ITEM 1.
BUSINESS
OVERVIEW
GenVec, Inc. (GenVec, we, our, or the Company) is a clinical-stage biopharmaceutical company with an entrepreneurial focus on leveraging its proprietary adenovector gene delivery platform to develop a pipeline of cutting-edge therapeutics and vaccines. The Company is a pioneer in the design, testing and manufacture of adenoviral-based product candidates that can deliver on the promise of gene-based medicine. GenVec’s lead product candidate, CGF166, is licensed to Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and is currently in a Phase 1/2 clinical study for the treatment of hearing loss and balance disorders. In addition to our internal and partnered pipeline, we also focus on opportunities to license our proprietary technology platform, including vectors and production cell lines, for the development and manufacture of therapeutics and vaccines to the biopharmaceutical industry.
A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, Merial Limited, and the U.S. government to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), Enterovirus D68 (EV-D68) and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).
Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.
Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders through the delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis on the development of novel treatments for hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.
We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).
As a biopharmaceutical company, our business and our ability to execute our strategy to achieve our corporate goals are subject to numerous risks and uncertainties. Material risks and uncertainties relating to our business and our industry are described in Item 1A
ITEM 1A.
RISK FACTORS
Investing in our securities involves a high degree of risk. In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following important factors that could affect our actual future results, including, but not limited to, our product development programs, contract revenues, expenses, net losses, and earnings per share.
We have a history of losses and anticipate future losses.
We have incurred net losses in each year since our inception in December 1992, including a net loss of  $2.5 million for the year ended December 31, 2014. As of December 31, 2014, we had an accumulated deficit of approximately $278.3 million. We are unsure if or when we will become profitable. The size of our net losses will depend, in part, on our revenues and our expenses.
We have derived all of our revenues from payments from collaborations with corporations and government entities and will continue to do so for the foreseeable future. It may be several years, if ever, before we will recognize revenue from product candidate sales or royalties. While we have taken efforts to control costs throughout 2014, a large portion of our expenses are fixed, including expenses related to facilities, equipment and personnel, and our ability to continue to meaningfully reduce costs is limited. In addition, we expect to continue to spend significant amounts to fund research and development to advance our programs and to enhance our core technologies. As a result of our operating expenses, we will need to generate significant additional revenue to achieve profitability. Even if we do achieve profitability, it may not be sustainable.
We are a biopharmaceutical company deploying unproven technologies, and we may never be able to develop, obtain regulatory approval of, or market any of our product candidates.
Gene-based products are new and rapidly evolving medical approaches, which have not been shown to be effective on a widespread basis. Only a limited number of gene-based products have been successfully developed and commercialized to date. In addition, no gene therapy product has received regulatory approval in the U.S. None of our product candidates have been approved for sale in the U.S. or elsewhere. Gene-based products may be susceptible to various risks, including undesirable and unintended side effects
from genes or the delivery systems, unintended immune responses, inadequate therapeutic efficacy, or other characteristics that may prevent or limit their approval or commercial use. Successful products require significant development and investment, including a lengthy and uncertain period of testing to show their safety and effectiveness before their regulatory approval or commercialization. We have not proven our ability to develop, obtain regulatory approval of, or commercialize gene-based medicines or vaccines.
If we or our collaborators fail to adequately show the safety and efficacy of our product candidates, we will not be able to obtain FDA approval of our product candidates.
We face the risk of failure involved in developing therapies based on new technologies and the difficulties generally associated with drug development. CGF166 is the only product candidate that we and our collaborators currently have in clinical trials. Novartis initiated dosing in a Phase 1/2 clinical trial of CGF166 in October 2014. Significant additional research and animal testing, referred to as preclinical testing, will need to be conducted before any of our other product candidates currently under active development can advance to clinical trials. It may take us many years to complete preclinical testing or trials, and we expect that doing so will be dependent on our ability to enter into collaborations. Drug development is an uncertain scientific and medical endeavor, and failure could occur at any stage of development. Acceptable results in early testing or trials might not be repeated later. Not all products in preclinical testing or early stage clinical trials will become approved products, and historically there is a high rate of attrition for product candidates in preclinical and clinical trials due to scientific feasibility, safety, efficacy, changing standards of medical care and other variables. Before an application can be filed with the FDA for product approval, we or our collaborators must show that a particular product candidate is safe and effective. Even with respect to product candidates that advance to clinical trials, we or our collaborators must demonstrate the safety and efficacy of those product candidates before FDA approval can be secured. The failure to adequately show the safety and effectiveness of our product candidates would prevent FDA approval of our products. Any one of our product candidates could fail at any time, as clinical development of drug candidates presents numerous unpredictable and significant risks and is very uncertain at all times prior to regulatory approval by the FDA or health authorities in other major markets.
Because regulatory approval must be obtained to market our products, we cannot predict whether or when our products will be commercialized; failure to comply with applicable regulations can also harm our business and operations.
The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether we or our collaborators will obtain regulatory approval for any of our products. No one can market a pharmaceutical product in the U.S. until it has completed rigorous preclinical testing, clinical trials, and an extensive regulatory approval process implemented by the FDA. To date, the FDA has not approved a gene therapy product for sale in the U.S. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity, and novelty of the product, and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling, and promotion of drugs for human use.
Before commencing clinical trials, we or our collaborators must submit an IND application to the FDA and wait for the IND to become effective 30 days following its receipt by the FDA. Even after an IND becomes effective, however, a clinical trial is subject to continuing oversight by an Institutional Review Board (IRB) and the FDA.
Clinical trials are also subject to:
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Informed consent;
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Good clinical practices (GCP) regulations; and
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Potential suspension or termination by the company conducting the clinical trial, the IRB, or the FDA at any time if, among other reasons, it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND or the conduct of the trials.
Delays or rejections in the regulatory approval process may be encountered because of additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials, or FDA regulatory review. For instance, the FDA Amendments Act of 2007 imposed additional obligations on pharmaceutical companies and delegated more enforcement authority to the FDA in the area of drug safety. Key elements of this legislation give the FDA authority to: (1) require companies to conduct post-marketing safety studies of drugs, (2) impose certain drug labeling changes relating to safety, (3) mandate risk mitigation measures such as the education of healthcare providers and the restricted distribution of medicines, and (4) require companies to publicly disclose data from clinical trials.
Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production, or injunction, as well as other regulatory action against our product candidates or us. If regulatory approval of a product is granted, this approval will be limited to those disease indications for which the product has been shown through clinical trials to be safe and effective. Even if approved, a product may not be approved for the indications that are necessary or desirable for successful commercialization, or the FDA may impose restrictions on distribution of the product that may materially impact our operations. The FDA also strictly regulates promotion and labeling after approval. Outside the U.S., the ability to market a product is also contingent upon receiving clearances from the appropriate regulatory authorities. This non-U.S. regulatory approval process includes risks similar to those associated with FDA clearance described above and is subject to the independent judgments, policies, priorities and decisions of the applicable regulatory authorities, which may differ from those of the FDA.
We do not currently have any late stage clinical trials in our therapeutic product or vaccine development programs and, therefore, we do not have any near-term prospects of generating revenues from the commercial sale of our therapeutic or vaccine products.
We do not currently have any therapeutic products or vaccines in late stage clinical programs, and the one product of ours that has received some approval is our FMD vaccine, on which a conditional license was issued that was applicable in certain emergency or similar situations. Accordingly, we do not have any near-term prospects of generating revenues from the commercial sale of our product candidates in our therapeutic product or vaccine programs. In October 2014 Novartis initiated dosing in a Phase 1/2 clinical trial of CGF166. There can be no assurance that CGF166 will successfully complete that trial, much less enter or successfully complete any other clinical trial. There also can be no assurance that any of our other therapeutic products or our vaccines will enter or successfully complete the clinical trials required for commercialization.
In 2013, our Board of Directors adopted a new operating strategy, and we do not know if it will be successful.
In 2013, our Board of Directors approved an operating strategy focused on working with leading companies and organizations such as Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and the U.S. government to leverage our proprietary gene-delivery technologies to address the prevention and treatment of significant health concerns. This strategy includes working with Novartis to facilitate the development of first-in-class products for the treatment of hearing and balance disorders, developing a sustainable revenue base by licensing rights to our proprietary vector and cell line technologies to additional companies and organizations, licensing our preclinical vaccine candidates for the prevention of RSV and the treatment of HSV-2 infection, and minimizing our cash burn by operating our business in a cost-efficient manner. This operating strategy was adopted after our Board of Directors approved and then determined to withdraw a Plan of Complete Liquidation and Dissolution of the Company (the Plan of Dissolution). This operating strategy may not be successful, and is largely dependent on the success of our collaboration agreement with Novartis, of which there can be no assurance. Furthermore, our ability to execute on our operating strategy may also be affected by our having approved and then withdrawn the Plan of Dissolution. For example, potential licensees or other collaborators may be reluctant to enter into arrangements with us on terms that are acceptable to us, or at all, because of any concerns regarding our long-term stability and plans raised by our adoption and then abandonment of the Plan of Dissolution. Accordingly, we may not be able to successfully execute our operating strategy.
A central aspect of our business strategy is to enter into collaborations with other companies to develop, obtain regulatory approval of, and commercialize our potential products, and if we are unable to find collaborators or sustain existing relationships, we may not be able to generate revenue and advance our products.
A central aspect of our business strategy is to enter into collaborations to support the development of our products. Our lead program, in the field of regenerative medicine and licensed to Novartis, is for the development of novel treatments for hearing loss and balance disorders. In addition to this program, we intend to license rights to our proprietary vector and cell line technologies to additional companies and organizations and license our preclinical vaccine candidates for the prevention of RSV and the treatment of HSV-2 infection. There can be no assurance that we will be able to enter into licensing and other collaboration agreements on terms that are acceptable to us, or at all. If we are not able to enter into and sustain license or other collaboration agreements, we would not be able to develop a sustainable revenue base, and we would need to raise additional funds for the development and commercialization of our product candidates and technologies and develop additional capabilities in testing, manufacturing, marketing and sales, among other areas. If we are not able to enter into successful collaborations or obtain additional funds through other means, we would have to delay, curtail or abandon the development and commercialization of certain product candidates and technologies.
We intend to continue to seek support for our government funded contracts and collaborations for the development of new vaccines, but our existing agreements are subject to termination and uncertain future funding and there is no certainty that we will be able to enter into new agreements.
In addition to corporate collaborations, we have historically entered into agreements with U.S. government agencies, such as the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH), the U.S. Department of Homeland Security (DHS), the U.S. Department of Agriculture (USDA) and the U.S. Naval Medical Research Center (NMRC) to support our vaccine research. These and similar agreements have historically accounted for a substantial portion of our revenues, and we intend to continue entering into these agreements in the future. Our business strategy is partially dependent on collaboration agreements with U.S. government agencies and on the ability of these government agencies to perform under these agreements, which performance depends on adequate continued funding of the agencies and their programs.
We have no control over the resources and funding government agencies may devote to any collaboration agreements with us, which may be subject to annual renewal and which generally may be terminated by the government agencies at any time. Any significant reductions in the funding of U.S. government agencies or in the funding areas targeted by our business could materially and adversely affect our business, results of operations, and financial condition. If we were to fail to satisfy our contractual obligations to deliver in the manner required by a collaboration agreement with a U.S. government agency, the applicable Federal Acquisition Regulations allow the agency to cancel the agreement in whole or in part, and we may be required to perform corrective actions, including but not limited to delivering to the government any uncompleted or partially completed work. The performance of these corrective actions could have a material adverse impact on our financial results in the period or periods affected. Government agencies may fail to perform their responsibilities under these agreements, which could materially impact our financial results.
In addition, our contract related costs and fees, including allocated indirect costs, are subject to audits and adjustments by negotiation between us and the U.S. government. As part of the audit process, the government audit agency verifies that all charges made by a contractor against a contract are legitimate and appropriate. Audits may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees. Any audits of our contract related costs and fees could result in material adjustments to our revenues. In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal year basis even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded and additional funds are normally committed to the contract by the procuring agency as appropriations are made by Congress for future fiscal years. Any failure of such agencies to continue to fund such contracts could have a material adverse effect on our business, results of operations, and financial condition.
We apply for and have received funding from government agencies under Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) grants. Eligibility of public companies to receive such grants is based on size and ownership criteria that are under review by the Small Business Administration (SBA). As a result, our eligibility may change in the future and additional funding from this source may not be available.
We depend, and anticipate depending further, on corporate collaborators for the development of our product candidates.
When we sign a collaboration agreement, license agreement or similar agreement with a collaborator to develop a product candidate, we will generally expect them to further the development of the product candidate, which could include the design and conduct of clinical trials, the preparation and filing of documents necessary to obtain regulatory approval, and the manufacturing, sale, marketing and other commercialization of the product if it obtains regulatory approval. We may also grant the collaborator certain rights. For example, under the terms of our collaboration agreement with Novartis, we granted Novartis certain exclusive, worldwide rights in specified intellectual property related to our atonal gene program and atonal adenovectors, as well as non-exclusive, world-wide rights to certain other intellectual property related to our hearing loss and balance disorders program and our adenovector platform related to the atonal gene. Novartis has the right to develop and commercialize any products related to the licensed intellectual property. Our dependence on a corporate collaborator, such as Novartis, subjects us to a number of risks, including that:
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We may not be able to control the amount and timing of resources that the collaborator devotes to the development or commercialization of product candidates or to their marketing and distribution;
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The collaborator may not be successful in its efforts to obtain regulatory approvals in a timely manner, or at all;
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The collaborator may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
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The collaborator may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
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Changes in the collaborator’s business strategy may also adversely affect its willingness or ability to complete its obligations under any arrangement;
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Our agreement with the collaborator may fail to provide us with significant protection, or may not be effectively enforced, if a collaborator fails to perform;
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The collaboration may be terminated or allowed to expire, which would delay the development and may increase the cost of developing our product candidates;
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The collaborator could have the ability to unilaterally terminate agreements, or have extension or renewal rights, in instances that we believe are not commercially reasonable or consistent with our current business strategy; and
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The collaborator may not be able to pay us as expected.
Given these risks, the success of our current and future collaborations is highly unpredictable and can have a substantial negative or positive impact on our business. If our collaborations fail, our product development or commercialization of product candidates could be delayed or cancelled, which would negatively impact our business, results of operations and financial condition.
Collaborations might produce conflicts that could delay or prevent the development or commercialization of our potential product candidates and negatively impact our business and financial condition.
An important part of our strategy involves conducting multiple product development programs. We may pursue opportunities in fields that conflict with those of our collaborators. In addition, disagreements with
our collaborators could develop over rights to our intellectual property or rights to technology developed with our collaborators. The resolution of such conflicts and disagreements may affect ownership of intellectual property that we believe we are entitled to. In addition, any disagreement or conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators. Such a conflict or disagreement could also lead to delays or termination of collaborative research, development, regulatory approval, or commercialization of various products or could require or result in litigation or arbitration, which would be time consuming, expensive, lead to a diversion of management attention and resources and could have a significant negative impact on our business, financial condition, and results of operations.
Our collaboration agreements may prohibit us from conducting research in areas that may compete with our collaboration products, while our collaborators may not be limited to the same extent. This could negatively affect our ability to develop products and, ultimately, prevent us from achieving a continuing source of revenues.
We anticipate some of our corporate or academic collaborators will be conducting multiple product development efforts within each disease area that is the subject of their collaborations with us. In certain circumstances we have agreed not to conduct independently, or with any third party, certain research and development activities that are competitive with the research and development activities conducted under our collaborations. Therefore, our collaborations may limit the areas of research and development we may pursue alone or with others. Some of our collaborators, however, may develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of their collaborations with us. In addition, competing products, either developed by the collaborators or to which the collaborators have rights, may result in their withdrawing support for our product candidates.
Agreements with government agencies may lead to claims against us under the Federal False Claims Act, and these claims could result in substantial fines and other penalties.
The biopharmaceutical industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions. Our agreements with U.S. government agencies or any arrangement that implicates the payment of government funds may be subject to substantial financial penalties under the Federal Civil Monetary Penalties Act and the federal civil False Claims Act. Under the False Claims Act’s “whistleblower” provisions, private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits, known as qui tam actions, may be filed by private individuals, including present and former employees. The federal civil False Claims Act provides for treble damages and civil penalties of up to $11,000 per false claim. If our operations are found to be in violation of any of these laws, or any other governmental regulations that apply to us, we may be subject to penalties, damages, fines, exclusion from federal healthcare programs like Medicare and Medicaid, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results.
We or our collaborators may experience delays in conducting our clinical trials.
Clinical trials, including the Phase 1/2 clinical trial of CGF166, may be delayed or prematurely terminated by many factors, including: (i) limited number of, and competition for, suitable patients for the particular clinical trial; (ii) slower than expected rate of patient recruitment and enrollment; (iii) failure of patients to complete the trial; (iv) inability to obtain sufficient quantities of acceptable materials for use in clinical trials; (v) delay or failure in reaching agreement on contract terms with prospective study sites or other third-party vendors who are supporting our clinical trials; (vi) inability to reach agreement with the FDA on a trial design that we are able to execute; (vii) difficulty in adequately following up with patients after treatment; and (viii) changes in laws, regulations, regulatory policy or clinical practices. Our ability or the ability of our collaborators to enroll appropriate patients for any clinical trials for our product candidates also may be adversely affected by trials being conducted by our competitors for similar disease indications. The failure of any clinical trials to meet applicable regulatory standards, or the standards of the relevant reviewing bodies could cause such trials to be delayed, suspended or terminated, which could further delay
the development of any of our product candidates. Any such delays increase our product development costs, with the possibility that we could be required to raise additional funds. Delays in one clinical trial also can adversely affect our ability and the ability of our collaborators to launch clinical trials for similar or different indications. Consequently, if such delays are significant they could negatively affect our financial results and the commercial prospects for our products.
Additionally, clinical trials may be suspended or terminated at any time by the FDA, an IRB, other regulatory authorities, or by us for a variety of reasons, including safety. Any failure or significant delay in completing clinical trials for our product candidates could harm our financial results and commercial prospects for our product candidates.
Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, and the FDA may not agree with our interpretations, which could delay, limit or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a trial to be delayed or repeated or a program to be terminated.
If successful large-scale manufacturing of gene-based medicines is not possible, we or our collaborators may be unable to manufacture enough of our product candidates to achieve regulatory approval or market our products.
Few companies to date have demonstrated successful large-scale manufacturing of gene-based medicines, including those that have had significantly more resources than we and it is anticipated that significant challenges will be faced in the scale-up of our manufacturing process for commercial production. There are a limited number of contract manufacturers qualified to perform large-scale manufacturing of gene-based medicines. We or our collaborators may be unable to manufacture commercial-scale quantities of gene-base medicines or receive appropriate government approvals on a timely basis or at all. Failure to successfully manufacture or obtain appropriate government approvals on a timely basis or at all would prevent us from achieving our business objectives.
If regulatory approvals are not obtained for a manufacturing facility for our products, we may experience delays, be unable to meet demand, and may lose potential revenues.
