10-K 1 v338064_10k.htm FORM 10-K

 

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File No. 1-13441

 

HEMISPHERX BIOPHARMA, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   52-0845822
(State or other jurisdiction of   (I.R.S. Employer Identification
incorporation or organization)   Number)

 

1617 JFK Boulevard Philadelphia, Pennsylvania   19103
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (215) 988-0080

 

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

 

Common Stock, $.001 par value

 

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

(Title of Each Class)

NONE

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): ¨ Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller Reporting Company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The aggregate market value of Common Stock held by non-affiliates at June 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter was $37,155,742.

 

The number of shares of the registrant’s Common Stock outstanding as of March 1, 2013 was 166,784,590.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

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TABLE OF CONTENTS

 

  Page
   
PART I  
   
ITEM 1. Business 1
   
ITEM 1A. Risk Factors 20
   
ITEM 1B. Unresolved Staff Comments 37
   
ITEM 2. Properties 37
   
ITEM 3. Legal Proceedings 37
   
ITEM 4. Mine Safety Disclosures 41
   
PART II  
   
ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 41
   
ITEM 6. Selected Financial Data 43
   
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 44
   
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 56
   
ITEM 8. Financial Statements and Supplementary Data 56
   
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 56
   
ITEM 9A. Controls and Procedures 56
   
ITEM 9B. Other Information 58
   
PART III  
   
ITEM 10. Directors, Executive Officers and Corporate Governance 58
   
ITEM 11. Executive Compensation 64
   
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 90
   
ITEM 13. Certain Relationships and Related Transactions,and Director Independence 93
   
ITEM 14. Principal Accountant Fees and Services 95
   
PART IV  
   
ITEM 15. Exhibits and Financial Statement Schedules 95

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this Annual Report on Form 10-K (the “Form 10-K”), including statements under “ITEM 1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings” and “ITEM 6. Management’s Discussion and Analysis of Financial Condition and Result of Operations”, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 (collectively, the “Reform Act”). Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should”, or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. All statements other than statements of historical fact included in this Form 10-K regarding our financial position, business strategy and plans or objectives for future operations are forward-looking statements. Without limiting the broader description of forward-looking statements above, we note generally that statements regarding potential drugs, their potential therapeutic effect, the possibility of obtaining regulatory approval, our ability to manufacture and sell any products, market acceptance or our ability to earn a profit from sales or licenses of any drugs or our ability to discover new drugs in the future are all forward-looking in nature. With regard to Hemispherx’ New Drug Application (“NDA”) for Ampligen® to treat Chronic Fatigue Syndrome (“CFS”), we note that there are additional steps which the U.S. Food and Drug Administration (“FDA”) has advised Hemispherx to take in our seeking approval. The final results of these and other ongoing activities, and of the FDA review, could vary materially from Hemispherx’ expectations and could adversely affect the chances for approval of the Ampligen® NDA. Any failure to satisfy the FDA’s requirements could significantly delay, or preclude outright, approval of the Ampligen® NDA.

 

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Hemispherx Biopharma, Inc. and its subsidiaries (collectively, “Hemispherx”, “Company”, “we or “us”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and other factors referenced in this Form 10-K. The inclusion of forward-looking statements should not be regarded as a representation by Hemispherx that any of its plans will be achieved. These forward-looking statements are neither promises nor guarantees of future performance, and are subject to a variety of risks and uncertainties, many of which are beyond Hemispherx’ control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. We do not undertake and specifically decline any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

PART I

 

ITEM 1.Business.

 

GENERAL

 

We are a specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged in the clinical development of new drug therapies based on natural immune system enhancing technologies for the treatment of viral and immune based chronic disorders. We were founded in the early 1970s doing contract research for the National Institutes of Health. Since that time, we have established a strong foundation of laboratory, pre-clinical and clinical data with respect to the development of natural interferon and nucleic acids to enhance the natural antiviral defense system of the human body and to aid the development of therapeutic products for the treatment of certain chronic diseases. We have three domestic subsidiaries BioPro Corp., BioAegean Corp., and Core BioTech Corp., all of which are incorporated in Delaware and are dormant. Our foreign subsidiary is Hemispherx Biopharma Europe N.V./S.A. established in Belgium in 1998, which has minimal activity. All significant intercompany balances and transactions have been eliminated in consolidation.

