royalties
upon achievement of certain milestones or product sales. The Company also
entered into a separate investment agreement with Medtronic for $10,000,000 in
cash in exchange for 1,408,451 shares of AVI common stock and a warrant to
purchase 3,000,000 shares of AVI common stock. Closing of the transaction
occurred during the second quarter of 2001. Pursuant to the investment
agreement, Medtronic agrees to purchase 352,113 shares of common stock at $7.10
per share and an additional $7,500,000 of common stock based on the average
trailing 5 days closing price preceding the commitment date. These stock purchases
by Medtronic are subject to meeting certain technology milestones and any
required regulatory or shareholder approvals.
In March 2002, the Company closed a private equity
financing for net proceeds of $21,321,000 with
several institutional investors. The Company sold 3,070,671 shares of common
stock at $7.50 per share. Investors also received a warrant for the purchase of
614,139 common shares for $10.50 per share. These warrants are immediately
exercisable and expire in March 2006.
In
2000, the Board of Directors and the Company’s shareholders approved the
Employee Stock Purchase Plan under which the Company is authorized to sell up
to 250,000 shares of common stock to its full-time employees, nearly all of
whom are eligible to participate. Under the terms of the Plan, employees may
elect every six months to have up to 10% of their compensation withheld to
purchase the Company’s common stock. The purchase price of the stock is 85% of
the lower of the beginning-of-plan period or end-of-plan period market price of
the Company’s common stock. During 2002, employees elected to purchase a total
of 31,766 shares of the Company’s common stock at $4.74 per share. During 2001,
employees elected to purchase a total of 29,419 shares of the Company’s common
stock at $5.61 per share. During 2000, employees elected to purchase 7,769
shares of the Company’s common stock at $5.45 per share.
The
Company has two stock option plans, the 2002 Equity Incentive Plan and the 1997
Stock Option Plan (the Plans). The 2002 Plan provides for the issuance of
incentive stock options to employees and nonqualified stock options, stock
appreciation rights and bonus rights to employees, directors of the Company and
consultants. The 1997 Plan provides for the assumption of the ImmunoTherapy
Options under the Merger Agreement. The Company has reserved
4,772,351 shares of common stock for issuance under the Plans. Options
issued under the Plans generally vest ratably over four years and expire five
to ten years from the date of grant.
A
summary of the status of the Company’s stock option plans and changes are
presented in the following table:
At December 31, 2002, 1,103,770 shares were
available for future grant.
The following table summarizes information about stock options
outstanding at December 31, 2002:
The
Company has also issued warrants for the purchase of common stock in
conjunction with financing and compensation arrangements. The 614,139, and
3,000,000 warrants granted in 2002 and 2001, respectively, have not been
considered in the fair value based method of accounting defined in SFAS 123 as
such warrant grants related to the raising of additional equity. Of the
2,115,878 warrants granted during 2000, 1,965,878 have not been considered in
the fair value based method of accounting defined in SFAS 123 as such warrant
grants related to the raising of additional equity. A summary of the status of
the Company’s warrants and changes are presented in the following table:
In connection with the initial public offering, the Company authorized
the issuance of the Underwriters’ Warrants (the Warrants) and reserved 400,000
shares of Common Stock for issuance upon exercise of such Warrants (including
the warrants to purchase common stock issuable upon exercise of the Warrants).
The Warrants entitle the holder to acquire up to an aggregate of 200,000 Units
at an exercise price of $10.80 per Unit and are currently exercisable. In 2002,
the Company extended the expiration date of the warrants to August 2003. Each
Unit consists of one share of Common Stock and one redeemable warrant. Each
warrant initially entitles the holder thereof to purchase one share of Common
Stock at a price of $13.50 per share.