Completion of clinical trials for and commercialization of our product candidates requires access to, or development of, facilities to manufacture a sufficient supply of our product candidates. We have limited experience manufacturing any of our gene-based products in the volumes that will be necessary to support large-scale clinical trials or commercial sales, and we expect that we will rely on our collaborators for manufacturing capabilities. Before we or our collaborators can begin commercial manufacturing of any of our product candidates, we or our collaborators must obtain regulatory approval of the manufacturing facility and process. Manufacturing of our proposed products must comply with the FDA’s current Good Manufacturing Practices (cGMP) requirements and similar non-U.S. regulatory requirements. The cGMP requirements govern personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls and records and reports. Among other things, complying with cGMP and comparable non-U.S. regulatory requirements will require us to expend time, money and effort in production, record keeping, and quality control to assure the product meets applicable specifications and other requirements. We or our collaborators must also pass a preapproval inspection before FDA approval. Significant capital will likely need to be expended on the development of manufacturing capacity for a product candidate even before we know if the FDA will approve the product for commercialization. Furthermore, if we or our collaborators materially fail to comply with these requirements, our product candidates likely would not be approved. If we or our collaborators fail to comply with these requirements after approval, we would be subject to possible regulatory action (including warning letters, restrictions on the product, product recalls, suspension or withdrawal of approval, seizures, injunctions, civil fines, and criminal sanctions), and we may be limited in the jurisdictions in which we are permitted to sell our products. The FDA and non-U.S. regulatory authorities generally have the authority to perform unannounced periodic inspections of manufacturing facilities to ensure compliance with cGMP and non-U.S. regulatory requirements.
We rely on a limited number of suppliers for some of our manufacturing materials. Any problems experienced by any of these suppliers could negatively impact our operations.
We rely on third-party suppliers and vendors for some of the materials used in the manufacture of our product candidates. Some of these materials are available from only one supplier or vendor. For supply of early clinical trial materials, we rely on one supplier, Life Technologies Corporation, for its cell culture medium and another supplier, Lonza Walkersville, Inc., for custom buffers. The cell culture medium is used to grow the cells within which our product candidates are produced. We do not currently have supply agreements with any of these suppliers. Any significant problem experienced by one of our suppliers could result in a delay or interruption in the supply of materials to us until such supplier resolves the problem or an alternative source of supply is located. We have limited experience with alternative sources of raw materials. Any delay or interruption would likely lead to a delay or interruption of manufacturing operations, which could negatively affect our operations.
We face substantial competition from other companies and research institutions that are developing products to treat the same diseases that our product candidates target, and we may not be able to compete successfully.
We compete with pharmaceutical and biotechnology companies pursuing other forms of treatment for the health concerns our product candidates target. We may also face competition from companies that may develop competing technology internally or acquire it from the government, universities or other research institutions. As these companies develop their technologies, they may develop proprietary positions, which may prevent or limit our product commercialization efforts.
Some of our competitors are established companies with greater financial and other resources than ours. Our competitors may succeed in:
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Identifying important genes or delivery mechanisms before we do;
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Developing products or product candidates earlier than we do;
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Forming collaborations before we do or precluding us from forming collaborations with others;
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Obtaining approvals from the FDA or other regulatory agencies, for such products more rapidly than we do;
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Developing and validating manufacturing processes more rapidly than we do;
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Obtaining patent protection to other intellectual property rights that would limit or preclude our ability to use our technologies or develop products; or
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Developing products that are safer or more effective than those we develop or propose to develop.
While we seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us.
In addition, with the March 2010 enactment of the Biologics Price Competition and Innovation Act (BPCIA), our products, if approved, may subsequently face competition from “biosimilar” products that are approved via an abbreviated process on the basis of a showing that the product is similar to our approved product. The BPCIA provides periods of exclusivity during which abbreviated applications may not be submitted to, or approved by, FDA, but the statute then allows approval by an abbreviated pathway and, if certain standards are met, a finding by FDA that the biosimilar product is interchangeable with the reference product. A similar abbreviated approval process for biosimilars (but without the possibility of an interchangeability determination) is available in Europe, too. If competitors are able to obtain marketing approval for biosimilars under an abbreviated regulatory approval process in the U.S. or Europe, our products may become subject to additional competition with the attendant pricing pressure. We also could face or be forced to bring litigation with respect to the validity or scope of patents relating to our products.
If we are unable to adequately protect our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to compete with us.
Our commercial success will depend, in part, on obtaining patent protection for our products and other technologies and successfully defending these patents against third party challenges. Our patent position,
like that of other biotechnology firms, is highly uncertain and involves complex legal and factual questions. The laws, rules, and regulations affecting biotechnology patent protection in the U.S. and other countries are uncertain and are currently undergoing review and revision. Changes in, or different interpretations of, patent laws in the U.S. and other countries might allow others to use our discoveries or to develop and commercialize our products without any compensation to us.
Our ability to develop and protect a proprietary position based on biotechnological innovations and technologies involving genes and gene delivery systems, methods of use, production, formulations, and the like is particularly uncertain. The U.S. Patent and Trademark Office, as well as patent offices in other countries, have often required that patent applications concerning biotechnology-related inventions be limited or narrowed substantially. Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. In addition, other companies or institutions possess issued patents and have filed and will file patent applications that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene therapy products that are the same as or similar to the subject matter of our patent applications. For example, although we have pending patent applications pertaining to particular adenovectors that cannot reproduce themselves and adenovectors modified to alter cell binding characteristics, we are aware of issued patents and pending patent applications of other companies and institutions relating to the same subject matter. Patents and patent applications of third parties may have priority over our issued patents and our pending or yet to be filed patent applications. Proceedings before the U.S. Patent and Trademark Office and other patent offices to determine who properly lays claim to inventions are costly and time consuming, and we may not win in any such proceedings.
The issued patents we already have or may obtain in the future may not provide commercially meaningful protection against competitors. Other companies or institutions may challenge our or our collaborators’ patents in the U.S. and in other countries. In the event a company, institution or researcher infringes upon our or our collaborators’ patent rights, enforcing these rights may be difficult, expensive and time consuming, with no guarantee that our or our collaborators’ patent rights will be upheld. Others may be able to design around these patents or develop unique products providing effects similar to our products. In addition, our competitors may legally challenge our patents, and they may be considered invalid. For example, we are also aware of issued patents and pending patent applications of third parties relating to aspects of production, purification, quality assessment, and formulation technology. It could be alleged that our production, purification, quality assessment, and formulation technology conflict with such existing or future patents.
Various components used in developing gene therapy products, such as particular genes, vectors, promoters, cell lines, and construction methods, used by others and by us, are available to the public. As a result, we are unable to obtain patent protection with respect to such components, and third parties can freely use such components. Third parties may develop products using such components that compete with our potential products. Also, with respect to some of our patentable inventions, we or our collaborators have decided not to pursue patent protection outside the U.S. Accordingly, our competitors could develop, and receive non-U.S. patent protection for, gene therapies or technologies for which we or our collaborators have or are seeking U.S. patent protection. Our competitors may be free to use these gene therapies or technologies outside the U.S. in the absence of patent protection.
We also rely to a limited extent on trade secrets to protect our technology. However, trade secrets are difficult to protect. While we have entered into confidentiality agreements with employees and collaborators, we may not be able to prevent the disclosure or use of our trade secrets. In addition, other companies or institutions may independently develop substantially equivalent information and techniques.
If our technologies and potential products conflict with intellectual property rights of competitors, universities, or others, then we may be prevented from licensing those technologies, developing those product candidates or both.
Other companies and institutions have issued patents and have filed or will file patent applications that may issue into patents that cover or attempt to cover genes, vectors, cell lines, and methods of making and using gene and gene-based therapy products used in or similar to our product candidates and technologies. We also are aware of other issued patents and pending patent applications that relate to various aspects of our
manufacture of our product candidates and systems, and it could be alleged that our manufacture of these product candidates or licensure of those technologies conflicts with these patents. We have not conducted freedom-to-use patent searches on all aspects of our technologies, product candidates or potential product candidates, and we may be unaware of relevant patents and patent applications of third parties. In addition, the freedom-to-use patent searches that have been conducted may not have identified all relevant issued patents or pending patent applications that could issue into patents, particularly in view of the characterizations of the subject matter of issued patents and pending patent applications, as well as the fact that pending patent applications can be maintained in secrecy for a period of time and, in some circumstances, until issuance as patents.
An issued patent gives rise to a rebuttable presumption of validity under U.S. law and under the laws of some other countries. The holder of a patent to which we or our collaborators do not hold a license could bring legal actions against our collaborators or us for damages or to stop us or our collaborators from using the affected technology, which could limit or preclude our ability to license our technologies or to develop and commercialize our product candidates. If any of our potential products are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to develop and commercialize the potential products or, at the discretion of the competitor or third party, to stop development and commercialization of the potential products. Similarly, if any of our out-licensed technologies are found to infringe a patent of a competitor or third party, we or our collaborators may be required to pay damages and to either obtain a license in order to continue to utilize the technologies or, at the discretion of the competitor or third party, to stop utilizing the technologies. Since we have concentrated our resources on licensing certain of our technologies and developing only a limited number of products, the inability to license one of our technologies or to market one of our products would disproportionately affect us as opposed to a competing company with many products in development.
We believe there will be significant litigation in our industry regarding intellectual property rights. Many of our competitors have expended and are continuing to expend significant amounts of time, money and management resources on intellectual property litigation. If we become involved in litigation, it could consume a substantial portion of our resources and could adversely affect our business, financial condition and results of operations, even if we ultimately are successful in such litigation, in view of our limited resources.
If we lose our rights to use intellectual property we license from others, or those rights are not enforceable, then our ability to develop and commercialize our product candidates will be harmed.
We rely, in part, on licenses to use some technologies material to our business. For example, to create our product candidates we combine our adenovectors with genes intended to produce therapeutic proteins. In most instances we do not own the patents or patent applications that cover these genes and certain methods of use thereof which underlie these licenses. For these genes, we do not control the enforcement of the patents. We rely upon our licensors to properly prosecute and file those patent applications and defend and enforce any issued patents.
While many of the licenses under which we have rights provide us with exclusive rights in specified fields, the scope of our rights under these and other licenses may be subject to dispute by our licensors or third parties. In addition, our rights to use these technologies and practice the inventions claimed in the licensed patents and patent applications are subject to our licensors abiding by the terms of those licenses and not terminating them. Any of our licenses may be terminated by the licensor if we are in breach of a term or condition of the license agreement or in certain other circumstances. In addition, some of our licenses require us to achieve specific development milestones.
Legal proceedings to obtain, enforce, and defend patents, and litigation of third-party claims of intellectual property infringement could require us to spend money and could impair our operations.
Our success will depend, in part, on our ability to obtain patent protection for our products and processes, both in the U.S. and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and can involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields.
Protecting intellectual property rights can be expensive and time consuming. Litigation may be necessary to enforce patents issued to us or to determine the scope and validity of third party proprietary rights. Moreover, if a competitor were to file a patent application claiming technology also invented by us, we would have to participate in an interference proceeding before the U.S. Patent and Trademark Office to determine the priority of invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to challenge third-party patent rights to allow us or our licensees to commercialize products based on our technologies. Litigation could result in substantial costs and diversion of management efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed, or require us to cease using some technologies.
Our products and processes may infringe, or be found to infringe, patents not owned or controlled by us. Patents held by others may require us to alter our products or processes, obtain licenses or stop activities. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patent. In addition, we may be required to obtain licenses, redesign our products or processes to avoid infringement or pay money damages. As a result, our business may suffer if we are not able to obtain licenses at all or on commercially reasonable terms to us or we are required to redesign our products or processes to avoid infringement.
We are exposed to potential product liability claims.
Our business will expose us to potential product liability risks inherent in the clinical testing and manufacturing and marketing of pharmaceutical products, and we may not be able to avoid significant product liability exposure. A product liability claim or recall could be detrimental to our business. Although we currently maintain product liability and clinical trial insurance, our present product liability and clinical trial insurance may be inadequate. Any successful product liability claim may prevent us from obtaining adequate product liability and clinical trial insurance in the future on commercially desirable or reasonable terms. In addition, product liability and clinical trial coverage may cease to be available in sufficient amounts or at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products. A successful product liability claim could have a material adverse effect on our reputation, business, financial condition and results of operations.
Adverse events in the field of gene therapy may negatively affect regulatory approval or public perception of our products or product candidates.
Most of our product candidates under development could be broadly described as recombinant DNA therapies. A number of clinical trials are being conducted by other biotechnology and pharmaceutical companies involving related therapies, including compounds similar to or competitive with, our product candidates. The announcement of adverse results from these clinical trials, such as serious adverse events or unexpected side effects attributable to the treatment, or any response by the FDA or other similar regulatory authority to such clinical trials, may impede the timing of our clinical trials, delay or prevent us from obtaining regulatory approval, impede our ability to secure additional funding, or negatively influence public perception of our product candidates. As a result, these conditions could harm our business and results of operations and depress the value of our stock.
The commercial success of our product candidates will depend, in part, on public acceptance of the use of gene therapies for the prevention or treatment of significant health concerns. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapy products and could cause a decrease in the demand for any products we may develop.
Our product candidates involve new technologies and therapeutic approaches in the field of gene therapy, which is a new and evolving field. As discussed above, no gene therapy product has received regulatory approval in the U.S., and adverse events in this field may negatively affect public perception of our product candidates. Even if our product candidates attain regulatory approval, our success will depend upon the medical community, patients, and third-party payers accepting gene therapy products in general, and our
product candidates in particular, as medically useful, cost-effective, and safe. In particular, our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments they are already familiar with and for which greater clinical data may be available. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend our products for a variety of reasons, including the reimbursement policies of government and third-party payers. Furthermore, third-party payers, such as health insurance plans, may be reluctant to authorize and pay for new forms of treatment they may deem expensive and less proven than existing treatments. Even if gene therapy products, and our product candidates in particular, are accepted by the medical community and third-party payers, the public in general, or patients in particular, may be uncomfortable with new therapies, including our product candidates, and it could take substantial time for them to accept gene therapy products as a viable treatment alternative, if ever. If gene therapy and our product candidates do not gain widespread acceptance, we may be unable to generate significant revenues, if any, which would adversely affect our results of operations. In addition, even if our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our product candidates or that render them obsolete.
We use hazardous biological materials in our business; any liability or disputes relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development processes involve the use of hazardous biological materials. Such materials include human and animal cell lines and viruses, such as adenoviruses and animals infected with human viruses. Some of the biological material may be novel, including viruses with novel properties. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets.
Although we have general liability insurance, these policies contain exclusions from insurance against claims arising from pollution from chemical or radioactive materials. Our collaborators are working with these types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials. Although we believe we are currently in compliance with all applicable environmental and occupational health and safety regulations, compliance with environmental laws and regulations may be expensive and current or future environmental regulations may impair our research, development, or production efforts.
Our revenue is exclusively derived from our collaboration agreements, which can result in significant fluctuation in our revenue from period to period, and our past revenue is therefore not necessarily indicative of our future revenue.
Our revenue is exclusively derived from our collaboration agreements with corporate partners, under which we may receive grants, milestone payments based on clinical progress, regulatory progress or net sales achievements, royalties, manufacturing revenue or payment for our development activities on behalf of third parties. We are particularly dependent on our agreement with Novartis, pursuant to which we are facilitating the development of first-in-class products for the treatment of hearing and balance disorders. On February 11, 2014, Novartis informed us that the third milestone under our agreement had been achieved after Novartis filed an IND with the FDA for the clinical development of CGF166, the lead product candidate under our collaboration. The IND was deemed effective on February 7, 2014, triggering a $2 million milestone payment to us. On October 28, 2014, the fourth milestone under our agreement with Novartis was achieved after the first patient was dosed in the Phase 1/2 clinical trial of CGF166, triggering a $3 million milestone payment to us. Significant variations in the timing of receipt of cash payments and our recognition of revenue can result from the timing of clinical, regulatory or sales events which result in milestone payments and the timing and success of the commercial launch of new products by our
collaboration partners. The amount of our revenue derived from collaboration agreements in any given period will depend on a number of unpredictable factors, including our ability to find and maintain suitable collaboration partners, the timing of the negotiation and conclusion of collaboration agreements with such partners, whether and when we or our collaboration partner achieve clinical, regulatory and sales milestones, whether the collaboration is exclusive or whether we can seek other partners, the timing of regulatory approvals in one or more major markets and the market introduction of new products or generic versions of the approved product, as well as other factors.
Changes in healthcare law and implementing regulations, including those based on recently enacted legislation, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict, and these changes could have a material adverse effect on our business and financial condition if we are able to commercialize our candidate products.
Healthcare costs have risen significantly over the past decade. In March 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, (collectively, PPACA). This law substantially changes the way health care is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. PPACA contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, increased rebates and taxes on pharmaceutical products, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs.
We anticipate that if and when we or our collaborators commercialize our products in the U.S., a significant portion of our revenue and the revenue from our collaborators from sales of our products will be derived from government payers, including Medicare, Medicaid, and Department of Defense programs. Reimbursement rates to purchasers of our drugs and our net revenues for sales of drugs used by these programs can be altered by legislation or regulation. PPACA and other federal law require rebates on certain drugs utilized under Medicare, Medicaid, and Department of Defense programs and require discounts on certain drugs furnished to Medicare beneficiaries. For example, as part of PPACA’s provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program, (commonly known as the “donut hole”), once we or our collaborators participate in the Medicare program, we or our collaborators will be required to provide a 50% discount on branded prescription drugs dispensed to beneficiaries within this donut hole.
PPACA also made changes to the Medicaid drug rebate program, discussed further herein, including changing the definition of AMP, expanding rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well, and increasing the minimum rebate from 15.1% to 23.1% of the AMP for most innovator products and from 11% to 13% for non-innovator products. We expect that the increased minimum rebate of 23.1% will apply to our products following commercialization, if successful, in the U.S. Furthermore, PPACA requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of  $3.0 billion in 2015, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. We expect that PPACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have an adverse effect on our industry generally and our ability to successfully commercialize our product candidates or could limit or eliminate our spending on development projects.
Some of PPACA reforms will take effect in 2015, and others are slated for implementation in 2015. The effects of such reforms will be shaped significantly by implementing regulations that have yet to be finalized, by difficulties in implementation of the new insurance marketplaces and by state government decisions. In 2012, Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicare and Medicaid programs, issued proposed regulations to implement the changes to the Medicaid drug rebate program under PPACA but has not yet issued final regulations. CMS is currently expected to release the final regulations in April 2015. Many states have not chosen to expand their Medicaid programs by raising the income limit to 133% of the federal poverty level, as is permitted by
PPACA. It is unclear whether these states will choose to expand their programs in the future and whether there will be more uninsured patients than anticipated when Congress passed PPACA. For each state that does not choose to expand its Medicaid program as permitted by PPACA, there will be fewer insured patients overall. In addition, problems with implementation of the websites and other administrative services to help people enroll in qualifying insurance coverage may have reduced the number of uninsured people who obtain coverage under PPACA. The reduction in the number of insured patients could impact the sales, business and financial condition following the commercialization, if successful, of our products in the U.S.
PPACA also expanded the Public Health Service’s 340B drug pricing discount program. A pharmaceutical manufacturer must participate in the 340B drug pricing program in order for federal funds to be available to pay for the pharmaceutical manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating pharmaceutical manufacturer agrees to charge statutorily-defined covered entities no more than the 340B discounted ceiling price for the pharmaceutical manufacturer’s covered outpatient drugs. PPACA obligates the Secretary of the Department of Health and Human Services to create regulations and processes to improve the integrity of the program and to ensure the agreement that manufacturers must sign to participate in the program obligates a manufacturer to offer the ceiling price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. In addition, legislation may be introduced that, if passed, could further expand the 340B drug pricing program to include additional covered entities or could require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting. To the extent that PPACA and subsequent legislation, as discussed above, causes the statutory and regulatory definitions of AMP and the Medicaid rebate amount to change, these changes also impact the 340B discounted ceiling price.