 

1
 

 

Our current strategic focus is derived from four applications of our two core pharmaceutical technology platforms Ampligen® and Alferon N Injection®. The commercial focus for Ampligen® includes application as a treatment for CFS and as an influenza vaccine enhancer (adjuvant) for both therapeutic and preventative vaccine development. Alferon N Injection® is a FDA approved product with an indication for refractory or recurring genital warts. Alferon® LDO (Low Dose Oral) is a formulation under development targeting influenza.

 

We own and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ that produces Alferon® and Ampligen®. In December 2011, our Board of Directors (the “Board”) reevaluated the facility enhancement project to focus on upgrading the facility to provide for a high volume, more cost effective manufacturing process for Alferon N Injection®, Alferon® LDO and Ampligen®. In this regard, the Board increased the funding allocated to this project from $4.4 million to $6.5 million, and then again in June 2012 to $7.2 million. The facility enhancement project is in its final stage with construction complete and a Certificate of Approval issued by the Construction Official of New Brunswick, NJ for the work completed. Approximately $7,051,000 has been spent to date through December 31, 2012 and financed through a Margin Account with an effective interest rate of approximately 2.75%, as compared to $1,695,000 at December 31, 2011. While facility upgrades are being undertaken to the Alferon® manufacturing process, this project has not impacted our capability to manufacture the Ampligen® drug substance intermediates needed for the final production steps. The production of new Alferon® Active Pharmaceutical Ingredient (“API”) inventory will not commence until the capital improvement and validation phases are complete. Due to the necessity to redirect our resources to the Ampligen® NDA application process and efforts towards the pre-approval inspection for Ampligen® manufacturing, the validation phase of the Alferon® manufacturing project had been delayed but is now underway. While the facility had been granted approval of its Biological License Application (“BLA”) by the FDA for Alferon®, this status will need to be reaffirmed upon the completion of the facility’s enhancements prior to commercial sale of newly produced Alferon®. Once we have obtained a reaffirmation of FDA BLA status and have begun production of new Alferon® API, the FDA will be required to provide approval as to the quality and stability of the final product. We anticipate that it will take until the second half of 2014 before we will have newly produced Alferon® that can be commercially sold. We outsource certain components of our research and development, manufacturing, marketing and distribution while maintaining control over the entire process through our quality assurance group and our clinical monitoring group. We cannot provide any guarantee that the facility will necessarily pass a pre-approval inspection for Ampligen® or Alferon® manufacture, which are conducted in separately dedicated areas within the overall New Brunswick manufacturing complex.

 

On February 1, 2013, we received a Complete Response Letter (“CRL”) from the FDA declining to approve our new drug application (“NDA”) for Ampligen® for CFS. The FDA said Hemispherx should conduct at least one additional clinical trial, complete various nonclinical studies and perform a number of data analyses. In its CRL, the FDA set forth the reasons for this action and provided recommendations to address certain of the outstanding issues. The Agency stated that the submitted data do not provide substantial evidence of efficacy of Ampligen® for the treatment of CFS and that the data does not provide sufficient information to determine whether the product is safe for use in CFS due to the limited size of the safety database and multiple discrepancies within the submitted data.