The following table summarizes information about warrants outstanding
at December 31, 2002:
5. INCOME TAXES:
As
of December 31, 2002 and 2001 the Company has net operating loss carryforwards
of approximately $78,131,000 and $52,087,000, respectively, available to reduce
future taxable income, which expire 2002 through 2021. Of this $78,131,000,
approximately $4,150,000 relates to net operating losses assumed as part of the
ImmunoTherapy Corporation acquisition. Utilization of these ImmunoTherapy
Corporation net operating losses is limited to approximately $1,200,000 per
year. In addition, the Internal Revenue Code rules under Section 382 could
limit the future use of the remaining $73,981,000 in losses based on ownership
changes and the value of the Company’s stock. Approximately $3,100,000 of the
Company’s carryforwards were generated as a result of deductions related to
exercises of stock options. When utilized, this portion of the Company’s
carryforwards, as tax effected, will be accounted for as a direct increase to
contributed capital rather than as a reduction of that year’s provision for
income taxes. The principal differences between net operating loss
carryforwards for tax purposes and the accumulated deficit result from
depreciation, amortization, investment write-downs, and treatment of research
and development costs and deductions related to the exercise of stock options
for income tax purposes.
The
Company had a net deferred tax asset of $41,344,000 and $28,116,000 at
December 31, 2002 and 2001, primarily from net operating loss
carryforwards. A valuation allowance was recorded to reduce the net deferred
tax asset to zero because it is more likely than not the deferred tax asset
will not be realized. The net change in the valuation allowance for deferred
tax assets was an increase of approximately $13,228,000 and $10,769,000 for the
years ended December 31, 2002 and 2001, respectively, mainly due to the
increase in the net operating loss carryforwards and write-down of short-term
securities.
An
analysis of the deferred tax assets(liabilities) are as follows:
6. RELATED PARTY
TRANSACTIONS:
In
December 1999, the Company entered into an agreement with SuperGen, Inc. The
president and chief executive officer of SuperGen, Inc. is a member of
our Board of Directors. The chief executive officer of the Company is a member
of the Board of Directors of SuperGen, Inc. Under terms of the agreement,
the Company received $2.5 million cash and 100,000 shares of SuperGen, Inc. common stock, for
1,000,000 shares of AVI common stock. SuperGen, Inc. also acquired
exclusive negotiating rights for the United States market for Avicine, the
Company’s proprietary cancer vaccine currently in late-stage clinical testing
against a variety of solid tumors.
In
April 2000, the Company entered into an alliance with SuperGen, Inc. for shared
development and marketing rights for Avicine as discussed in Note 3. As of December
31, 2001, SuperGen, Inc. owed AVI $1,169,537 related to this alliance. This
amount was paid by SuperGen, Inc. in 2002.
Effective
May 19, 1993, the Company and AGDG entered into a Technology Transfer Agreement
as discussed in Note 1. In March 2000, the Company and AGDG amended the
Technology Transfer Agreement as discussed in Note 1.
In
December 2000, the Company loaned the chief executive officer of AVI $500,000.
The term of the loan was one year. The loan was secured by the chief executive
officer’s stock in AVI. Interest accrued at the rate of 8.5%. On January 3, 2002,
the loan to the Company’s chief executive officer was repaid in full with
accrued interest.
During the year ended December 31, 2002, the
Company paid Boston Healthcare Associates, Inc., of which director Andrew J.
Ferrara is President, $73,563 for business development consulting services. The
Company expects to pay Mr. Ferrara, or his firm, for additional consulting
services that may be performed for the Company during 2003.
In June 2002, the Company loaned the chief executive
officer of AVI $500,000. The term of the loan is one year. The loan is secured
by the chief executive officer’s stock in AVI. Interest on the loan accrues at
the rate of 4.75% per annum. This loan was made prior to the Sarbanes-Oxley
Act, which prohibits loans to executives, and therefore is grandfathered in.
7. COMMITMENTS:
Lease Obligations
The
Company leases office and laboratory facilities under various noncancelable
operating leases through December 2007. Rent expense under these leases was
$946,000, $541,000 and $405,000 for the years ended December 31, 2002,
2001 and 2000, respectively, and $3,653,000 for the period from July 22,
1980 through December 31, 2002.
At
December 31, 2002, the aggregate noncancelable future minimum payments under
these leases are as follows:
Royalty Obligations
The
Company has license agreements for which it is obligated to pay the licensors a
minimum annual royalty. Royalty payments under these agreements was $75,000,
$78,750 and $60,000 for the years ended December 31, 2002, 2001 and 2000,
respectively, and $333,750 for the period from July 22, 1980 through
December 31, 2002.
At
December 31, 2002, the aggregate future minimum royalty payments under
these agreements are as follows:
8. FINANCIAL
INFORMATION BY QUARTER (UNAUDITED):