In addition to PPACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payers to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for any product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payers, or may increase the tax obligations on life sciences companies such as ours.
The healthcare industry, and thus our business, continues to be subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change. The restrictions under applicable federal and state health care fraud and abuse laws and regulations that may affect our ability to operate include, but are not limited to:
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The federal Anti-Kickback Law, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA clarified that liability may be established under the federal Anti-Kickback Law without proving actual knowledge of the statute or specific intent to violate it. In addition, PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Law constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Law protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical and biological products, including certain discounts, or engaging such individuals as speakers or consultants, may be subject to scrutiny if
they do not fit squarely within an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs.
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The federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government. Many healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper activities including causing false claims to be submitted as a result of the marketing of their products for unapproved and thus non-reimbursable uses, inflating prices reported to private price publication services which are used to set drug payment rates under government healthcare programs and other interactions with customers including those that may have affected their billing or coding practices and submission to the federal government. In addition, PPACA amended federal law to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Law constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs.
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The Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, and also imposes obligations with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
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The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, which requires certain pharmaceutical and biological manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals and public reporting of the payment data. Pharmaceutical and biological manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to have started tracking such payments on August 1, 2013, and must submit a report on or before the 90th day of each calendar year disclosing reportable payments made in the previous calendar year.
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Analogous state laws and regulations, such as state anti-kickback and false claims laws, which may apply to items or services reimbursed under Medicaid and other state programs or, in several states, regardless of the payer. Some state laws also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to certain health care providers in those states. Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes of conduct.
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The federal Foreign Corrupt Practices Act of 1997 and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. A determination that our operations or activities are not, or were not, in compliance with United States or foreign laws
or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government-funded healthcare programs like Medicare and Medicaid, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
If third party payers do not provide coverage or reimbursement for our products, those products will not be widely accepted, which would have a negative impact on our business, results of operations and financial conditions.
Even if a product of ours receives regulatory approval, our success will depend, in part, on the extent to which coverage and reimbursement will be available from third party payers such as Medicare, Medicaid, other government health programs, private health insurers, managed care programs, and other organizations. Third party payers are increasingly challenging the price and cost-effectiveness of medical products and services, and this trend is expected to continue. Therefore, significant uncertainty exists as to the pricing approvals for, and the coverage or reimbursement status of, newly approved healthcare products. Additional federal or state health care legislation may be adopted in the future, any products that we seek to commercialize may not be considered cost-effective, and limitations on coverage and the amount of reimbursement for our products could be imposed. Adequate third-party insurance coverage may not be available for us to establish and maintain price levels that are sufficient for realization of an appropriate return on our investment in product development. Moreover, the existence or threat of cost control measures, including a reduction in reimbursement rates could cause potential corporate collaborators to be less willing or able to pursue research and development programs related to our product candidates. We cannot be certain that, if and when our products become commercialized, the pertinent reimbursement amounts or formulary status for our products will be sufficient to enable us to market and sell our products.
Our business involves animal testing and changes in laws, regulations, accepted clinical procedures, or social pressures could restrict our use of animals in testing and adversely affect our research and development efforts.
Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations, or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us or our partners by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts. In addition, preclinical animal studies conducted by us or third parties on our behalf may be subject to the USDA regulations for certain animal species. Failure to comply with applicable regulations could extend or delay clinical trials conducted for our drug candidates.
Our stock price could continue to be highly volatile and investors may not be able to resell their shares at or above the price they paid for them.
The market price of our common stock, like that of many other life sciences companies, has been and is likely to continue to be highly volatile. During 2014, the closing price of our stock price ranged from $1.68 to $4.15. The following factors, among others, could have a significant impact on the market price of our common stock:
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Results of our preclinical studies and future clinical trials or announcements regarding our plans for future studies or trials, or those of our competitors;
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Evidence or lack of evidence of the safety or efficacy of our potential products or those of our competitors;
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Announcement by us or our competitors of technological innovations or new products;
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Developments concerning our patent or other proprietary rights or those of our competitors, including litigation and challenges to our proprietary rights;
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Geopolitical developments, natural or man-made disease threats, or other events beyond our control;
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U.S. and foreign governmental regulatory actions;
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Changes or announcements in reimbursement policies;
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Period-to-period fluctuations in our operating results;
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Market conditions for life science stocks in general;
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Changes in the collective short interest in our stock;
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Changes in estimates of our performance by securities analysts; and
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Our cash balances, need for additional capital, and access to capital.
We do not intend to pay dividends on our common stock for the foreseeable future.
We do not anticipate that we will have any revenues for the foreseeable future and accordingly, we do not anticipate that we will pay any dividends for the foreseeable future. Accordingly, any return on an investment in our Company will be realized, if at all, only when you sell shares of our common stock.
We are at risk of additional securities-related litigation due to our expected stock price volatility.
In the past, stockholders have brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because life science companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. We may be the target of securities-related litigation in the future. Securities litigation could result in substantial costs, divert our management’s attention and resources, and could seriously harm our business.
We depend on our key technical and management personnel to advance our technology and implement our business strategy, and the loss of these personnel could impair the development of our products and business.
We rely, and will continue to rely, on our key management and scientific staff, all of whom are employed at will. Our success depends upon the ability of our senior management to implement our business strategy. The loss of key personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. If we do not succeed in retaining and recruiting necessary personnel or developing this expertise, our business could suffer significantly. Furthermore, changes in our senior management may lead to instability for our Company which could cause our business to suffer significantly.
We have implemented anti-takeover provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to
replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:
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Establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new majority of the board;
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Authorizing the issuance of  “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt;
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Prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
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Limiting the ability of stockholders to call special meetings of the stockholders;
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Prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and
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Establishing 90- to 120-day advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at stockholder meetings.
We have adopted a stockholder rights plan that may discourage, delay, or prevent a merger or acquisition that is beneficial to our stockholders.
In August 2011, our Board of Directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a merger or acquisition beneficial to our stockholders by diluting the ability of a potential acquirer to acquire us. Pursuant to the terms of our plan, when a person or group (except under certain circumstances) acquires 20 percent or more of our outstanding common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20 percent or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to acquire 20 percent or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirer’s rights would not become exercisable for our shares of common stock at a discount, the potential acquirer would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquirer from acquiring us. As a result, either by operation of the plan or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.
Our ability to utilize our net operating loss carryforwards may be limited.
We have significant federal and state net operating loss carryforwards. However, our net operating loss carryforwards and certain other tax attributes may expire and not be used. Additionally, under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, as well as other pre-change tax attributes (e.g., research and experimentation tax credits), to offset its post-change income may be limited. We have previously experienced at least one ownership change and may experience ownership changes in the future as a result of subsequent shifts in our stock ownership or future equity offerings. As of December 31, 2014, we had federal net operating loss carryforwards of approximately $253.3 million that expire at various dates through 2033 that together with other tax attributes could expire unutilized or could be limited if we have experienced, or if in the future we experience, an ownership change.
We may need to raise additional capital, and the issuance of debt or equity securities could adversely affect our common stockholders.
We are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure
to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. We may need to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.
We have historically raised capital through the issuance of equity securities. We have on file an effective shelf registration statement that allows us to raise up to $75.0 million from the sale of common or preferred stock or warrants for the purchase of common or preferred stock. We may also choose to issue either debt or equity securities in offerings not made pursuant to our shelf registration statement. The issuance of debt or equity securities could adversely affect the voting power of holders of our common stock. The issuance of debt or equity securities could also decrease the market price of our common stock or have terms and conditions that could discourage a takeover or other transaction that might involve a premium price for our shares or that our stockholders might believe to be in their best interests.
We may not be able to raise additional capital on favorable terms, if at all.
We may not be able to raise additional funds on acceptable terms, or at all through the issuance of equity or debt securities. If we are unable to secure sufficient capital to fund our research and development activities, we may not be able to continue operations, or we may have to enter into collaboration agreements that could require us to share commercial rights to our products to a greater extent or at earlier stages in the drug development process than is currently intended.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
PROPERTIES
In December 2013, we entered into a lease for 6,489 square feet for our corporate offices and research development laboratories at 910 Clopper Road, Suite 220N in Gaithersburg, Maryland. We relocated our operations to this location in January 2014. In December 2014 we amended this lease to include an additional 2,290 square feet located at 910 Clopper Road, Suite 260S in Gaithersburg, Maryland. In February 2015 we amended this lease to include an additional 733 square feet located at 910 Clopper Road, Suite 280S in Gaithersburg, Maryland. As a result of the last amendment, the term of the lease now expires on March 31, 2020. We have additional space within this facility that can be utilized to accommodate future growth, and we currently believe this facility is sufficient to meet our present needs.
We leased 42,900 square feet at 65 West Watkins Mill Road in Gaithersburg, Maryland. The term of that lease expired on October 31, 2014.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
On February 3, 2012, a putative class action lawsuit captioned Satish Shah v. GenVec, Inc., et al. Civil Action. No. 8:12 CV-00341-DKC was commenced in the United States District Court for the District of Maryland against the Company, Paul H. Fischer, Douglas J. Swirsky and Mark O. Thornton. Following appointment of a Lead Plaintiff group in April 2012, Lead Plaintiffs filed a pleading titled Amended Class Action Complaint for Violations of the Federal Securities Laws on July 6, 2012 (the Amended Class Action Complaint). In the Amended Class Action Complaint, Lead Plaintiffs asserted claims, purportedly on behalf of a class of persons who had purchased or acquired Company common stock between March 12, 2009 and March 30, 2010 (the Class Period), that the Company and the individual defendants had violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Lead Plaintiffs alleged generally that the Company and individual defendants had made materially false or misleading statements or omissions concerning the prospects for the Company’s leading product candidate at the time, TNFerade, and the outcome of the then-ongoing clinical trial for TNFerade. Lead Plaintiffs alleged that these misrepresentations resulted in the Company’s common stock trading at artificially inflated prices throughout the Class Period. Lead Plaintiffs sought unspecified damages. On September 4, 2012, the Company and the individual defendants
moved to dismiss the Amended Class Action Complaint in its entirety for failure to state a claim upon which relief can be granted. On September 20, 2013, the Court granted this motion and dismissed the case in its entirety and with prejudice. Lead Plaintiffs did not file an appeal.
On March 12, 2012, a putative shareholder derivative action was commenced in the United States District Court for the District of Maryland against certain current and former members of our Board of Directors and the Company as a nominal defendant. The case was styled Garnitschnig v. Horovitz, et al. and generally arose out of the matters alleged to underlie the securities action. The plaintiff, who purported to bring the action derivatively on behalf of the Company, originally alleged that the individual defendants violated their fiduciary duties, wasted corporate assets and were unjustly enriched by the receipt of compensation while serving as our directors. Pursuant to the Court’s order dated April 5, 2013, the Garnitschnig case was stayed pending a decision on the motions to dismiss filed in the Shah action. On October 2, 2013, the parties entered into a stipulation confirming that the stay of the Garnitschnig action was lifted and providing that, if the plaintiff elected to continue with the action, he would file an Amended Complaint on or before November 26, 2013.
On November 1, 2013, the plaintiff in the Garnitschnig action filed an Amended Verified Shareholder Derivative and Class Action Complaint (the Amended Complaint) that supersedes the previous Complaint and asserted claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets and alleged violations of the duty of candor. The plaintiff, who now purported to bring the Amended Complaint both derivatively and as a shareholder class action, alleged that certain current and former members of the Board of Directors exceeded their authority under the Company’s 2011 Omnibus Incentive Plan (the 2011 Plan) by exceeding certain limits applicable to both stock options and restricted stock. The Amended Complaint further alleged that the Company’s Proxy Statement was materially false and misleading for failing to disclose the alleged violations of the 2011 Plan. The Amended Complaint sought, among other things, an unspecified amount of damages.
On November 1, 2013, the plaintiff in the Garnitschnig action also filed a motion for preliminary injunction seeking to postpone the Company’s 2013 annual meeting unless and until certain disclosures were made to the Company’s shareholders regarding the 2011 Plan. On November 20, 2013, the Court denied that motion in its entirety. The Company and the individual defendants then filed motions to dismiss the Amended Complaint on January 27, 2014. On September 5, 2014, the Court denied the Company’s and the individual defendants’ motion to dismiss as to all claims except for the claim for corporate waste, holding that the Amended Complaint adequately alleged claims for breach of fiduciary duty and breach of the duty of candor against the Board of Directors, and claims for unjust enrichment against certain current and former officer and directors.
On October 17, 2014, a second putative class and derivative action was filed in the United States District Court for the District of Maryland styled Galitsis v. Swirsky, et. al., Case No. 14-cv-3265. The Galitsis Complaint contains the same allegations and asserts the same claims as those in the Garnitschnig Amended Complaint (except for the dismissed corporate waste claim). Shortly after the Galitsis action was filed, counsel for the plaintiff  (who was also counsel for the plaintiff in the Garnitschnig action) voluntarily dismissed the Garnitschnig action.
On or about November 3, 2014, the parties to the Galitsis action reached an agreement in principle set forth in a Settlement Term Sheet to settle the Galitsis action. Subsequently, on January 23, 2015, the parties executed and filed with the Court a Stipulation of Settlement embodying terms previously set forth in the Settlement Term Sheet. In connection with the settlement, the Company put forward proposals at its annual meeting held on December 5, 2014 to ratify awards made pursuant to the 2011 Plan. The parties also agreed in connection with the settlement that the Company would follow certain corporate governance policies. The stipulation of settlement is subject to certain customary conditions, including court approval. On March 12, 2015, the Court entered an order preliminarily approving the proposed settlement of the Galitsis action and scheduled a hearing on May 6, 2015 to consider whether to enter an order of final approval. If the court approves the settlement, the settlement will resolve all of the claims that were or could have been brought in the Galitsis action, including all claims related to awards made pursuant to the 2011 Plan.
The Company and the individual defendants vigorously deny all liability with respect to the claims alleged in the Galitsis action. However, the Company considered it desirable that the action be settled to avoid the substantial burden, expense, risk, inconvenience and distraction of continued litigation and to fully and finally resolve the settled claims. The settlement, including any award of attorneys’ fees or expenses, is contingent upon court approval. As such, the amount of possible loss or range of loss, if any, cannot be reasonably estimated. The Company does not believe that, based on currently available information, the outcome of this proceeding will have a material adverse effect on our financial condition.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is currently traded on the NASDAQ Capital Market under the symbol “GNVC”. Set forth below is the range of quarterly high and low closing sale prices for our common stock for the two most recent years, as reported on the NASDAQ Capital Market:
As of February 27, 2015, there were approximately 76 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (DTC), which is the single record holder for shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners.
We have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future. We did not repurchase any of our equity securities during the last fiscal year.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following tables set forth our selected financial data for each of the years in the five-year period ended December 31, 2014. The information below should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods.
SUMMARY STATEMENT OF OPERATIONS:
SUMMARY BALANCE SHEET DATA:
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report. See “Item 1A: Risk Factors” regarding certain factors known to GenVec that could cause reported financial information not to be necessarily indicative of future results, including discussions of the risks related to the development, regulatory approval, manufacture, proprietary protection of our product candidates, and their market success relative to alternative products.
OVERVIEW
GenVec, Inc. (GenVec, we, our, or the Company) is a clinical-stage biopharmaceutical company with an entrepreneurial focus on leveraging its proprietary adenovector gene delivery platform to develop a pipeline of cutting-edge therapeutics and vaccines. The Company is a pioneer in the design, testing and manufacture of adenoviral-based product candidates that can deliver on the promise of gene-based medicine. GenVec’s
lead product candidate, CGF166, is licensed to Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and is currently in a Phase 1/2 clinical study for the treatment of hearing loss and balance disorders. In addition to our internal and partnered pipeline, we also focus on opportunities to license our proprietary technology platform, including vectors and production cell lines, for the development and manufacture of therapeutics and vaccines to the biopharmaceutical industry.
A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, Merial Limited, and the U.S. Government to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), Enterovirus D68 (EV-D68) and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).
Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.
Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders through the delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis on the development of novel treatments for hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.
We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).
Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants, or government or agency-sponsored studies that could reduce our development costs.
An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.
Our research and development expenses were $2.3 million and $5.5 million for the years ended December 31, 2014 and 2013, respectively. These expenses were divided between our research and development platforms in the following manner:
Hearing. In a collaboration with Novartis, our hearing loss and balance disorders program is focused on the restoration of hearing and balance function through the regeneration of critical cells of the inner ear. Since commencement of this development program, GenVec has incurred approximately $23 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded under our agreement with Novartis. The decrease in research and development expenses in 2014 was primarily due to our lead product candidate, CGF166, entering into a Phase 1/2 clinical study.
Vaccines. Under our corporate and government funded vaccine programs, GenVec continues to develop vaccine candidates against malaria, RSV, HSV, and other infectious diseases, as well as an animal health vaccine for FMD. Since commencement of these vaccine development programs in 2002, GenVec has incurred approximately $120 million in research and development costs, including an allocation of corporate general and administrative expenses, most of which have been funded under our agreements with our various sponsors. We have entered into a collaboration with Merial Limited to develop vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are supported by the U.S. Department of Homeland Security and in collaboration with the U.S. Department of Agriculture.
To date, none of our proprietary or collaborative programs has resulted in a commercial product; therefore, we have not received any revenues or royalties from the sale of products. We have funded our operations primarily through public and private placements of equity securities, payments received under collaborative programs with public and private entities, and debt financings.
We have incurred operating losses each year since inception and, as of December 31, 2014, had an accumulated deficit of approximately $278.3 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative activities. Research and development expenses consist primarily of salaries and related personnel costs, sponsored research costs, patent costs, technology access fees, clinical trial costs, and other expenses related to our product development and research programs. General and administrative expenses consist primarily of compensation and benefit expenses for executive, finance and other administrative personnel, facility costs, professional fees, business development costs, insurance premiums, and other general corporate expenditures.
Due to the inherent uncertainties in research and development and the nature of our business, including those discussed throughout this Annual Report on Form 10-K, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. However, we believe that we have sufficient operating capital to continue our current research, development and collaborative activities into 2017.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates using authoritative pronouncements, historical experience, and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Significant accounting policies are more fully described in Note 2 “Summary of Significant Accounting Policies” in the Notes to Financial Statements included in this Annual Report on Form 10-K.
We have discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions.
We believe the following accounting policies to be critical because they require significant estimates or judgment on the part of management.
Revenue Recognition. Revenue is recognized when all four of the following criteria are met (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the services or products has occurred, and (iv) collectability of the contract amounts is considered probable.
Our collaborative research and development agreements provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront non-refundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved in achieving the milestone; and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.
Research and development revenue from cost-reimbursement and cost-plus fixed-fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors, such as indirect rate estimates, are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.
Research and development revenue from fixed-price best efforts arrangements is recognized as earned based on the performance requirements of the contract. Revenue under these arrangements is recognized when delivery to and acceptance by the customer has been received. During the period of performance, recoverable contract costs are accumulated on the balance sheet in other current assets, but no revenue or profit is recorded prior to customer acceptance of the contractually stated deliverables. Recoverable contract costs that are accumulated on the balance sheet include all direct costs associated with the arrangement and an allocation of indirect costs. Payments received in advance of customer acceptance are recorded as deferred revenue. Once customer acceptance has been received, revenue and recoverable contract costs are recognized. Over the course of the arrangement, we routinely evaluate whether revenue and profitability should be recognized in the current period. Any known or probable losses on projects are charged to operations in the period in which such losses are determined.