 

2
 

 

In the two randomized double-blind, placebo-controlled clinical studies that form the basis of the Ampligen® NDA, AMP-502 and AMP-516, Hemispherx believes that the primary efficacy endpoints were met and that they showed a statistically significant improvement (i.e., with a p-value of less than 0.05). The FDA and Hemispherx agree that in clinical study AMP-502, the primary endpoint was met (p=0.02). In clinical study AMP-516, the FDA’s analysis resulted in a p-value of 0.10, while Hemispherx’ calculation resulted in a p-value of <0.05, and yet both analyses suggest that those patients on Ampligen® improved over those on placebo. With regard to safety, we have provided data from the 845 subjects who have received Ampligen®, including 589 subjects suffering from severe CFS and over 100 CFS patients who have received Ampligen® for at least one year or longer. The Company believes that these data are sufficient to determine the safety profile of Ampligen®. At the December 20, 2012, FDA Advisory Committee meeting, 8 of the 13 members voted “yes” on the question of “Is the safety profile of Ampligen® adequate for approval for the treatment of CFS?” though the majority of the Advisory Committee members did not vote in favor of the other questions presented.

 

We plan to request an end-of-review conference with the FDA as a precursor to a possible submission of a formal appeal to the Office of New Drugs in the FDA’s Center for Drug Evaluation and Research regarding the Agency's decision. The purpose of the conference would be to review all of the issues raised in the Agency’s CRL as well as to discuss the corroborating data and experiences of clinicians and patients who have seen the benefits of Ampligen® therapy.

 

Our principal executive office is located at One Penn Center, 1617 JFK Boulevard, Philadelphia, Pennsylvania 19103, and our telephone number is 215-988-0080.

 

AVAILABLE INFORMATION

 

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Exchange Act electronically with the Securities and Exchange Commission, or SEC. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

 

You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.hemispherx.net under the Investor Relations tab for SEC Filings or by contacting the Investor Relations Department by calling (518) 398-6222 or sending an e-mail message to ir@hemispherx.net.

 

OUR PRODUCTS

 

Our primary pharmaceutical product platform consists of our experimental compound, Ampligen®, our FDA approved natural interferon product, Alferon N Injection® and, our experimental liquid natural interferon for oral administration, Alferon® LDO (Low Dose Oral).

 

Ampligen®

 

Ampligen® is an experimental drug currently undergoing clinical development for the treatment of Chronic Fatigue Syndrome (“CFS”). As noted above and discussed below, the FDA in its recent CRL declined to approve our NDA for the treatment of CFS with Ampligen®. Over its developmental history, Ampligen® has received various designations, including Orphan Drug Product Designation (FDA), Treatment IND (e.g., treatment investigational new drugs, or “Emergency” or “Compassionate” use authorization) with Cost Recovery Authorization (FDA) and “promising” clinical outcome recognition based on the evaluation of certain summary clinical reports (“AHRQ” or Agency for Healthcare Research and Quality). Ampligen® represents the first drug in the class of large (macromolecular) RNA (nucleic acid) molecules to apply for NDA review. Based on the results of published, peer reviewed pre-clinical studies and clinical trials, we believe that Ampligen® may have broad-spectrum anti-viral and anti-cancer properties.

 

3
 

 

We believe that nucleic acid compounds represent a potential new class of pharmaceutical products as they are designed to act at the molecular level for treatment of human diseases. There are two forms of nucleic acids, DNA and RNA. DNA is a group of naturally occurring molecules found in chromosomes, the cell’s genetic machinery. RNA is a group of naturally occurring informational molecules which orchestrate a cell’s behavior which, in turn, regulates the action of groups of cells, including the cells which compromise the body’s immune system. RNA directs the production of proteins and regulates certain cell activities including the activation of an otherwise dormant cellular defense against viruses and tumors. Our drug technology utilizes specifically-configured RNA. Our double-stranded RNA drug product, trademarked Ampligen®, is an experimental, unapproved drug, that would be administered intravenously. Ampligen® has been assigned the generic name rintatolimod by the United States Adopted Names Council (USANC) and has the chemical designation poly(I) poly(C12U).

 

Clinical trials of Ampligen® already conducted by us include studies of the potential treatment of CFS, Hepatitis B, HIV and cancer patients with renal cell carcinoma and malignant melanoma. All of these potential uses will require additional clinical trials to generate the safety and effectiveness data necessary to support regulatory approval.

 

In May 1997, the FDA approved an open-label treatment protocol, (“AMP 511”), allowing patient access to Ampligen® for treatment in an open-label safety study under which severely debilitated CFS patients have the opportunity to be on Ampligen® to treat this very serious and chronic condition. The data collected from the AMP 511 protocol through a consortium group with active clinical sites in New York City, NY, Charlotte, NC, Miami, FL, Incline Village, Nevada, and Salt Lake City, UT, provide safety information regarding the use of Ampligen® in patients with CFS. As of December 31, 2012, we had twenty-eight patients participating in this open label treatment protocol with twenty taking treatment and eight on drug holiday. We are establishing an enlarged data base of clinical safety information which we believe will provide further documentation regarding the absence of autoimmune disease associated with Ampligen® treatment. We believe that continued efforts to understand existing data, and to advance the development of new data and information, will ultimately support our filings of the Ampligen® NDA and/or the design of future clinical studies.

 

In July 2008, the FDA accepted for review our NDA for Ampligen® to treat CFS, originally submitted in October 2007. We continue to seek marketing approval for the first-ever treatment for CFS, and the NDA for Ampligen® is the first-ever NDA accepted for review by the FDA for systemic use of a toll-like receptor 3 (“TLR-3”) therapy to treat any condition. In November 2009, we received a CRL from the FDA which described specific additional recommendations related to the Ampligen® NDA. In accordance with its 2008 Complete Response procedure, the FDA reviewers determined that they could not approve the application in its present form and provided specific recommendations to address the outstanding issues.

 

On June 8, 2012, we and our consultants met with the FDA to discuss certain aspects of the CRL. At that meeting, the FDA agreed to accept, for review, in Hemispherx’ complete response new analyses of data from the AMP-516 Trial. However, the FDA noted that whether the new analyses provide adequate evidence of Ampligen®’s efficacy in treating CFS would ultimately be an issue to be resolved during the review.

 

4
 

 

As a result of the FDA meeting, Hemispherx redirected many of its resources to the Ampligen® NDA submission and our preparation for the FDA pre-approval inspections by reassigning personnel, hiring additional staff, consultants and various independent contractors. The Company submitted the complete response to the FDA on July 31, 2012.

 

On December 20, 2012, the FDA held a meeting of its Arthritis Advisory Committee (“AAC”) to discuss the Ampligen® NDA. The AAC questions and the results of the members’ voting thereon were as follows:

·“Considering the totality of the data, is there substantial evidence of efficacy for Ampligen for the treatment of patients with chronic fatigue syndrome (CFS)?” The AAC voted 9 no, 4 yes and 1 AAC member did not vote;
·“Has the safety of Ampligen been adequately assessed and characterized for the treatment of chronic fatigue syndrome (CFS)?” The AAC voted 9 no, 4 yes and 1 AAC member did not vote;
·“Is the safety profile of Ampligen adequate for approval for the treatment of CFS?” The AAC voted 8 yes, 5 no and 1 non-vote; and
·“Based on the information included in the briefing materials and presentations, has the applicant provided sufficient efficacy and safety data to support marketing of Ampligen for the treatment of CFS?” The AAC voted 8 no, 5 yes and 1 non-vote.

 

The AAC based its voting on a review of data from the Ampligen® clinical development program included as part of our NDA submission. This submission included data on nine studies conducted in patients with CFS, including two randomized double-blind, placebo-controlled studies and seven open-label studies. The trials were designed to evaluate safety, tolerability and efficacy in the approximately 845 patients (589 unique subjects suffering from severely debilitating CFS) who received Ampligen®.