Stock Based Compensation
We account for stock-based compensation based on the estimated grant date fair value of the stock using the Black-Scholes option-pricing model. The estimated grant date fair value is recognized in earnings over the requisite service period.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, refer to the section titled “Recent Accounting Pronouncements” within Note 2 “Summary of Significant Accounting Policies” in the Notes to Financial Statements included in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2014 AND 2013
REVENUE
Revenue. Revenue increased 64% to $6.0 million in 2014 from $3.7 million in 2013.
Revenues for the twelve-month period ended December 31, 2014 were derived from the collaboration with Novartis to discover and develop novel treatments for hearing loss and balance disorders and from the Company’s funded research and development programs with the Department of Homeland Security (DHS), National Institutes of Allergy and Infectious Diseases (NIAID) of the National Institutes of Health (NIH), and the U.S. Naval Medical Research Center (NMRC), all of which use GenVec’s proprietary adenovector technology for the development of either vaccine candidates against foot-and-mouth disease (FMD) for livestock or vaccines against malaria.
We entered into a research collaboration and license agreement (the Agreement) with Novartis in January 2010, which accounted for $0.2 million and $0.4 million of revenue in 2014 and 2013, respectively.
Additionally, since the inception of the Agreement, we have been eligible to receive up to an additional $206.6 million in milestone payments if certain clinical, regulatory and sales milestones are met. In September 2010, we announced that we had achieved the first milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities. In December 2011, we announced that we had achieved the second milestone in the collaboration with Novartis. The $300,000 milestone was triggered by the successful completion of certain preclinical development activities. In February 2014, we announced that we had achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection of the Investigational New Drug application filed by Novartis for CGF166 with the U.S. Food and Drug Administration (FDA). In October 2014, we announced that we had achieved the fourth milestone in the collaboration with Novartis. The $3.0 million milestone was triggered by the first patient treated with CGF166 in a Phase 1/2 clinical trial sponsored by Novartis utilizing GenVec technology for the treatment of severe-to-profound bilateral hearing loss. As of February 28, 2015, milestones available under the Agreement include $21.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. Additionally, we are also entitled to royalties on future sales.
In August 2010, the Company and Novartis entered into a development agreement related to the supply of clinical trial material in connection with activities under the Agreement, which accounted for $0.3 million and $0.4 million in revenue in 2014 and 2013, respectively.
In September 2012, we signed an agreement worth approximately $3.5 million with the U.S. Naval Medical Logistics Command to support malaria vaccine development efforts at the NMRC. Under the terms of the agreement, GenVec was responsible for producing clinical supplies of our malaria vaccine, which utilized our novel, proprietary technology. NMRC used this clinical material as part of its efforts to assess the safety and efficacy of these next-generation vectored vaccines using the clinical challenge model developed by NMRC and the Walter Reed Army Institute of Research (WRAIR) malaria vaccine programs, which now are unified as the U.S. Military Malaria Vaccine Program (USMMVP). Under the agreement, GenVec
retained the right to commercialize this novel technology. There was $1.4 million of revenue recognized under this contract during 2013 and no revenue recognized under this contract during 2014. On July 29, 2013, we entered into a modification to terminate contractual obligations under the agreement.
The increase in revenue in 2014 is primarily due to increased revenue of  $4.6 million generated by our hearing loss and balance disorders program versus the prior year as a result of our achievement of milestones totaling $5.0 million in revenue in 2014 offset by a $0.4 million reduction in revenues received for services performed in connection with this program. We continue to expect that revenue for this program will decrease now that our lead product candidate, CGF166, is in Phase 1/2 clinical development. This revenue increase in 2014 was partially offset by a $1.5 million decrease in revenue in 2014 associated with our malaria program, primarily due to the termination of our September 2012 agreement with the NMRC in July 2013, as compared to the comparable prior year period. We also experienced reduced revenues of $0.4 million, $0.2 million, and $0.2 million as a result of reduced work scope for work performed under grants, for our foot and mouth disease and for our HIV programs in 2014 as compared to 2013.
OPERATING EXPENSES
Research and development. Research and development expenses decreased 59% to $2.3 million in 2014 from $5.5 million in 2013. In 2014, we experienced lower research and development costs than in the prior year due primarily to decreased personnel costs due to the reductions in force that occurred in 2013 and a decreased allocation of facility costs to research and development in 2014 as compared to 2013. Stock-based compensation expense included in research and development personnel costs decreased approximately $236,000 in 2014 as compared to the prior year.
General and administrative. General and administrative expenses decreased 26% to $6.3 million in 2014 from $8.5 million in 2013. General and administrative expenses were lower in 2014 primarily due to lower personnel, professional and facility overhead costs. The reduced costs were partially offset by an increased allocation of facility costs to general and administrative in 2014 as compared to 2013. General and administrative expenses include a decrease of approximately $96,000 of stock-based compensation expense in 2014 as compared to the prior year and no non-recurring severance costs in 2014 as compared to $1.5 million in 2013.
OTHER INCOME (LOSS)
Total other income decreased to $22,000 in 2014 as compared to $275,000 in 2013. In 2014, total other income consisted primarily of interest income. In 2013, total other income consisted of the gain on the sale of non-capital laboratory supplies and equipment and to a lesser extent interest income.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced significant losses since our inception. As of December 31, 2014 we have an accumulated deficit of  $278.3 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.
As of December 31, 2014, cash, cash equivalents, and short-term investments totaled $14.7 million as compared to $6.1 million at December 31, 2013.
For the 12 months ended December 31, 2014, we used net cash of  $2.0 million for operating activities. This consisted of a net loss for the period of  $2.5 million, which included approximately $0.2 million of non-cash depreciation and amortization, $0.5 million of non-cash stock-based compensation expenses, $0.1 million of loss on sale of long lived assets, $0.4 million used for the net change in current assets and liabilities, and $0.1 million provided by the net change in non-current assets. Net cash was used primarily for our internally funded research and development programs and general and administrative activities.
Net cash used in investing activities during the 12 months ended December 31, 2014 was $5.9 million, which included $5.9 million for the net purchases of marketable securities and $44,000 for the purchase of property and equipment.
There was $10.7 million of cash provided by financing activities during the 12 months ended December 31, 2014 as a result of our “at-the-market” offering and Registered Direct Offerings that occurred in the first quarter of 2014 as described below.
As of December 31, 2013, cash, cash equivalents, and short-term investments totaled $6.1 million as compared to $15.3 million at December 31, 2012.
For the 12 months ended December 31, 2013, we used net cash of  $9.3 million for operating activities. This consisted of a net loss for the period of  $10.0 million, which included approximately $0.2 million of non-cash depreciation and amortization, $0.9 million of non-cash stock-based compensation expenses, $0.2 million of impairment of long lived assets, $0.3 million for the gain on sale of long lived assets, $0.4 million used for the net change in current assets and liabilities, and $0.1 million provided by the net change in non-current assets. Net cash was used primarily for our internally funded research and development programs and general and administrative activities.
Net cash provided by investing activities during the 12 months ended December 31, 2013 was $10.4 million which included $10.2 million for the net proceeds from sales of marketable securities and $0.6 million for proceeds from the sale of property and equipment, reduced by $0.4 million for the purchase of property and equipment.
There was no cash provided or used from financing activities during the 12 months ended December 31, 2013.
Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses. We also utilize different financing instruments, such as debt and capital and/or operating leases, to finance various equipment and facility needs.
Since our initial public offering, we have raised capital by offering shares of our common stock and warrants to purchase shares of our common stock in a variety of offerings. On May 29, 2014, 711,539 warrants with an exercise price of  $8.58 issued in May 2009 expired. On February 1, 2015, 420,000 warrants with an exercise price of  $27.50 issued in February 2010 expired. As a result, as of February 28, 2015, we have no warrants outstanding. Please see Note 8 “Stockholders’ Equity” to our audited financial statements included in this Annual Report.
On September 7, 2011, we entered into a Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Stockholder Rights Agreement was not adopted in response to any specific effort to acquire control of the Company. In connection with the adoption of the new Stockholder Rights Agreement, the Company’s Board of Directors declared a dividend of one preferred stock purchase right, or Right, for each outstanding share of common stock to stockholders of record as of the close of business on September 7, 2011. Initially, the Rights will be represented by GenVec’s common stock certificates or book entry notations, will not be traded separately from the common stock and will not be exercisable. In the event that any person acquires beneficial ownership of 20% or more of the outstanding shares of GenVec’s common stock, or upon the occurrence of certain other events, each holder of a Right, other than the acquirer, would be entitled to receive, upon payment of the purchase price, which is initially set at $32 per Right, a number of shares of GenVec common stock having a value equal to two times such purchase price. The Company’s Board of Directors is entitled to redeem the Rights at $0.001 per right at any time before a person or group has acquired 20% or more of the Company’s common stock. The Rights will expire on September 7, 2021, subject to the Company’s right to extend such date, unless earlier redeemed or exchanged by the Company or terminated. The Rights will at no time have any voting rights. The Company has authorized 30,000 shares of Series B Junior Participating Preferred Stock in connection with the adoption of the new Stockholder Rights Agreement. There was no Series B Junior Participating Preferred Stock issued or outstanding as of December 31, 2014.
On January 23, 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. As of March 20, 2015, we have sold approximately $11.6 million of common stock under the 2014 shelf registration statement. The 2014 shelf
registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities in a public primary offering using Form S-3 with a value exceeding more than one-third of our public float in any 12-month period so long as our public float remains below $75.0 million. Our last sales under the Form S-3 were in March 2014, in the amount of $9.0 million.
On February 11, 2014, we entered into an Equity Distribution Agreement (the EDA) with Roth Capital Partners, LLC (Roth Capital Partners), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth Capital Partners (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth Capital Partners, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to use the net proceeds from the sale of shares in the ATM Offering, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of March 20, 2015, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.
On March 18, 2014, we sold 2,870,000 shares of our common stock, par value $0.001, in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of $3.15 per share, resulting in gross proceeds of approximately $9.0 million.
Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. We currently estimate we will use between $5 million and $7 million of cash during the four quarters ending December 31, 2015. Our estimate includes approximately $0.3 million in contractual obligations. Based on this estimate we have sufficient resources to fund our operations into 2017.
OFF-BALANCE SHEET OBLIGATIONS
We had no off-balance sheet obligations other than in connection with our operating leases.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report. See “Index to Financial Statements” on Page for a list of the financial statements being filed herein.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2014. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that: (a) the information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management has concluded that, as of December 31, 2014, our internal control over financial reporting is effective based on those criteria.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors
The following table sets forth the director nominees for election at the Company’s 2015 annual meeting of stockholders (the Annual Meeting), the directors of the Company currently in office, their ages and the positions currently held by each such person with the Company.
(1)
Member of the Audit Committee.
(2)
Member of the Compensation Committee.
(3)
Member of the Nominating and Corporate Governance Committee.
The biographies of each of the directors below contains information regarding the experiences, qualifications, attributes, or skills that caused the Nominating and Corporate Governance Committee and the Board to determine that the person should serve as a director for the Company.
Directors Whose Terms Expire in 2015
Douglas J. Swirsky has served as the President and Chief Executive Officer and as a director of the Company since September 2013. He joined the Company in 2006 as Chief Financial Officer, Corporate Secretary and Treasurer, and continues to serve as Corporate Secretary. Prior to joining the Company, Mr. Swirsky was a Managing Director and the Head of Life Sciences Investment Banking at Stifel Nicolaus from 2005 to 2006 and held investment banking positions at Legg Mason from 2002 until Stifel Financial’s acquisition of the Legg Mason Capital Markets business in 2005. Mr. Swirsky, a Certified Public Accountant and holder of a Chartered Financial Analyst® designation, has also previously held investment banking positions at UBS, PaineWebber, and Morgan Stanley. His experience also includes positions in public accounting and consulting. Mr. Swirsky received his undergraduate degree in Business Administration from Boston University and his M.B.A. from the Kellogg School of Management at Northwestern University. Mr. Swirsky is a member of the Board of Directors of Fibrocell Science, Inc. Within the past five years, Mr. Swirsky has also served on the board of PolyMedix, Inc.
Mr. Swirsky’s background with, and institutional knowledge of, the Company together with his day-to-day leadership of our business gives the Board an invaluable executive with a Company-focused perspective.
Wayne T. Hockmeyer, Ph.D. has served as a director of the Company since December 2000. Dr. Hockmeyer is a member of the Nominating and Corporate Governance Committee, is the Chairman of the Compensation Committee, and was appointed Chairman of the Board in November 2013. Dr. Hockmeyer founded MedImmune, Inc. (MedImmune) in April 1988 as President and Chief Executive Officer and was elected a director of MedImmune in May 1988. Dr. Hockmeyer became Chairman of the board of
directors of MedImmune in May 1993 and left his position as Chief Executive Officer in October 2000. Dr. Hockmeyer is currently retired, having resigned from his positions as a member of the MedImmune board of directors and as President of MedImmune Ventures, Inc. following the acquisition of MedImmune by AstraZeneca Biopharmaceuticals, Inc. in June 2007. Dr. Hockmeyer earned his bachelor’s degree from Purdue University and his Ph.D. from the University of Florida in 1972. Currently, he is a director of Baxter International Inc., and the Indian River Medical Center. Within the past five years, Dr. Hockmeyer served on the board of directors of Idenix Pharmaceuticals, Inc.
Dr. Hockmeyer’s experience for the past two decades at the forefront of biotechnology development provides a valuable resource and knowledge base for our Board. Dr. Hockmeyer’s experience in founding and managing MedImmune prior to its acquisition, both as its most senior executive and as Chairman of its board of directors, enables him to counsel the Board in a unique and beneficial manner.
Directors Whose Terms Expire in 2016
William N. Kelley, M.D. has served as a director of the Company since June 2002. Dr. Kelley is the Chairman of the Nominating and Corporate Governance Committee and a member of the Compensation Committee. Dr. Kelley and his colleagues at the University of Michigan were the first to show proof of concept data for in vivo gene therapy as it is recognized today. From 1989 to 2000, Dr. Kelley served as Executive Vice President of the University of Pennsylvania with responsibilities as Chief Executive Officer for the Medical Center, Dean of the School of Medicine, and the Robert G. Dunlop Professor of Medicine and Biochemistry and Biophysics. He is currently Professor of Medicine at the School of Medicine of the University of Pennsylvania. In the national leadership arena, Dr. Kelley has served as President of the American Society for Clinical Investigation, President of the American College of Rheumatology, Chair of the American Board of Internal Medicine, and Chair of the Residency Review Committee for Internal Medicine. Within the past five years, Dr. Kelley served on the board of directors of Merck & Co. Inc., Beckman Coulter, Inc., Advanced Biosurfaces, Inc., Polymedix, Inc., and he now also serves on the board of directors of Transenterix, Inc.
Dr. Kelley brings a long history of involvement in experimental models of gene therapy to the Board. Dr. Kelley’s many leadership roles, both as a leader in the field of gene therapy and as a senior management figure of an internationally renowned medical center, allow him to provide strong leadership to our Board.
Quinterol J. Mallette, M.D. was appointed to the Board in October 2014. Dr. Mallette is a member of the Audit Committee. Dr. Mallette was initially recommended as a director candidate by one of our stockholders. Dr. Mallette presently serves as Senior Analyst at SWK Holdings, Inc., a publicly-traded healthcare-focused specialty finance firm, a position he has held since 2013. From 2011 to 2013, Dr. Mallette was the Founder and President of Mallette Research Associates, a provider of in-depth, real-time equity research to brokerage houses. From 2009 to 2011, Dr. Mallette was the Founder and President of the Invictus Trading Group, Inc., a proprietary trading group with expertise in healthcare. Dr. Mallette began his career in 2001 at Lehman Brothers as an Equity Research Analyst in the Biotechnology space. Dr. Mallette left Lehman to fill the role of Senior Analyst for a healthcare-dedicated fund, before starting his own fund. Dr. Mallette holds B.S. degrees in Biomedical Engineering and Psychology from Duke University. He also received an MBA from the Fuqua School of Business at Duke University and a medical degree from the Duke University School of Medicine.
Dr. Mallette has significant experience in healthcare and biotechnology-focused finance and investment institutions and an educational background in medicine and business, bringing to the Board a deep understanding of the Company’s industry and the capital markets.
Directors Whose Terms Expire in 2017
Stefan D. Loren, Ph.D. has served as a director of the Company since September 2013. Dr. Loren is a member of the Audit Committee and the Nominating and Corporate Governance Committee. Dr. Loren was initially recommended as a director candidate by one of our stockholders. Since March 2014, Dr. Loren has been engaged in founding Loren Capital Strategy, an investment fund. Dr. Loren was a Managing Director of Westwicke Partners, a healthcare-focused consulting firm, from 2008 through February 2014. From 2007 to 2008, Dr. Loren was an Analyst with Perceptive Advisors, a healthcare-focused investment
fund, and, prior to that, served as an analyst and portfolio manager for MTB Investment Advisors from 2005 to 2007. Prior to 2005, Dr. Loren was a Managing Director in the healthcare equity research group at Legg Mason, and before joining Legg Mason, a Research Chemist at the advanced technologies division of Abbott Laboratories and a Research Fellow at the Scripps Research Institute. Dr. Loren received his B.A. from the University of California, San Diego, and his Ph.D. from University of California, Berkeley. Currently, he is a director of Marina Biotech, Inc. Within the past five years, Dr. Loren has served on the boards of directors of Orchid Cellmark Inc. and Polymedix, Inc.
Dr. Loren has over 15 years of experience in financial markets and a decade of experience in research and development in the pharmaceutical and biotechnology industries. This unique combination makes Dr. Loren an important resource to our Board.
Marc R. Schneebaum has served as a director of the Company since April 2007. Mr. Schneebaum is a member of the Compensation Committee and the Chairman of the Audit Committee. Mr. Schneebaum has served as the Chief Financial Officer and Senior Vice President of Synta Pharmaceuticals Corp. since December 2014. Mr. Schneebaum has also served as an industry consultant. Mr. Schneebaum served as President, Chief Executive Officer and a director of Predictive BioSciences, Inc., a commercial stage cancer diagnostics company, from 2011 to 2013. From 1997 to 2010, Mr. Schneebaum served as President, Chief Executive Officer, and a director of Sensors for Medicine and Science, Inc., an emerging medical technology company. From 1991 to 1997, he served as Senior Vice President, Finance, Business Development and Administration, and Chief Financial Officer of Genetic Therapy, Inc., a biotechnology company (acquired by Sandoz/Novartis). From 1987 to 1991, Mr. Schneebaum was a Vice President at Alex Brown & Sons Incorporated, a leading investment banking firm (now part of Deutsche Bank), where he participated in a variety of finance and strategic assignments. Mr. Schneebaum began his career in the accounting and auditing group at KPMG LLP, advancing to Senior Manager in the management consulting group. Mr. Schneebaum, a Certified Public Accountant (inactive), received his degree in Business Administration from the University of Maryland. He has also served on the boards of the March of Dimes of Maryland and the Maryland Enterprise Investment Fund.