 

On February 1, 2013, we received a CRL from the FDA declining to approve Hemispherx’ NDA for Ampligen® for CFS. In its CRL, the FDA communicated that Hemispherx should conduct at least one additional clinical trial, complete various nonclinical studies and perform a number of data analyses. The additional clinical study should address, among other things, Ampligen®’s efficacy in treating CFS patients, be of sufficient size and duration to assess the safety of Ampligen® and be sufficient to determine appropriate dosing. The FDA set forth the reasons for this action and provided recommendations to address certain of the outstanding issues. The FDA stated that the submitted data do not provide substantial evidence of efficacy of Ampligen® for the treatment of CFS and that the data do not provide sufficient information to determine whether the product is safe for use in CFS due to the limited size of the safety database and multiple discrepancies within the submitted data. In addition to the safety and effectiveness issues recommended to be addressed in at least one additional clinical trial, the CRL states that Hemispherx should conduct complete rodent carcinogenicity studies in two species prior to approval and also conduct additional animal toxicology studies providing more comprehensive evaluation of Ampligen® fragments and degradation products. The CRL also requests evaluation of variation between lots of Ampligen® tested in the development process and recommends tighter control of the Ampligen® manufacturing process.

 

In response to the CRL, we plan to avail ourselves of the opportunity for an “end-of-review” meeting with representatives of the Office of Drug Evaluation II which issued the CRL, in order to clarify and seek to narrow the outstanding issues regarding the further development of Ampligen® for the treatment of CFS.

 

5
 

 

FDA regulations provide a formal dispute resolution process to obtain review of any FDA decision, including a decision not to approve an NDA, by raising the matter with the supervisor of the FDA office that made the decision. The formal dispute resolution process exists to encourage open, prompt discussion of scientific (including, medical) disputes and procedural (including, administrative) disputes that arise during the drug development, new drug review, and post-marketing oversight processes of the FDA. Depending on the results of the “end-of-review” meeting, we will determine whether or not to submit a formal appeal regarding the FDA’s decision under applicable FDA regulations and guidance. Please see “Risks Associated With Our Business” in Item 1A. Risk Factors below.

 

Until we undertake the end-of-review conference(s) with the FDA, we are unable to reasonably estimate the nature, costs, necessary efforts to obtain FDA clearance or anticipated completion dates of any additional clinical study or studies. Utilizing the industry norms for undertaking a Phase III clinical study, we estimate upon acceptance of the study’s design that it would take approximately 18 months to three years to complete a new well-controlled Ampligen® clinical study for resubmission to the FDA. Industry norms suggest that it will require three to six months to initiate the study, one to two years to accrue and test patients, three to six months to close-out the study and file the necessary documents with the FDA. The actual duration to complete the clinical study may be different based on the final design of an acceptable Phase III clinical study design, availability of suitable participants and clinical sites along with other factors that could impact the implementation of the study, analysis of results or requirements of the FDA and/or other governmental organizations. The actual duration to complete the clinical study may be different based on the length of time it takes to design the study and obtain FDA’s acceptance of the design, the final design of an acceptable Phase III clinical study design, availability of suitable participants and clinical sites along with other factors that could impact the implementation of the study, analysis of results or requirements of the FDA and/or other governmental organizations.

 

There are multiple reasons for fatigue and the accurate diagnosis of CFS remains one of exclusion and adherence to strict diagnostic guidelines. In that regard, we have evaluated a blood test for CFS using a new technology being developed by Chronix Biomedical and continue to be interested in such diagnostic platform that may include next generation sequencing, gene expression or immune assays of dysfunction. While we believe that finding an accurate diagnostic for CFS is useful, we do not believe that development of new diagnostic tools is a prerequisite to FDA approval of a CFS treatment or design of a successful clinical study.

 

On July 12, 2012, we filed a new drug application for Ampligen® with the ANMAT (Administracion Nacional de Medicamentos, Alimentos y Tecnologia Medica), the agency responsible for the national regulation of drugs, foods and medical technology in Argentina, under the ANMAT’s Orphan Drug regulations. We believe that the approval of Ampligen® as an Orphan Drug may allow reimbursement by the Health Services Authority (SSS), the central health authority in Argentina for patients seeking treatment for CFS.