Mr. Schneebaum’s financial acumen, his varied leadership roles in the medical technology and biotechnology fields and his experience in investment banking, accounting, and management consulting at leading institutions bring a level of knowledge to the Board that aids greatly in its deliberations.
Executive Officers
Please see “Executive Officers of the Registrant” in Part I of this Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s executive officers, directors and persons who beneficially own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Such executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports filed by such reporting persons.
Based solely on the Company’s review of copies of such reports furnished to the Company and written representations that no other reports were required during the year ended December 31, 2014, the Company believes that all Section 16(a) filing requirements applicable to the Company’s executive officers, directors, and greater than 10% beneficial owners were complied with in a timely manner.
Code of Business Conduct and Ethics
The Board has adopted the Code of Business Conduct and Ethics (the Code), which sets forth standards of expected conduct of the Chief Executive Officer, financial executives, directors, executive officers and all employees of the Company. The Code includes policies on employment, conflicts of interest and confidential information and requires strict adherence to all laws and regulations applicable to the conduct of the Company’s business. A copy of the Code can be found in the Investors and Media - Corporate Governance section on the Company’s website at www.genvec.com. The Company will disclose any
amendment to the Code or waivers of the Code relating to the Company’s directors, executive officers, principal financial and accounting officers, or persons performing similar functions on its website within five business days following the date of any such amendment or waiver.
Director Nomination Process
There have been no material changes to the process by which stockholders may submit nominees for election to the Board of Directors to the Nominating and Corporate Governance Committee since that process was described in the Company’s Proxy Statement filed with the SEC on November 4, 2014.
Audit Committee & Audit Committee Financial Expert
The Board has established the Audit Committee in accordance with Section 3(a)(58)(A) of the Exchange Act. The Board has adopted, and annually reviews, a written charter outlining the practices followed by the Audit Committee. The Audit Committee’s job is one of oversight as set forth in its Charter. It is not the duty of the Audit Committee to prepare the Company’s financial statements, to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with accepted accounting principles. The Company’s management is responsible for the preparation, presentation and integrity of the financial statements. Management is also responsible for maintaining appropriate accounting and financial reporting practices and policies as well as internal controls and procedures designed to provide reasonable assurance that the Company is in compliance with accounting standards and applicable laws and regulations. The independent registered public accounting firm is responsible for planning and performing an independent audit of financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). The independent registered public accounting firm is responsible for expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted accounting principles.
The members of the Audit Committee are Marc R. Schneebaum (Chairman), Stefan D. Loren, Ph.D. and Quinterol J. Mallette, M.D. Each member of the Audit Committee is independent as defined by NASDAQ listing standards. The Board has determined that at least one member of the Audit Committee, Marc R. Schneebaum, is an Audit Committee Financial Expert as defined in the SEC’s rules and regulations. The Audit Committee is responsible for appointing, compensating, overseeing and evaluating the selection of the Company’s independent registered public accounting firm and is responsible for overseeing the following: management’s preparation of the Company’s financial statements and management’s conduct of the accounting and financial reporting processes; management’s maintenance of internal controls and procedures for financial reporting; the Company’s compliance with applicable legal and regulatory requirements, including without limitation those requirements relating to financial controls and reporting; the independent auditor’s qualifications and independence; and the performance of the independent auditors, including the annual independent audit of the Company’s financial statements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES AND INFORMATION
Summary Compensation Table
The following table summarizes the total compensation paid or earned by each of the named executive officers for the year ended December 31, 2014:
(1)
Mr. Swirsky became Chief Executive Officer in September 2013.
(2)
Amounts represent the aggregate grant date fair value as computed in accordance with ASC Topic 718 using the assumptions set forth in Note 8 to the audited financial statements of the Company.
(3)
Represents amounts earned under the Company’s annual performance award plan for the respective year.
(4)
Amounts shown for 2014 are discussed below under Narrative Disclosure to Summary Compensation Table.
Narrative Disclosure to Summary Compensation Table
The following section provides a description of the 2014 compensation information contained in the Summary Compensation Table above for the following individuals, whom we refer to as our named executive officers:
•
Douglas J. Swirsky, President, Chief Executive Officer, and Corporate Secretary
•
Douglas E. Brough, Chief Scientific Officer
•
Bryan T. Butman, Senior Vice President, Development
Mr. Swirsky became our Chief Executive Officer (CEO) in September 2013.
Base Salaries
The Compensation Committee recommends a base salary level for the CEO, subject to Board approval, and approves base salary levels for the other named executive officers based on individual performance, promotions, and industry information. In considering base salary levels, the Compensation Committee gives most weight to the CEO’s performance assessment of each named executive officer (other than himself or herself). After the appointment of Mr. Swirsky to the position of President and CEO in September 2013, Mr. Swirsky’s base salary was increased by 20.6% to $375,000 in December 2013. Based on the recommendation by the Compensation Committee, Mr. Swirsky, and Drs. Brough and Butman did not receive an increase to their base salaries in 2014.
Annual Performance Award Plan
Each year, the named executive officers have the opportunity to receive annual performance awards through participation in the Company’s annual performance award plan. Participants in this plan are eligible to receive a target payment that is expressed as a percentage of the participant’s base salary and that is based
on performance of the Company and each named executive officer’s overall individual performance (with the exception of the CEO). For 2014, annual performance award opportunities for Mr. Swirsky and Drs. Brough and Butman remained unchanged from the percentages used in the prior year, and were 50% and 30%, respectively.
For Mr. Swirsky, 100% of the annual performance award was based on corporate goals. For Drs. Brough and Butman, 70% was payable based on corporate goals and 30% was payable based on individual goals.
The corporate goals for 2014 were set on January 23, 2014. The goals, level of achievement and weight are described below:
Hearing Program
Receive payment for non-rejection of IND (weighted 20%)
Hearing Program
Receive payment for treatment of first patient (weighted 30%)
Hearing Program
Requalification of quality program by Novartis (weighted 5%)
Business Development
Enter new license agreements for technology or product program (weighted 25%)
Stability Program
Reestablish program (weighted 5%)
Financial Goals
2014 Cash Burn of  $5.5M or less and other corporate initiatives (weighted 15%)
In general, achievement of 100% of the corporate goals and the Compensation Committee’s positive evaluation of individual performance will result in an annual incentive award payment to the individual at the target level. The Compensation Committee retains the discretion, however, to pay the annual performance awards at levels below or above the target level as it evaluates both the achievement of corporate goals, taking into account the weightings assigned to each goal, and the individual performance of the executives.
The Compensation Committee determined that the executives had a strong performance and that the payments under the Company’s annual performance award plan should reflect the organization’s achievements.
Annual Stock Option Grants
The Company uses stock options for its equity incentive awards in order to be consistent with its objective to align the interests of stockholders and its executives. Stock options are awarded annually and are considered part of total compensation, along with base salary and annual performance awards. Stock options granted in 2014, consistent with awards in prior years, vest over a four-year period, with one-eighth of each option grant vesting six months after the date of grant and the remainder vesting ratably over the following 42 months. This vesting schedule was selected because of the Company’s belief that it is consistent with industry practice while still providing a relatively long retention benefit.
Stock options that are granted as part of the long-term incentive program are granted with an exercise price equivalent to the closing price of the common stock on NASDAQ Capital Market on the date of grant. The exercise price of stock options granted to a newly hired executive officer is set at the closing price of GenVec’s common stock on NASDAQ on the start date of the executive officer, which is a date on or after approval of the grant by the Compensation Committee. In 2014, Mr. Swirsky, Drs. Brough and Butman, received annual stock option grants of 75,000, 50,000, and 40,000, respectively, on January 23, 2014 at an exercise price of  $3.96 per share.
Long-term Incentives - Special, One-time Restricted Share Grant
The Compensation Committee and our Board of Directors approved a special one-time award of 200,000, 125,000, and 75,000 restricted shares of our common stock to Mr. Swirsky, Dr. Brough, and Dr. Butman,
respectively, in September 2013 at the same time that the Board of Directors adopted our new operating strategy. The Compensation Committee determined it was appropriate to make the one-time award of restricted stock because of concerns about retention and to further align the interests of our executives with our stockholders. The Compensation Committee was concerned that notwithstanding the positive performance of our leadership by creating a new operating strategy, there was at risk of not being able to retain the Company’s leadership who were viewed as important to achieve the Company’s new operating strategy. Furthermore, the Compensation Committee determined it appropriate to make a grant to Mr. Swirsky to reflect his appointment as CEO. The stock award is disclosed in the stock award column of the summary compensation table.
All Other Compensation
In 2014, for Mr. Swirsky and Drs. Brough and Butman, the amounts shown in All Other Compensation in the Summary Compensation Table above include amounts for matching contributions under the Company’s 401(k) plan.
Employment, Severance and Change in Control Arrangements
GenVec has entered into employment agreements with Mr. Swirsky and Drs. Brough and Butman and has entered into a change in control agreement with Mr. Swirsky.
Salary Continuation Agreements. The Company entered into a salary continuation agreement with Mr. Swirsky when he joined the Company in 2006, which was pursuant to a form of agreement that was adopted in October 2002 and amended in December 2008 to provide for technical compliance with certain Treasury regulations. The Company has also entered into salary continuation agreements with Drs. Brough and Butman with terms substantially similar to the form of agreement adopted in October 2002 as amended by the December 2008 amendment. Under the terms of the salary continuation agreements, if the named executive officer is terminated without “cause” (as defined below) and other than by reason of death or disability, the officer will be paid the officer’s regular base salary for a period of 12 months. The named executive officer will also receive a pro-rata bonus equal to the product of the bonus paid to the officer for the fiscal year preceding the termination date, divided by 12 months times the number of months of service during the year of termination. These agreements also include continued health and welfare benefits for the same period as the salary continuation, a non-compete for the same period as the salary continuation and a non-disparagement clause.
Under the terms of the salary continuation agreements, “cause” is defined to include:
•
the willful and continued failure of the named executive officer to substantially perform his duties;
•
willfully engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company;
•
personal dishonesty or breach of fiduciary duty to the Company for personal benefit at the expense of the Company; or
•
willfully violating any law, rule, regulation, or order in a manner that is materially and demonstrably injurious to the Company.
Acceleration of Stock Awards. The form of stock option award agreements for stock option awards made to each of the named executive officers provides that in the event of a change in control, all unvested equity awards will accelerate in full. Under the terms of the stock option award agreements, a “change in control” means the occurrence of any of the following events:
•
any person becomes the beneficial owner of 40% or more of the Company’s common stock;
•
the Company’s stockholders approve a merger, consolidation, share exchange, division or other reorganization of the Company with any other organization;
•
the Company’s stockholders approve a complete plan of liquidation, winding-up of the Company, or an agreement for the sale or disposition of all or substantially all of the Company’s assets; or
•
during any twenty-four month period, individuals who at the beginning of such period constituted the Board cease for any reason to constitute at least a majority of the Board.
Change in Control Agreement with Mr. Swirsky. GenVec entered into a change in control agreement with Mr. Swirsky when he joined the Company in September 2006. Mr. Swirsky’s agreement was amended in December 2008 to provide for technical compliance with certain Treasury regulations. Mr. Swirsky is entitled to certain payments upon termination without cause (as defined in the salary continuation agreements described above) following a change in control (as defined in the stock option award agreements described above).
Specifically, if Mr. Swirsky’s employment is terminated without cause other than as a result of his death or disability or if he resigns for good reason within two years following a change in control, he is entitled to a lump sum severance payment equal to his monthly salary and average monthly bonus times 18, continued health and welfare benefits for an 18-month period and a pro-rata bonus for the termination year. In addition, his agreement provides for an excise tax gross-up payment, reimbursement of certain legal costs related to the enforcement of the agreement and the accelerated vesting of all unvested options at termination.
In addition, pursuant to his change in control agreement, upon the death or disability of Mr. Swirsky during such time as he is entitled to any payments or benefits under the agreement, such payments and benefits are payable to Mr. Swirsky’s heirs or estate, respectively. To the extent Mr. Swirsky becomes entitled to benefits under the change in control agreement, the salary continuation agreement is superseded and he will not receive any benefit under that agreement.
Under the terms of the change in control agreement, “good reason” is defined as the occurrence of any of the following events without the consent of the executive in connection with a change of control, unless, if correctable, such circumstances are fully corrected with 30 days of the notice of termination given in respect thereof, which notice must be given within 90 days of the occurrence:
•
the assignment to the executive of any duties inconsistent in any material respect with the executive’s position, authority, duties or responsibilities, as they were immediately prior to the change in control;
•
the diminution in any material respect in the executive’s position, authority, duties or responsibilities as they were immediately prior to a change in control;
•
a reduction by the Company in the executive’s annual base salary;
•
a relocation of more than 35 miles from where the executive’s office or location was immediately prior to a change in control;
•
the failure to continue any compensation plan in which the executive participates, unless an equitable arrangement has been made, or the continuation of the plan under materially less favorable terms;
•
the failure by the Company to pay to the executive any deferred compensation when due under any deferred compensation plan or agreement applicable to the executive; or
•
a material breach by the Company of the terms and provisions of the change in control agreement.
To constitute good reason for purposes of the change in control agreement, the termination by the executive must occur within two years following the initial occurrence of the event constituting the good reason.
Outstanding Equity Awards at Fiscal Year End
The following table provides information with respect to outstanding stock options and restricted stock awards held by the named executive officers as of December 31, 2014. All outstanding grants issued prior to 2012 were made under the Company’s 2002 Stock Incentive Plan. Grants made in 2012 and thereafter were made under the Company’s 2011 Omnibus Incentive Plan.
(1)
All awards have been adjusted to reflect the effect of the reverse stock split of the Company’s common stock on April 19, 2011.
(2)
The options indicated in the table above as unexercisable at December 31, 2014 result from the following option grants which vest over a four year period with 12.5% vestiing after six months from the date of grant and the remainder vesting ratably over the next 42 months.
On January 19, 2011, Mr. Swirsky, Dr. Brough, and Dr. Butman were each granted 20,000 options.
On January 18, 2012, Dr. Brough was granted 75,000 options and Mr. Swirsky and Dr. Butman were each granted 60,000 options.
On January 22, 2013, Mr. Swirsky was granted 125,000 options, Dr. Brough was granted 85,000 options and Dr. Butman was granted 75,000 options.
On September 3, 2013, Mr. Swirsky was granted 200,000 shares of restricted stock, Dr. Brough was granted 125,000 shares of restricted stock, Dr. Butman was granted 75,000 shares of restricted stock.
On January 23, 2014, Mr. Swirsky was granted 75,000 options, Dr. Brough was granted 50,000 options, Dr. Butman was granted 40,000 options.
(3)
Restricted Stock has a two-year cliff vesting with 100% vesting on September 3, 2015. The market value of the shares of common stock that have not vested is based on the closing price of our common stock on the NASDAQ Capital Market of  $2.08 on December 31, 2014.
DIRECTOR COMPENSATION TABLE
The Compensation Committee, pursuant to its charter, periodically reviews the compensation of non-employee directors. The Company’s current policy for the compensation of non-employee directors, which became effective on January 1, 2015, provides that non-employee directors of the Company will receive $60,000 annually for their service on the Board of Directors.
The Company’s policy from October 1, 2013 through December 31, 2014 for the compensation of non-employee directors provided that non-employee directors of the Company receive $40,000 annually for their service on the Board of Directors.
Prior to October 1, 2013, the Company’s policy for the compensation of non-employee directors, which was approved in September 2011 and in effect through September 2013, provided that non-employee directors of the Company received $30,000 annually for their service on the Board of Directors, $2,000 for each Board meeting attended and $1,000 for each committee meeting attended. Additionally, the chairman of each of the Company’s committees received an additional annual payment of  $7,000, with the exception of the Audit Committee chairman who received an annual payment of  $10,000. The Chairman of the Board of Directors received $35,000 annually, $4,000 for each Board meeting attended, and $1,000 per committee meeting.
Directors who are employees of GenVec do not receive fees or other compensation for their services as directors. All directors are reimbursed for travel and other expenses incurred in the performance of their duties.
In addition, pursuant to a policy adopted by the Board in 2012, each non-employee director receives: (i) upon becoming a director, an option to purchase 20,000 shares of common stock that is exercisable ratably over a four-year period, and (ii) after our annual meeting of stockholders each year, an annual grant of an option to purchase 15,000 shares of common stock, 50% of which becomes exercisable six months after the date of grant and 50% of which becomes exercisable 12 months after the date of grant. In the case of the Chairman of the Board, the annual grant is of an option to purchase 22,500 shares of common stock. Director options have an exercise price equal to the fair market value of our common stock on the date of the grant and a 10-year term.
The following table details the total compensation earned by the Company’s non-employee directors in 2014:
(1)
Mr. Swirsky, the President and Chief Executive Officer of GenVec, does not receive compensation as a Director of the Company. Compensation for Mr. Swirsky is disclosed in the Summary Compensation Table.
(2)
All annual retainers payable to the chairman of the board and each director are paid in quarterly installments.
(3)
On December 5, 2014, each of the Company’s continuing non-management directors received a stock option award of 15,000 shares, which had an aggregate grant date fair value of  $25,356 except for Dr. Mallette who received an initial grant of 20,000 on December 5, 2014 for becoming a member of the Board of Directors and a grant of 15,000 options on December 5, 2014, these grants had aggregate grant date fair values of  $33,807 and $25,356 respectively. Also Dr. Hockmeyer received a stock option award of 22,500 shares as chairman of the board, which had an aggregate grant date fair value of $38,033. All fair values have been computed in accordance with ASC Topic 718 using the assumptions set forth in Note 8 to the audited financial statements of the Company.
(4)
Dr. Horovitz resigned from our Board of Directors on October 24, 2014 and will continue as a consultant until June 30, 2016. Dr. Mallette became a member of our Board of Directors on October 30, 2014.
As of December 31, 2014, each director had the following number of vested and unvested equity awards outstanding:
(1)
Unvested equity awards for Drs. Hockmeyer, Horvitz, Kelley and Mr. Schneebaum includes 75,000 shares of restricted stock that will vest on September 3, 2015. Drs. Kelley, Loren, Mallette and Mr. Schneebaum each has 15,000 stock options that will vest 50% on June 5, 2015 and 50% on December 5, 2015. Dr. Loren also has 15,000 stock options that will vest ratably over three years beginning on September 19, 2015. Dr. Hockmeyer has 22,500 stock options that will vest 50% on June 5, 2015 and 50% on December 5, 2015. Dr. Mallette also has 20,000 stock options that will vest ratably over four years beginning on October 30, 2015.
(2)
Dr. Horovitz resigned from our Board of Directors on October 24, 2014 and will continue as a consultant unitl June 30, 2016. Dr. Mallette joined our Board of Directors on October 30, 2014.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 20, 2015 (unless otherwise specified), regarding the beneficial ownership of the Company’s common stock by (i) each named executive officer (as defined below) of the Company (ii) each director of the Company and (iii) all current directors and executive officers as a group. As of March 20, 2015, there were three persons known to the Company to be the beneficial owners of more than 5% of the outstanding shares of common stock.
Beneficial ownership is determined in accordance with the rules of the SEC for computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person. Shares of common stock subject to options currently exercisable or exercisable within 60 days after
March 20, 2015 are considered outstanding for the purpose of computing the percentage ownership of the person holding such options, but are not considered outstanding when computing the percentage ownership of each other person. Except as indicated in the footnotes to this table, each stockholder named in the table below has sole voting and investment power for the shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 17,269,962 shares of common stock outstanding on March 20, 2015. Unless otherwise specified, the address for each director or executive officer is care of the Company at its principal office.
(1)
Includes shares of Common Stock issuable upon exercise of options that are exercisable within 60 days of March 20, 2014 in the following amounts: Wayne T. Hockmeyer, 25,500 shares; Zola P. Horovitz, 37,500 shares; William N. Kelley, 25,500 shares; Marc R. Schneebaum, 24,500 shares; Stefan D. Loren, 20,000 shares; Quinterol J. Mallette, M.D., 0 shares; Douglas J. Swirsky, 249,250 shares; Douglas E. Brough 178,937 shares; Bryan T. Butman, 194,687 shares; and directors and executive officers as a group (8 people) 718,374 shares.
(2)
Based solely on the Schedule 13G/A filed February 17, 2015 by EcoR1 Capital Fund, L.P. (“Capital Fund”), EcoR1 Capital Fund Qualified, L.P., (“Qualified Fund”), EcoR1 Capital, LLC (“EcoR1”) and Mr. Oleg Nodelman. As disclosed in the Schedule 13G/A, (i) Capital Fund directly owns 754,875, (ii) Qualified Fund directly owns 1,231,538 shares, (iii) EcoR1 may be deemed to beneficially own 1,986,413 shares as general partner of Capital Fund and Qualified Fund, and (iv) Mr. Nodelman may be deemed to beneficially own 1,986,413 shares as manager of EcoR1.
EcoR1 and Mr. Nodelman each disclaim beneficial ownership of the shares directly owned by Capital Fund. The address for the above entities and person is 409 Illinois Street, San Francisco, California 94158.
(3)
Based solely on the Schedule 13G filed on March 25, 2014 by Cormorant Global Healthcare Master Fund, LP, Cormorant Global Healthcare, LLC, Cormorant Asset Management, LLC and Bihua Chen. As disclosed in the Schedule 13G, the shares held by Cormorant Global Healthcare Master Fund, LP, for which Cormorant GP, LLC serves as the general partner and Cormorant Asset Management, LLC serves as the investment manager. Bihua Chen serves as the managing member of Cormorant Global Healthcare GP, LLC and Cormorant Asset Management, LLC. Each of the reporting persons has shared voting and investment power over all 1,329,300 shares.
Each of the reporting persons disclaims beneficial ownership of the shares reported in the Schedule 13G except to the extent of its or his pecuniary interest therein. The address for the above entities and person is 100 High Street, Suite 1105, Boston, Massachussetts 02110.
(4)
Based solely on the Schedule 13G filed on February 17, 2015 by Perceptive Advisors, LLC and Joseph Edelman. As disclosed in the Schedule 13G, the shares held by an investment fund to which Perceptive Advisors LLC serves as the investment manager. Mr. Edelman serves as the managing member of Perceptive Advisors, LLC. Each of the reporting persons has shared voting and investment power over all 1,040,344 shares.
Each of the reporting persons expressly disclaims beneficial ownership of the shares reported in the Schedule 13G herein. The address for the above entities and person is 499 Park Avenue, 25th Floor, New York, NY 10022.
(5)
Dr. Horovitz resigned from the Board of Directors effective October 24, 2014. Dr. Mallette joined our Board of Directors on October 30, 2014.
Equity Compensation Plan Information
The following table discloses certain information about the options issued and available for issuance under all outstanding Company option plans as of December 31, 2014:
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Person Transactions
We review all relationships and transactions in which the Company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. The Company’s senior management is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related party transactions, including obtaining annual written certifications of the directors and executive officers with respect to their knowledge of related person transactions. The Company’s senior management is responsible for then determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. The Audit Committee reviews and approves or ratifies any related party transaction that meets the standard for disclosure under the SEC rules. The Audit Committee’s review of related party transactions, including information reported to the Audit Committee by senior management and the written certifications, encompasses transactions with related persons within the meaning of Item 404 of Regulation S-K as promulgated by the SEC. The Audit Committee reviews each potential related party transaction on its underlying merit. In accordance with the Audit Committee’s practices, in the course of its review and approval or ratification of related person transactions, the Audit Committee considers:
•
the nature of the related person’s interest in the transaction;
•
the material terms of the transaction, including, without limitation, the amount and type of transaction;
•
the importance of the transaction to the related person;
•
whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the Company; and
•
any other matters the committee deems appropriate.
Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.
In connection Dr. Horovitz’s resignation from the Board of Directors, the Company entered into a consulting agreement with Dr. Horovitz effective as of date of his resignation from the Board of Directors, October 24, 2014, in order to have the benefit of his scientific and institutional knowledge of the Company. The consulting agreement will run through June 30, 2016 and provides that, among other things, Dr. Horovitz will provide consulting services requested by the Board or the Chief Executive Officer. The Company will pay a consulting fee to Dr. Horovitz of  $7,500 for the remainder of 2014, and $10,000 per calendar quarter thereafter. The Company does not currently anticipate that it will require Dr. Horovitz’s services for more than one full day per calendar quarter. However, if the Company requests Dr. Horovitz to provide more than one full day of service per calendar quarter, he will receive an additional payment of $1,000 per day. The agreement contains other customary terms, including provisions on confidentiality of GenVec information and invention assignment provisions.
Director Independence
The Board of Directors has affirmatively determined that each of the following directors is independent within the meaning of the NASDAQ director independence standards: Wayne T. Hockmeyer, Ph.D.; William N. Kelley, M.D.; Stefan D. Loren, Ph.D.; Marc R. Schneebaum; and Quinterol J. Mallette, M.D. The Board of Directors has also affirmatively determined that the following former director was independent within the meaning of the NASDAQ director independence standards until his resignation from our Board in October 2014: Zola P. Horovitz, Ph.D. The Board of Directors has determined that Douglas J. Swirsky, the Company’s President and Chief Executive Officer is not independent within the meaning of the NASDAQ director independence standards. The Board has also determined that all standing committees of the Board of Directors are composed entirely of independent directors.
The Board does not have a policy on whether the roles of Chairman of the Board and Chief Executive Officer should be separate. Historically, the Company has split the positions of the Chairman of the Board and Chief Executive Officer because we believe that this structure is appropriate given the differences between the two roles in our current management structure. Our Chief Executive Officer, among other duties, is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board, among other responsibilities, provides guidance to the Chief Executive Officer and presides over meetings of the full Board.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
The following is a summary of the fees billed to GenVec by Stegman & Company (Stegman) and KPMG LLP (KPMG) for professional services rendered for the year ended December 31, 2014 and by KPMG for professional services rendered for the year ended December 31, 2013:
Audit Fees
These fees consist of fees for professional services rendered for the audit of GenVec’s financial statements, review of the interim financial statements included in quarterly reports, and services in connection with regulatory filings. In 2014, we paid $44,800 to KPMG and $98,526 to Stegman for audit fees.
Audit-Related Fees
These fees comprise assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees” above. In 2014, we paid $137,836 to KPMG and $11,695 to Stegman for audit-related fees.
Tax Fees
These fees comprise tax compliance and tax preparation assistance for state and federal filings; consultations concerning tax related matters and other tax compliance projects. GenVec did not incur such fees with Stegman or KPMG during 2014 or 2013.
All Other Fees
All other fees consist of fees not included in any other category. These fees were incurred by Stegman.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by Stegman and KPMG, our independent registered public accounting firms during 2014. On an ongoing basis, management of GenVec defines and communicates specific projects and categories of service for which the advance approval of the Audit Committee is requested. The Audit Committee reviews these requests and advises management if the Committee approves the engagement of the Company’s independent accounting firm. On a periodic basis, GenVec’s management reports to the Audit Committee regarding the actual spending for such projects and services compared to the approved amounts. In 2014, all fees paid to Stegman and KPMG were pre-approved pursuant to the Audit Committee’s policy. To ensure prompt handling of unexpected matters, the Audit Committee’s charter authorizes its Chairman to act on behalf of the Audit Committee in between regularly scheduled meetings, including pre-approving services provided by the Company’s independent accounting firm. If the Chairman exercises this authority, he reports the action taken to the Audit Committee at its next regular meeting.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements - See “Index to Financial Statements” on page below for a list of the financial statements being filed herein.
Financial Statements Schedules - All financial statement schedules are omitted because they are not applicable, not required under the instructions, or all the information required is set forth in the financial statements or notes thereto.
Exhibits - The following exhibits are filed or incorporated by reference as part of this report.
Index to ExhibitS
EXHIBIT
NUMBER
DESCRIPTION
3.1
Amended & Restated Certificate of Incorporation, as amended, of the Company.(16)
3.1(a)
Certificate of Designation of the Series B Junior Participating Preferred Stock of the Company.(17)
3.2
Amended & Restated Bylaws of the Company.(7)
4.1
Specimen Common Stock Certificate.(1)
4.2
Rights Agreement dated as August 11, 2011 between the Company and American Stock Transfer & Trust Company, LLC, the form of Certificate of Designation of Series B Junior Participating Preferred Stock attached as Exhibit A thereto, the form of Rights Certificate attached as Exhibit B thereto, and the form of Summary of Rights attached as Exhibit C thereto.(17)
10.1
Form of Indemnification Agreement for Directors and Officers.*(1)
10.2
2002 Stock Incentive Plan as amended and forms of agreements thereunder.*(4)
10.3
Amendment to the GenVec, Inc. 2002 Stock Incentive Plan.*(10)
10.4
2011 Omnibus Incentive Plan.*(18)
10.5
Amendment to 2011 Omnibus Incentive Plan dated July 11, 2012.(19)
10.6
Amendment to 2011 Omnibus Incentive Plan dated November 22, 2013.(20)
10.7
License Agreement dated May 31, 1996 between Scios, Inc. and the Company.(1)
10.8
Amendment to Common Stock Warrant Agreement dated March 18, 2002 between the Company and Cornell Research Foundation, Inc.(2)
10.9
Lease Agreement dated May 4, 1999 between MOR BENNINGTON LLP and the Company.(1)
10.10
Amendment to Lease Agreement between MOR BENNINGTON LLP and the Company dated March 11, 2009.(5)
10.11
Employment Agreement by and between Cynthia Collins and GenVec, Inc., dated as of May 18, 2012* (21)
10.12
CEO Inducement Award of a Non-Qualified Stock Option by and between Cynthia Collins and GenVec, Inc., dated as of May 23, 2012*(21)
10.13
Salary Continuation Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(6)
10.14
Amendment to Salary Continuation Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(5)
10.15
Change in Control Agreement between the Company and Douglas J. Swirsky dated September 18, 2006.*(6)
10.16
Amendment to Change in Control Agreement between the Company and Douglas J. Swirsky dated December 9, 2008.*(5)
EXHIBIT
NUMBER
DESCRIPTION
10.17
Salary Continuation Agreement between the Company and Douglas E. Brough dated February 1, 2010.*(23)
10.18
Salary Continuation Agreement between the Company and Bryan T. Butman dated October 15, 2002.*(24)
10.19
Amendment to Salary Continuation Agreement between the Company and Bryan T. Butman dated December 9, 2008.*(24)
10.20
Form of Indemnification and Advancement of Expenses Agreement dated December 10, 2003.(3)
10.21
Agreement with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases of the National Institutes of Health for the supporting the transfer of the Company’s manufacturing processes dated September 30, 2006.+(13)
10.22
Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated January 30, 2007.+(29)
10.23
Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated August 30, 2007.+(14)
10.24
Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot and mouth vaccine candidates dated November 9, 2007.(15)
10.25
Agreement with the United States Department of Homeland Security for development of adenovector-based foot and mouth vaccine, dated February 12, 2010.(9)
10.26
Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(8)
10.27
Amended and Restated License Agreement, dated May 23, 1998, between the Company and the Cornell Research Foundation.+(1)
10.28
Amendment to Amended and Restated License Agreement, dated March 18, 2002, between the Company and the Cornell Research Foundation.+(2)
10.29
Agreement for the Supply of Services related to Development Materials, dated August 4, 2010, between Novartis Pharma AG and GenVec, Inc.+(11)
10.30
Agreement, dated November 3, 2009, between GenVec, Inc. and SAIC-Frederick, Inc.+(12)
10.31
Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates, dated September 20, 2010.+(28)
10.32
Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates, dated December 31, 2012.+(26)
10.33
Amendment to Agreement with the United States Department of Homeland Security for the development of adenovector-based foot-and-mouth vaccine candidates, dated March 19, 2013.+(26)
10.34
Equity Distribution Agreement, dated February 11, 2014, between the Company and Roth Capital Partners.(25)
10.35
Agreement with the U.S. Naval Medical Logistics Command regarding malaria vaccine development for the U.S. Naval Medical Research Center, dated September 29, 2012.+(22)
10.36
Amendment, dated July 29, 2013, of Agreement with the U.S. Naval Medical Logistics Command regarding malaria vaccine development for the U.S. Naval Medical Research Center, dated September 29, 2012.+(27)
EXHIBIT
NUMBER
DESCRIPTION
10.37
Amendment, dated January 24, 2012, to Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(23)
10.38
Amendment, dated January 12, 2013, to Research Collaboration and License Agreement, dated January 13, 2010, by and between GenVec, Inc. and Novartis Institutes for BioMedical Research, Inc.+(24)
23.1
Consent of Independent Registered Public Accounting Firm. (filed herewith)
23.2
Consent of Independent Registered Public Accounting Firm. (filed herewith)
24.1
Power of Attorney. (filed herewith)
31.1
Rule 13a-14(a) Certification by Principal Executive Officer. (filed herewith)
31.2
Rule 13a-14(a) Certification by Principal Financial Officer. (filed herewith)
32.1
Rule 13a-14(b) Certification by Principal Executive Officer pursuant to 18 United States Code Section 1350. (filed herewith)
32.2
Rule 13a-14(b) Certification by Principal Financial Officer pursuant to 18 United States Code Section 1350. (filed herewith)
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*
Compensatory plan, contract or arrangement.
+
Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been filed with the Commission pursuant to our application for confidential treatment.
(1)
Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-47408) declared effective by the Securities and Exchange Commission on December 12, 2000.
(2)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 31, 2003.
(3)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2004.
(4)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 17, 2008.
(5)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 16, 2009.
(6)
Incorporated by reference from our Current Report on Form 8-K (File No: 0-24469) filed with the Securities and Exchange Commission on September 19, 2006.
(7)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 10, 2003.
(8)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on January 19, 2010.
(9)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 12, 2010.
(10)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 18, 2010.
(11)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 6, 2010.
(12)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2010.
(13)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2006.
(14)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2007.
(15)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 8, 2008.
(16)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on August 9, 2011.
(17)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on August 12, 2011.
(18)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on June 17, 2011.
(19)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on July 17, 2012.
(20)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on November 27, 2013.
(21)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on May 24, 2012.
(22)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 9, 2012.
(23)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 15, 2012.
(24)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 22, 2013.
(25)
Incorporated by reference from our Current Report on Form 8-K (File No. 0-24469) filed with the Securities and Exchange Commission on February 13, 2014.
(26)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on May 10, 2013.
(27)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on November 12, 2013.
(28)
Incorporated by reference from our Annual Report on Form 10-K (File No. 0-24469) filed with the Securities and Exchange Commission on March 11, 2011.
(29)
Incorporated by reference from our Quarterly Report on Form 10-Q (File No. 0-24469) filed with the Securities and Exchange Commission on May 10, 2007.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
TITLE
DATE
/s/ DOUGLAS J. SWIRSKY
Douglas J. Swirsky
President, Chief Executive Officer, Corporate Secretary, and Director (Principal Executive Officer)
March 24, 2015
/s/ JAMES V. LAMBERT
James V. Lambert
Sr. Director, Accounting & Finance, Corporate Controller, and Treasurer (Principle Financial Officer and Accounting Officer)
March 24, 2015
/s/ WAYNE T. HOCKMEYER, PH.D.*
Wayne T. Hockmeyer, Ph.D.
Director
March 24, 2015
/s/ WILLIAM N. KELLEY, M.D.*
William N. Kelley, M.D.
Director
March 24, 2015
/s/ MARC R. SCHNEEBAUM*
Marc R. Schneebaum
Director
March 24, 2015
/s/ STEFAN D. LOREN*
Stefan D. Loren
Director
March 24, 2015
/s/ QUINTEROL J. MALLETTE, M.D.*
Quinterol J. Mallette, M.D.
Director
March 24, 2015
*By:
/s/ DOUGLAS J. SWIRSKY
Douglas J. Swirsky, attorney-in-fact
GENVEC, INC.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
GenVec, Inc.:
We have audited the accompanying balance sheet of GenVec, Inc. (“the Company”) as of December 31, 2014 and the related statements of operations and comprehensive loss, change in stockholders’ equity and cash flows for the year then ended. 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.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, the financial statements referred to above present fairly, in all material respects, the financial position of GenVec, Inc. as of December 31, 2014 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Stegman & Company
Baltimore, Maryland
March 24, 2015
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
GenVec, Inc.:
We have audited the accompanying balance sheet of GenVec, Inc. (“the Company”) as of December 31, 2013 and the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for the year then ended. 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.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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, the financial statements referred to above present fairly, in all material respects, the financial position of GenVec, Inc. as of December 31, 2013 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
March 28, 2014
GENVEC, INC.
BALANCE SHEETS
See accompanying notes to financial statements.
GENVEC, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
See accompanying notes to financial statements.
GENVEC, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
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GENVEC, INC.
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
GENVEC, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS DESCRIPTION
GenVec, Inc. (GenVec, we, our, or the Company) is a clinical-stage biopharmaceutical company with an entrepreneurial focus on leveraging its proprietary adenovector gene delivery platform to develop a pipeline of cutting-edge therapeutics and vaccines. The Company is a pioneer in the design, testing and manufacture of adenoviral-based product candidates that can deliver on the promise of gene-based medicine. GenVec’s lead product candidate, CGF166, is licensed to Novartis Institutes for BioMedical Research, Inc. (together with Novartis AG and its subsidiary corporations, including Novartis Pharma AG, Novartis) and is currently in a Phase 1/2 clinical study for the treatment of hearing loss and balance disorders. In addition to our internal and partnered pipeline, we also focus on opportunities to license our proprietary technology platform, including vectors and production cell lines, for the development and manufacture of therapeutics and vaccines to the biopharmaceutical industry.
A key component of our strategy is to develop and commercialize our product candidates through collaborations. GenVec is working with leading companies and organizations such as Novartis, Merial Limited, and the U.S. government to support a portfolio of programs that address the prevention and treatment of a number of significant human and animal health concerns. GenVec’s development programs address therapeutic areas such as hearing loss and balance disorders; as well as vaccines against infectious diseases including respiratory syncytial virus (RSV), herpes simplex virus (HSV), Enterovirus D68 (EV-D68) and malaria. In the area of animal health we are developing vaccines against foot-and-mouth disease (FMD).
Our core technology has the important advantage of localizing protein delivery in the body. This is accomplished by using our adenovector platform to locally deliver genes to cells, which then direct production of the desired protein. This approach reduces side effects typically associated with systemic delivery of proteins. For vaccines, the goal is to induce an immune response against a target protein or antigen. This is accomplished by using an adenovector to deliver a gene which causes production of an antigen, which then stimulates the desired immune reaction by the body.
Our research and development activities yield product candidates that utilize our technology platform and represent potential commercial opportunities. For example, preclinical research in hearing loss and balance disorders through the delivery of the atonal gene using GenVec’s adenovector technology may have the potential to restore hearing and balance function. We are working with Novartis on the development of novel treatments for hearing loss and balance disorders. There are currently no effective therapeutic treatments available for patients who have lost all balance function, and hearing loss remains a major unmet medical problem.
We have multiple vaccines in development leveraging our core adenovector technology including our preclinical programs to develop vaccine candidates for the prevention of RSV and HSV. We also have a program to develop a vaccine for malaria. In the field of animal health, we are working with Merial Limited to commercialize vaccines for the prevention of a major animal health problem, FMD. Development efforts for this program are also supported by the U.S. Department of Homeland Security (DHS) and in collaboration with the U.S. Department of Agriculture (USDA).
Our business strategy is focused on entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates. In the event that third parties take over the development for one or more of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our development plan or capital requirements. Our programs may also benefit from subsidies, grants or government or agency-sponsored studies that could reduce our development costs.
An element of our business strategy is to pursue, as resources permit, the research and development of a range of product candidates for a variety of indications. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad range of product candidates, our dependence on the success of one or a few product candidates would increase.
As a result of the uncertainties involved in our business, we are unable to estimate the duration and completion costs of our research and development projects or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. Our estimated future capital requirements are uncertain and could change materially as a result of many factors, including the progress of our research, development, clinical, manufacturing, and commercialization activities. However we believe our current cash and investments and committed and expected revenues from our collaborators and strategic alliances are expected to be sufficient to continue our current research, development and collaborative activities into 2017.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Critical accounting policies involved in applying our accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates are also those which are reasonably likely to change from period to period, and would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate to accounting policies for strategic alliances and research contract revenues, research and development activities, and stock-based compensation. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates.
(b) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid debt instruments, time deposits, and money market funds with original maturities of three months or less.
(c) INVESTMENTS
Our investments consist primarily of corporate stock and bonds, government agency bonds, and commercial paper. These investments are classified as available-for-sale securities, which are carried at fair value, with the unrealized holding gains and losses reported as a separate component of accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end,
forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
(d) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of our financial instruments, as reflected in the accompanying balance sheets, approximate fair value. Financial instruments consist of cash and cash equivalents, investments, accounts receivable, and accounts payable.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of assets, which are generally three to five years for equipment and seven years for furniture and fixtures. Leased property meeting certain criteria is capitalized at the lower of the present value of the future minimum lease payments or fair value at the inception of the lease. Amortization of capitalized leased assets is computed on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. We incur maintenance costs with respect to some of our major equipment. Repair and maintenance costs are expensed as incurred.
(f) REVENUE RECOGNITION
Revenue is recognized when all four of the following criteria are met (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the services or products has occurred, and (iv) collectability of the contract amounts is considered probable.
Our collaborative research and development agreements provide for upfront license fees, research payments, and/or substantive milestone payments. Upfront non-refundable fees associated with license and development agreements where we have continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Non-refundable research and development fees for which no future performance obligations exist are recognized when collection is assured. Substantive milestone payments are considered performance payments and are recognized upon achievement of the milestone if all of the following criteria are met: (i) achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; (ii) substantive effort is involved in achieving the milestone; and (iii) the amount of the milestone payment is reasonable in relation to all of the deliverables and payment terms within the arrangement. Determination of whether a milestone meets the aforementioned conditions involves the judgment of management.
Research and development revenue from cost-reimbursement and cost-plus fixed-fee agreements is recognized as earned based on the performance requirements of the contract. Revisions in revenues, cost, and billing factors, such as indirect rate estimates, are accounted for in the period of change. Reimbursable costs under such contracts are subject to audit and retroactive adjustment. Contract revenues and accounts receivable reported in the financial statements are recorded at the amount expected to be received. Contract revenues are adjusted to actual upon final audit and retroactive adjustment. Estimated contractual allowances are provided based on management’s evaluation of current contract terms and past experience with disallowed costs and reimbursement levels. Payments received in advance of work performed are recorded as deferred revenue.
Research and development revenue from fixed-price best efforts arrangements is recognized as earned based on the performance requirements of the contract. Revenue under these arrangements is recognized when delivery to and acceptance by the customer has been received. During the period of performance, recoverable contract costs are accumulated on the balance sheet in other current assets, but no revenue or profit is recorded prior to customer acceptance of the contractually stated deliverables. Recoverable contract costs that are accumulated on the balance sheet include all direct costs associated with the arrangement and an allocation of indirect costs. Payments received in advance of customer acceptance are
recorded as deferred revenue. Once customer acceptance has been received, revenue and recoverable contract costs are recognized. Over the course of the arrangement, we routinely evaluate whether revenue and profitability should be recognized in the current period. Any known or probable losses on projects are charged to operations in the period in which such losses are determined.
(g) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. Advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting research and development activities are recorded as an asset when the advance payments are made. Capitalized amounts are recognized as expense when the research and development activities are performed; that is, when the goods without alternative future use are acquired or the service is rendered.
Research and development costs include internal research and development expenditures (such as salaries and benefits, raw materials, supplies, and allocated facility expenses), contracted services (such as sponsored research, consulting, manufacture of drug supply, and testing services of proprietary research) and development activities and similar expenses associated with collaborative research agreements. These costs are expensed as incurred.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We include any interest or penalties incurred in connection with income taxes as part of other expense.
We have significant net operating loss carryforwards to potentially reduce future federal and state taxable income, and research and experimentation tax credit carryforwards available to potentially offset future federal income taxes. Due to the Company’s prior equity transactions, the Company’s net operating loss and research and experimentation credit carryforwards may expire unutilized due to changes in our ownership as defined within Section 382 of the Internal Revenue Code.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making that assessment. We recorded a full valuation allowance against all estimated net deferred tax assets at December 31, 2014 and 2013.
(i) NET LOSS PER SHARE
Basic earnings per share is computed based upon the net loss available to common stock stockholders divided by the weighted average number of common stock shares outstanding during the period. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share only when the effect of the inclusion would be dilutive. For the years ended December 31, 2014 and 2013 all common stock equivalent shares associated with our stock option plans, unvested restricted shares, and stock equivalent shares associated with our warrants were excluded from the denominator in the diluted loss per share calculation as their inclusion would have been antidilutive.
(j) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net loss and unrealized holding gains and losses from available-for-sale securities.
(k) STOCK-BASED COMPENSATION
We use the modified prospective method to account for stock-based compensation. Under this method, we measure stock-based compensation expense based on the grant date fair value of the awards which is then recognized over the period during which service is required to be provided. We estimate grant date fair value using the Black-Scholes option-pricing model. Stock-based compensation cost that has been included in expense from continuing operations amounted to $0.5 million and $0.9 million for the years ended December 31, 2014 and 2013, respectively.
(l) LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third party independent appraisals, as necessary.
(m) COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Topic 205), which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. Under the new standard, disclosures are required when conditions or events give rise to substantial doubt about an entity’s ability to continue as a going concern within one year from the financial statement issuance date. The new standard is effective for annual periods ending after December 15, 2016, and all annual and interim periods thereafter. Early application is permitted. The adoption of this standard will not have any impact on the Company’s financial position and results of operations and, at this time, the Company does not expect any impact on its disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for us on January 1, 2017. We are currently evaluating the potential impact that Topic 606 may have on our financial position and results of operations.
There are no other new accounting pronouncements issued but not effective until after December 31, 2014 that are expected to have a significant effect on our financial position or results of operations.
(3) FAIR VALUE MEASUREMENTS
For assets and liabilities measured at fair value we utilize FASB Accounting Standards Codification (ASC) Section 820 “Fair Value Measurements and Disclosures” (ASC 820) that defines fair value and establishes a framework for fair value measurements. This standard establishes a three-level hierarchy for disclosure of fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs used to measure fair value are as follows:
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Level 1 - Quoted prices in active markets for identical assets or liabilities;
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Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable (e.g. interest rates, yield curves, volatilities and default rates, among others) or can be corroborated by observable market data; and
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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The following table presents information about assets recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2014:
The following table presents information about assets and liabilities recorded at fair value on a recurring basis on the Balance Sheet at December 31, 2013:
We determine fair value for our investments with Level 1 inputs through quoted market prices and have classified them as available-for-sale. Our Level 2 investments consist of corporate notes and bonds and U.S. government agency securities maturing at various times into 2016.
We review all investments for other-than-temporary impairment at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of the decline in fair value as well as the intent and ability to hold the investment to allow for a recovery in the market value of the investment. In addition, we consider qualitative factors that include, but are not limited to: (i) the financial condition and business plans of the investee including its future earnings potential; (ii) the investee’s credit rating; and (iii) the current and expected market and industry conditions in which the investee operates. If a decline in the fair value of an investment is deemed by management to be other-than-temporary, we write down the cost basis of the investment to fair value, and the amount of the write down is included in net earnings. Such a determination is dependent on the facts and circumstances relating to each investment. We
have determined there have been no such impairments in 2014 or 2013; however as of December 31, 2014, the Company has an accumulated unrealized loss of  $33,000; $22,000 of which is related to our equity security holding which has been in a loss position for over twelve months.
All unrealized holding gains or losses related to our investments in marketable securities are reflected in our statements of operations and comprehensive loss.
A summary of investments is shown below:
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
Depreciation and amortization expense related to property and equipment was $0.2 million for the years ended December 31, 2014 and 2013, respectively. In September 2014, we sold office equipment and other long-lived assets for $5,000. Due to the sale, we recognized a loss of  $41,000. Additionally, we incurred $39,000 of accelerated depreciation for long-lived assets that have been taken out of service during the third quarter of 2014. In November 2013, we sold laboratory and other long-lived assets that were no longer needed for our current operating strategy. We recognized a gain of approximately $0.3 million on the sales. We also evaluated certain of our long-lived assets and determined that approximately $0.2 million of these assets were impaired during the second quarter of 2013.
In 2014, our lease on our facility at 65 W. Watkins Mill Road expired. As a result, we have removed leasehold improvements related to that facility as well as fully depreciated furniture and equipment that were disposed of. Gains and losses associated with the sale of long-lived equipment and the impairment of long-lived assets have been recorded within general and administrative expense, as applicable.
Additionally in November 2013, non-capital laboratory equipment was sold for net proceeds of approximately $0.3 million. Gains associated with the sale of non-capital laboratory supplies and equipment has been recorded as Other Income.
(5) ACCRUED EXPENSES AND OTHER
Accrued expenses and other consist of the following at December 31:
(6) STRATEGIC ALLIANCES AND RESEARCH CONTRACTS
We have established collaborations and research contracts with pharmaceutical and biotechnology companies and governmental agencies to enhance our ability to discover, evaluate, develop, and commercialize multiple product opportunities. Revenue earned under these contracts is summarized as follows:
(a) NOVARTIS
In January 2010, we signed a research collaboration and license agreement (the Agreement) with Novartis to discover and develop novel treatments for hearing loss and balance disorders. Under terms of the Agreement, we licensed the world-wide rights to our preclinical hearing loss and balance disorders program to Novartis. We received a $5.0 million non-refundable upfront license fee and Novartis purchased $2.0 million of our common stock. The common stock was recorded at fair value of  $3.3 million on the date of issuance. The upfront non-refundable fee was recognized ratably over the initial term of the two-year research and collaboration term of the Agreement. Revenue recognized from the non-refundable upfront license fee was $3.7 million by the end of the initial Agreement due to the pricing agreement associated with the sale of our common stock. In addition, we receive funding from Novartis for a research program focused on developing additional adenovectors for hearing loss. During the years ended December 31, 2014 and 2013 we recognized $0 of the upfront payment and $0.2 million and $0.4 million, respectively, for work performed under this Agreement.
Under the Agreement, we are eligible to receive milestones payments of up to $206.6 million; including up to $0.6 million for the achievement of preclinical development activities, up to $26.0 million for the achievement of clinical milestones including (non-rejection of an IND with respect to a covered product, the first patient visit in Phase I, Phase IIb and Phase III clinical trials), up to $45.0 million for the receipt of regulatory approvals and up to $135.0 million for sales-based milestones. During each of the years ended December 31, 2011 and 2010, we recognized $0.3 million of milestone payments as a result of the successful completion of preclinical development activities. In 2012 and 2013, there were no milestone payments received. In February 2014, we achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection by the FDA of the IND filed by Novartis for CGF166. In October 2014, we achieved the fourth milestone in the collaboration with Novartis. The $3.0 million milestone was triggered when the first patient was dosed in a Phase 1/2 clinical trial sponsored by Novartis utilizing GenVec technology for the treatment of severe-to-profound bilateral hearing loss.
In August 2010, we signed an agreement for the supply of services relating to development materials with Novartis, related to our collaboration in hearing loss and balance disorders. Under this agreement, valued at $14.9 million, we agreed to manufacture clinical trial material for up to two lead candidates. During the years ended December 31, 2014 and 2013 we recognized $0.3 million and $0.4 million, respectively, for services performed under this agreement.
In both January 2012 and January 2013, we announced that we had extended our Research Collaboration and License Agreement with Novartis. Under the extensions, Novartis funded research at GenVec through January 2014 to support this program.
In February 2014, we achieved the third milestone in the collaboration with Novartis. The $2.0 million milestone was triggered by the non-rejection of the IND application filed by Novartis with the FDA. In October 2014, we achieved the fourth milestone in the collaboration with Novartis. The $3.0 million milestone was triggered when the first patient was dosed in a Phase 1/2 clinical trial sponsored by Novartis.
As of December 31, 2014, milestones available under the Agreement include $21.0 million of additional clinical milestones, $45.0 million in regulatory milestones, and $135.0 million of sales-based milestones. We are also entitled to royalties on future sales. There have been no milestones achieved during 2015.
(b) U.S. DEPARTMENT OF HOMELAND SECURITY (DHS)
In January 2007, we signed a three-year agreement with the DHS, for the development of a vaccine candidate against foot-and-mouth disease (FMD) for livestock, under which we received $6 million in program funding for the first year and had the potential to receive up to $15.1 million in total if annual renewal options under the contract were exercised. Modifications to this agreement have brought the total value of the program up to approximately $20.8 million. During the years ended December 31, 2014 and 2013 we recognized $0 and $3,000 for services performed under this new agreement, respectively. As of December 31, 2014, $20.7 million in revenue has been recognized under this contract since inception. Work under this agreement was completed in 2013.
In February 2010, we signed a contract with the DHS to continue the development of adenovector-based vaccines against FMD. Under this contract, GenVec was to receive $3.8 million in program funding the first year and an additional $2.1 million if DHS exercises its renewal options under the contract. Under this contract, we were to use our adenovector technology to develop additional FMD-serotype candidate vaccines and also explore methods to increase the potency and simplify the production process of adenovector-based FMD vaccines. During the years ended December 31, 2014 and 2013, we recognized $0.4 million and $0.6 million, respectively, for services performed under this agreement. As of December 31, 2014, $5.6 million in revenue has been recognized under this contract since inception. Work under this agreement was completed in February 2015.
(c) VACCINE RESEARCH CENTER
In November 2009, we entered into a contract with SAIC-Frederick, Inc., for the development of influenza and HIV vaccines pursuant to their prime grant from the National Cancer Institute. Work under this contract included generation of HIV vaccine candidates, generation of a universal flu vaccine, process and assay development for manufacture of vaccine candidates for clinical testing, and continued support of the HIV vaccine candidates in clinical testing. This four-year contract had a total value of over $22 million if all options were exercised. Revenues of  $0 and $157,000 were recognized under this contract for the years ended December 31, 2014 and 2013. As of December 31, 2014, $5.8 million in revenue was recognized under this contract since inception. Work under this agreement was completed in 2013.
In July 2009, we received a grant from the National Institute of Allergy and Infectious Diseases of the National Institutes of Health (NIAID), valued at approximately $600,000 to identify new antigens for malaria vaccine development. We recognized $0 and $8,000 in revenue for the years ended December 31, 2014 and 2013. Work under this agreement was completed in 2013.
In March 2012, we received a grant from the NIAID, valued at approximately $600,000 to identify novel highly protective antigens for malaria vaccine development. We recognized $102,000 and $133,000 in revenue for the years ended December 31, 2014 and 2013.
(d) OTHER STRATEGIC ALLIANCES AND RESEARCH GRANTS
In October 2012, we signed an agreement worth approximately $3.5 million with the NMRC to further support malaria vaccine development. Under the terms of the agreement, we were responsible for producing clinical supplies of its malaria vaccine, which utilized our novel, proprietary technology. NMRC plans to use this clinical material to assess the safety and efficacy of these next-generation vectored vaccines using the clinical challenge model developed by NMRC and the Walter Reed Army Institute of Research (WRAIR) malaria vaccine programs, which now are unified as the U.S. Military Malaria Vaccine Program (USMMVP). Under the agreement, we retained the right to commercialize this novel technology. In July 2013 we entered into a modification with the NMRC to terminate contractual obligations under this agreement. We recognized $1.4 million in revenue under this contract in 2013 and no revenue in 2014.
In May 2012, we received a Phase 1 SBIR grant from the NIH to support the Company’s Respiratory Syncytial Virus (RSV) vaccine program. The SBIR grant, valued at approximately $590,000 provides funding to further understand the impact of maternal immunity against RSV on the generation of a protective immune response in newborns. We recognized $0 and $122,000 in revenue for the years ended December 31, 2014 and 2013. This grant was completed in May 2014.
In August 2009, we received a Phase 2 SBIR grant, valued at $2.5 million, from the NIAID to support the development of our cell line and vector production technology. Revenues of  $0 and $0.3 million were recognized under this grant for the years ended December 31, 2014 and 2013. Revenue recognized under this grant amounted to $2.3 million through December 31, 2014. Work under this grant was completed in 2013.
We have entered into other research grants with the government and recognized revenue under other collaborations during 2014. Revenue recognized under these research grants totaled $6,000 and $0.2 million in revenue for the years ended December 31, 2014 and 2013.
(7) COMMITMENTS AND CONTINGENCIES
(a) LEASE AGREEMENTS
We have a non-cancelable operating lease for our facility in Gaithersburg, MD through March 31, 2020. We also had a non-cancelable operating lease for our old facility in Gaithersburg, MD through October 31, 2014. Rent expense under all operating leases was approximately $0.7 million and $0.8 million for the years ended December 31, 2014 and 2013, respectively.
Future minimum lease payments as of December 31, 2014 under our non-cancelable operating leases are as follows (in thousands):
(b) LICENSE AGREEMENT
In November 2001, we entered into an exclusive, worldwide license agreement with Baylor College of Medicine for the rights related to the Atoh1 gene. Under the terms of the license agreement, we agreed to pay a non-refundable initial license fee of  $50,000 at the time of execution of the license agreement and we also agreed to pay a minimum annual license maintenance fee, a percentage of product royalties, and milestone payments based on our achievement of certain clinical and regulatory related milestones for these rights. Our ability to meet the milestones is dependent on a number of factors including final approvals by regulatory agencies and the continued enforceability of patent claims.
(c) LEGAL PROCEEDINGS
On February 3, 2012, a putative class action lawsuit captioned Satish Shah v. GenVec, Inc., et al. Civil Action. No. 8:12 CV-00341-DKC was commenced in the United States District Court for the District of Maryland against the Company, Paul H. Fischer, Douglas J. Swirsky and Mark O. Thornton. Following appointment of a Lead Plaintiff group in April 2012, Lead Plaintiffs filed a pleading titled Amended Class Action Complaint for Violations of the Federal Securities Laws on July 6, 2012 (the Amended Class Action Complaint). In the Amended Class Action Complaint, Lead Plaintiffs asserted claims, purportedly on behalf of a class of persons who had purchased or acquired Company common stock between March 12, 2009 and March 30, 2010 (the Class Period), that the Company and the individual defendants had violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. Lead Plaintiffs alleged generally that the Company and the individual defendants had made materially false or misleading statements or omissions concerning the prospects for the Company’s leading product candidate at the time, TNFerade, and the outcome of the then-ongoing clinical trial for TNFerade. Lead Plaintiffs alleged that these misrepresentations resulted in the Company’s common stock trading at artificially inflated prices throughout the Class Period. Lead Plaintiffs sought unspecified damages. On September 4, 2012, the Company and the individual defendants moved to dismiss the Amended Class Action Complaint in its entirety for failure to state a claim upon which relief can be granted. On September 20, 2013, the Court granted this motion and dismissed the case in its entirety and with prejudice. Lead Plaintiffs did not file an appeal.
On March 12, 2012, a putative shareholder derivative action was commenced in the United States District Court for the District of Maryland against certain current and former members of our Board of Directors and the Company as a nominal defendant. The case was styled Garnitschnig v. Horovitz, et al. and generally arose out of the matters alleged to underlie the securities action. The plaintiff, who purported to bring the action derivatively on behalf of the Company, originally alleged that the individual defendants violated their fiduciary duties, wasted corporate assets and were unjustly enriched by the receipt of compensation while serving as our directors. Pursuant to the Court’s order dated April 5, 2013, the Garnitschnig case was stayed pending a decision on the motions to dismiss filed in the Shah action. On October 2, 2013, the parties entered into a stipulation confirming that the stay of the Garnitschnig action was lifted and providing that, if the plaintiff elected to continue with the action, he would file an Amended Complaint on or before November 26, 2013.
On November 1, 2013, the plaintiff in the Garnitschnig action filed an Amended Verified Shareholder Derivative and Class Action Complaint (the Amended Complaint) that supersedes the previous Complaint and asserted claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets and alleged violations of the duty of candor. The plaintiff, who now purported to bring the Amended Complaint both derivatively and as a shareholder class action, alleged that certain current and former members of the Board of Directors exceeded their authority under the Company’s 2011 Omnibus Incentive Plan (the 2011 Plan) by exceeding certain limits applicable to both stock options and restricted stock. The Amended Complaint further alleged that the Company’s Proxy Statement was materially false and misleading for failing to disclose the alleged violations of the 2011 Plan. The Amended Complaint sought, among other things, an unspecified amount of damages.
On November 1, 2013, the plaintiff in the Garnitschnig action also filed a motion for preliminary injunction seeking to postpone the Company’s 2013 annual meeting unless and until certain disclosures were made to the Company’s shareholders regarding the 2011 Plan. On November 20, 2013, the Court denied that motion in its entirety. The Company and the individual defendants then filed motions to dismiss the Amended Complaint on January 27, 2014. On September 5, 2014, the Court denied the Company’s and the individual defendants’ motion to dismiss as to all claims except for the claim for corporate waste, holding that the Amended Complaint adequately alleged claims for breach of fiduciary duty and breach of the duty of candor against the Board of Directors, and claims for unjust enrichment against certain current and former officer and directors.
On October 17, 2014, a second putative class and derivative action was filed in the United States District Court for the District of Maryland styled Galitsis v. Swirsky, et. al., Case No. 14-cv-3265. The Galitsis Complaint contains the same allegations and asserts the same claims as those in the Garnitschnig Amended Complaint (except for the dismissed corporate waste claim). Shortly after the Galitsis action was filed, counsel for the plaintiff  (who was also counsel for the plaintiff in the Garnitschnig action) voluntarily dismissed the Garnitschnig action.
On or about November 3, 2014, the parties to the Galitsis action reached an agreement in principle set forth in a Settlement Term Sheet to settle the Galitsis action. Subsequently, on January 23, 2015, the parties executed and filed with the Court a Stipulation of Settlement embodying terms previously set forth in the Settlement Term Sheet. In connection with the settlement, the Company put forward proposals at its annual meeting held on December 5, 2014 to ratify awards made pursuant to the 2011 Plan. The parties also agreed in connection with the settlement that the Company would follow certain corporate governance policies. The stipulation of settlement is subject to certain customary conditions, including court approval. On March 12, 2015, the Court entered an order preliminarily approving the proposed settlement of the Galitsis action and scheduled a hearing on May 6, 2015 to consider whether to enter an order of final approval. If the court approves the settlement, the settlement will resolve all of the claims that were or could have been brought in the Galitsis action, including all claims related to awards made pursuant to the 2011 Plan.
The Company and the individual defendants vigorously deny all liability with respect to the claims alleged in the Galitsis action. However, the Company considered it desirable that the action be settled to avoid the substantial burden, expense, risk, inconvenience and distraction of continued litigation and to fully and finally resolve the settled claims. The settlement, including any award of attorneys’ fees or expenses, is contingent upon court approval. As such, the amount of possible loss or range of loss, if any, cannot be reasonably estimated. The Company does not believe that, based on currently available information, the outcome of this proceeding will have a material adverse effect on our financial condition.
(d) RESTRUCTURING
On February 7, 2013, we eliminated nine positions as part of our efforts to lower operating costs to conserve capital. The Company incurred $0.2 million of expenses due to the position eliminations with approximately $85,000 paid in the first quarter of 2013 and $90,000 in the second quarter of 2013.
On June 28, 2013, we announced the termination of 30 of our then-remaining 41 employees. The Company incurred $0.3 million of expenses in the second quarter of 2013 due to the position eliminations, which resulted in cash expenditures of that amount in the third quarter.
On September 3, 2013, we announced that Cynthia Collins, our then President and Chief Executive Officer, had departed the Company and resigned as a member of its Board of Directors. Douglas J. Swirsky, who had served as GenVec’s Senior Vice President and Chief Financial Officer since 2006, was named as the Company’s President and Chief Executive Officer and appointed to the Company’s Board of Directors. The Company incurred $1.0 million of expense in the third quarter of 2013 due to the departure of Ms. Collins that will be paid out over 18 months, in accordance with her employment agreement.
Costs associated with the elimination of positions have been recorded as a general and administrative personnel cost.
At December 31, 2014 and 2013, liabilities of approximately $128,000 and $817,000, respectively, remain in accrued expenses for the unpaid portion of the severance costs.
(8) STOCKHOLDERS’ EQUITY
(a) CAPITAL STOCK
In January 2014, we filed a $75.0 million shelf registration statement on Form S-3 (the 2014 shelf registration statement), with the Securities and Exchange Commission. The 2014 shelf registration statement was declared effective February 11, 2014 and allows us to obtain financing through the issuance of any combination of common stock, preferred stock or warrants. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities in a public primary offering with a value exceeding more than
one-third of our public float in any 12-month period so long as our public float remains below $75.0 million. As of March 20, 2015, pursuant to the Equity Distribution Agreement and the Registered Direct Offering described below we have sold approximately $11.6 million of securities since February 11, 2014.
On February 11, 2014, we entered into an Equity Distribution Agreement (the EDA) with Roth Capital Partners, LLC (Roth Capital Partners), pursuant to which we may sell from time to time up to $10.0 million of shares of our common stock, par value $0.001 per share, through Roth Capital Partners (the ATM Offering). Sales of shares in the ATM Offering, if any, may be made by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation directly on the NASDAQ Capital Market, or any other existing trading market for the shares or through a market maker, or, if agreed by the Company and Roth Capital Partners, by any other method permitted by law, including but not limited to in negotiated transactions. The ATM Offering is being made pursuant to the 2014 shelf registration statement. We intend to use the net proceeds from the sale of shares in the ATM Offering, if any, for operating costs, working capital and general corporate purposes. At the time of the registered direct offering described immediately below, we suspended the ATM Offering. We will continue to evaluate whether to resume the ATM offering in the future. As of March 20, 2015, we had sold 721,677 shares in the ATM Offering for gross proceeds of approximately $2.6 million.
On March 18, 2014, we sold 2,870,000 shares of our common stock in a registered direct offering pursuant to the 2014 shelf registration statement (the Registered Direct Offering), at a price of  $3.15 per share, resulting in gross proceeds of approximately $9.0 million. We intend to use the net proceeds, $8.4 million, from the sale of shares in the Registered Direct Offering for operating costs, working capital and general corporate purposes.
In September 2001, our Board of Directors of the Company adopted a Stockholders Rights Plan, and in connection therewith declared a dividend which was issued on September 28, 2001 of one preferred stock purchase right (a Right) for each share of common stock outstanding. The Rights would become exercisable only if a person or group acquired beneficial ownership of 20 percent or more of the outstanding common stock of GenVec (an Acquiring Person), or announced the intention to commence a tender or exchange offer the consummation of which would result in that person or group becoming an Acquiring Person. The Stockholder Rights Plan expired in September 2011.
In August 2011, the Company’s Board of Directors adopted a new Stockholder Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as rights agent, to be effective on September 7, 2011 upon expiration of the prior Stockholder Rights Agreement. The new Stockholder Rights Agreement was not adopted in response to any specific effort to acquire control of the Company. In connection with the adoption of the new Stockholder Rights Agreement, the Company’s Board of Directors declared a dividend of one preferred stock purchase right, or Right, for each outstanding share of common stock to stockholders of record as of the close of business on September 7, 2011. Initially, the Rights will be represented by GenVec’s common stock certificates or book entry notations, will not be traded separately from the common stock and will not be exercisable. In the event that any person acquires beneficial ownership of 20% or more of the outstanding shares of GenVec’s common stock, or upon the occurrence of certain other events, each holder of a Right, other than the acquirer, would be entitled to receive, upon payment of the purchase price, which is initially set at $32 per Right, a number of shares of GenVec common stock having a value equal to two times such purchase price. The Company’s Board of Directors is entitled to redeem the Rights at $0.001 per right at any time before a person or group has acquired 20% or more of the Company’s common stock. The Rights will expire on September 7, 2021, subject to the Company’s right to extend such date, unless earlier redeemed or exchanged by the Company or terminated. The Rights will at no time have any voting rights. The Company has authorized 30,000 shares of Series B Junior Participating Preferred Stock in connection with the adoption of the new Stockholder Rights Agreement. There was no Series B Junior Participating Preferred Stock issued or outstanding as of December 31, 2014 or December 31, 2013.
In addition to the common stock reflected on our balance sheets, the following items are reflected in the capital accounts as of December 31, 2014 and 2013:
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4,400,000 shares of  $0.001 par value preferred stock have been authorized; none are issued or outstanding.
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600,000 shares of  $0.001 par value Series A junior participating preferred stock have been authorized in connection with the preferred stock purchase rights referred to above; none are issued or outstanding.
(b) STOCK-BASED COMPENSATION
Stock Incentive Plans
Our stockholders approved the 2011 Omnibus Incentive Plan (2011 Plan) in June 2011. In July 2012 at the Company’s 2012 Annual Meeting of Stockholders, the stockholders of GenVec, Inc. (the “Company”) approved an amendment to the GenVec, Inc. Omnibus Incentive Plan (the “2011 Plan”) to increase the number of shares of common stock that are available to be issued through grants or awards made thereunder or through the exercise of options granted thereunder by 640,000 shares. On September 3, 2013, the Board of Directors of the Company acted to award shares of restricted stock pursuant to the 2011 Plan and thereby amended the Plan to provide that the limitation in Section 6.2(b) of the 2011 Plan on the maximum number of shares of stock that may be granted under the 2011 Plan, other than pursuant to Options or SARs (as those terms are defined in the 2011 Plan), in a calendar year was increased to 200,000 shares for purposes of those awards. In November 2013 at the Company’s 2013 Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2011 Plan to increase the number of shares of common stock that are available to be issued through grants or awards made thereunder or through the exercise of options granted thereunder by 500,000 shares. At December 31, 2014 there are 701,775 shares available for future issuance and 1,678,892 outstanding options and 730,000 outstanding restricted stock awards under the 2011 Plan, CEO incentive, and 2002 Plan. Options outstanding under the 2011 Plan at December 31, 2014 expire through 2024. Restricted stock awards generally vest over a two-year term, with 100% vesting two years after issuance. In 2014 and 2013, no restricted stock awards vested.
Stock options granted under the 2011 Plan generally have a contractual term of 10 years and vest ratably over a four year service period, when the option is fully exercisable. The Compensation Committee administers the 2011 Plan, approves the individuals to whom options, restricted stock, or other awards will be granted, and determines the terms of the awards, including the number of shares granted and exercise price of each option.
The 2011 Plan replaces the 2002 Stock Incentive Plan (2002 Plan), which was approved in June 2002 as the replacement for the 1993 Stock Incentive Plan (1993 Plan). There are 360,226 outstanding options and no outstanding restricted stock awards under the 2002 Plan at December 31, 2014. Options outstanding under the 2002 Plan at December 31, 2014 expire through 2021.
In May 2012, the Company granted an Inducement Award to purchase shares of common stock to our then President and Chief Executive Officer pursuant to a CEO inducement award agreement. The Inducement Award allows for the purchase of up to 250,000 shares of common stock at an exercise price per share equal to $2.54. The option has a ten-year term and vests ratably over a four year service period, when the option is fully exercisable. When Ms. Collins departed the Company she forfeited her unvested shares as of September 3, 2013. There are 83,333 outstanding options awards under the CEO inducement plan at December 31, 2014.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense related to employee stock options for the years ended December 31, 2014 and 2013, which was allocated as follows:
We use the Black-Scholes pricing model to value stock options. The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2014 and 2013 was calculated using the Black-Scholes model with the following weighted-average assumptions:
The risk-free interest rate assumption is based upon various U.S. Treasury rates as of the date of the grants, ranging from 1.82 percent to 2.01 percent and 1.00 percent to 1.85 percent, respectively, for the years ended December 31, 2014 and 2013. The dividend yield is based on the assumption that we are not expected to declare a dividend over the life of the options. The volatility assumption for 2014 and 2013 is based on the weighted average volatility for the most recent one-year period as well as the volatility over the expected life of 6.25 and 6.10, respectively. The expected life of employee stock options represents the weighted average combining the actual life of the options that have already been exercised or cancelled with the expected life of all outstanding options. The expected life of outstanding options is calculated assuming the options will be exercised at the midpoint of the vesting date and the full contractual term.
The Company estimates forfeiture rates at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on the demographics of current option holders and standard probabilities of employee turnover. Stock-based compensation expense recognized in the statement of operations for the year ended December 31, 2014 and 2013 has been adjusted for actual forfeitures during the respective periods. We do not record tax-related effects on stock-based compensation given our historical and anticipated operating experience and offsetting changes in our valuation allowance which fully reserves against potential deferred tax assets.
Stock Options
The activity of the plans from January 1, 2013 to December 31, 2014 is as follows:
Unrecognized stock-based compensation expense related to stock options was approximately $1.0 million as of December 31, 2014. This amount is expected to be expensed over a weighted average period of 2.5 years. There were no stock options exercised during the years ended December 31, 2014 or 2013.
The following table summarizes information about our stock options outstanding at December 31, 2014:
As of December 31, 2014 options covering 1,136,896 shares were exercisable at $0.84 to $41.00 per share (average $5.79 per share) and options covering 701,775 shares remain available to be granted.
Restricted Stock Awards
In September 2013, the Company issued 730,000 restricted shares of common stock under the 2011 Plan. The following table summarizes the status of the Company’s unvested restricted stock as of December 31, 2014:
Restricted stock awarded in 2013 vests 100% two years after the date of grant. The fair value of the grant is charged to operations over the vesting period. Unrecognized stock-based compensation expense related to restricted stock units was approximately $0.1 million as of December 31, 2014. This amount is expected to be expensed over a weighted average period of 0.7 years.
(c) WARRANTS
Warrants to purchase common stock were granted to organizations and institutions in conjunction with certain licensing and funding activities. The warrants typically vest six-months after issuance. Outstanding warrants as of December 31, 2014 are summarized below (in thousands, except per share amounts):
On June 11, 2013, 220,383 warrants with an exercise price of  $20.16 issued in June 2008 expired. On May 29, 2014, 711,539 warrants with an exercise price of  $8.58 issued in May 2009 expired. There were no warrants exercised during the year ended December 31, 2014. On February 1, 2015, the warrants listed in the table above expired.
(9) INCOME TAXES
For the years ended December 31, 2014 and 2013 there is no provision for income taxes included in the statement of operations. We have incurred operating losses, but have not recorded an income tax benefit for 2014 and 2013 as we have recorded a valuation allowance against our net operating losses and other net deferred tax assets due to uncertainties related to the ability to realize these tax assets. A reconciliation of tax credits computed at the statutory federal tax rate (34%) on operating loss before income taxes to the actual income tax expense is as follows (in thousands):
The Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported accumulated net losses to date, we have provided a full valuation allowance against our deferred tax assets.
Deferred income taxes reflect the net effects of net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):
The difference reflected in the change in the valuation allowance as it appears in the analysis of deferred tax assets in comparison to the reconciliation of income tax expense is the result of the tax impact of other comprehensive income.
At December 31, 2014, we have net operating loss carryforwards of approximately $253.3 million for federal income tax purposes which expire at various dates through 2033. We have research and experimentation tax credit carryforwards of  $14.2 million at December 31, 2014 which will expire at various dates through 2032.
Our NOL and tax credit carryforwards may be significantly limited under Section 382 of the Internal Revenue Code (IRC). NOL and tax credit carryforwards are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. The amount of U.S. loss carryforward which can be used by the Company each year is limited due to the changes in the Company’s ownership that occurred in 2003. Thus a portion of the Company’s loss carryforward may expire unused.
The limitation imposed by Section 382 would place an annual limitation on the amount of NOL and tax credit carryforwards that can be utilized. When we complete the necessary studies, the amount of NOL carryforwards available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryforwards, the effect of the reduction would be offset by a reduction in the valuation allowance. Thus, the resolution of this matter would have no effect on the reported assets, liabilities, revenues, and expenses for the periods presented.
As discussed in Note 2, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained effective January 1, 2007. At December 31, 2014 and December 31, 2013, we had no gross unrecognized tax benefits. We do not expect any significant changes in unrecognized tax benefits over the next 12 months. In addition, we did not recognize any interest or penalties related to uncertain tax positions at December 31, 2014 and 2013.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2011 through 2014 tax years generally remain subject to examination by federal and most state tax authorities. In addition, we would remain open to examination for earlier years if we were to utilize net operating losses or tax credit carryforwards that originated prior to 2011.
(10) QUARTERLY RESULTS (UNAUDITED)
Our unaudited quarterly information is as follows:
The net income/(loss) per share was calculated for each three-month period on a stand-alone basis. As a result, the sum of the net income/(loss) per share for the four quarters may not equal the loss per share for the respective 12-month period.
(11) SUBSEQUENT EVENTS
On March 23, 2015, we announced a collaboration with TheraBiologics, Inc. to develop cancer therapeutics leveraging both GenVec’s proprietary gene delivery platform and TheraBiologics’ proprietary neural stem cell (NSC) technology.
In exchange for an economic participation in the products being developed under the collaboration, we will contribute technology, know-how, vector construction, and technical and regulatory support to the program. TheraBiologics will be responsible for all other development costs.