 

Alferon N Injection®

 

Alferon N Injection® is the registered trademark for our injectable formulation of natural alpha interferon, which is approved by the FDA in 1989 for the treatment of certain categories of genital warts. Alferon® is the only natural-source, multi-species alpha interferon currently approved for sale in the U.S. for the intralesional (within lesions) treatment of refractory (resistant to other treatment) or recurring external genital warts in patients 18 years of age or older. Certain types of human papilloma viruses (“HPV”) cause genital warts, a sexually transmitted disease (“STD”). The U.S. Centers for Disease Control and Prevention (“CDC”) estimates that “approximately twenty million Americans are currently infected with HPV with another six million becoming newly infected each year. HPV is so common that at least 50% of sexually active men and women get it at some point in their lives.” Although they do not usually result in death, genital warts recurrence is common, cause significant morbidity and entail substantial health care costs.

 

6
 

 

Interferons are a group of proteins produced and secreted by cells to combat diseases. Researchers have identified four major classes of human interferon: alpha, beta, gamma and omega. Alferon N Injection® contains a multi-species form of alpha interferon. The world-wide market for injectable alpha interferon-based products has experienced rapid growth and various alpha interferon injectable products are approved for many major medical uses worldwide. Alpha interferons are manufactured commercially in three ways: by genetic engineering, by cell culture, and from human white blood cells. All three of these types of alpha interferon are or were approved for commercial sale in the U.S. Our natural alpha interferon is produced from human white blood cells.

 

The potential advantages of natural alpha interferon over recombinant (synthetic) interferon produced and marketed by other pharmaceutical firms may be based upon their respective molecular compositions. Natural alpha interferon is composed of a family of proteins containing many molecular species of interferon. In contrast, commercial recombinant alpha interferon products each contain only a single species. Researchers have reported that the various species of interferons may have differing antiviral activity depending upon the type of virus. Natural alpha interferon presents a broad complement of species, which we believe may account for its higher activity in laboratory studies. Natural alpha interferon is also glycosylated (partially covered with sugar molecules). Such glycosylation is not present on the currently U.S. marketed recombinant alpha interferons. We believe that the absence of glycosylation may be, in part, responsible for the production of interferon-neutralizing antibodies seen in patients treated with recombinant alpha interferon. Although cell culture-derived interferon is also composed of multiple glycosylated alpha interferon species, the types and relative quantity of these species are different from our natural alpha interferon.

 

Alferon N Injection® [Interferon alfa-n3 (human leukocyte derived)] is a highly purified, natural-source, glycosylated, multi-species alpha interferon product. There are essentially no antibodies observed against natural interferon to date and the product has a relatively low side-effect profile.

 

The recombinant DNA derived alpha interferon formulations have been reported to have decreased effectiveness after one year, probably due to neutralizing antibody formation. Neutralizing antibody formation has not been reported with the use of Alferon N Injection®.

 

Commercial sales of Alferon N Injection® were halted in March 2008 when our finished goods inventory expired. The production of Alferon N Injection® from the Work-In-Process Inventory was restarted in May 2010, continued into January 2011 with its conversion into API and is completed for the related Final Lot Release Test. To formulate, fill, finish and package (“fill and finish”) Alferon N Injection® Drug Product, we require a FDA approved third party Contract Manufacturing Organization (“CMO”). In January 2012, we agreed to a Technology, Transfer, Validation and Commercial Supply Agreement with Althea Technologies, Inc. (“Althea”) of San Diego, CA, regarding the fill and finish process for Alferon N Injection®. In April 2012, FDA reviewers raised certain questions about the status of our existing lots of older Work-In-Process Alferon® materials and Alferon® “API”, which would need to be released by the FDA before those materials could be used in commercial product.

 

7
 

 

As of December 31, 2012, all of our existing lots of Alferon® Work-In-Process Inventory have completed the fill, finish and packaging process with the need to undertake product quality and stability tests, the results of which would be submitted to the FDA for review. We are unable to provide any assurances that the FDA will approve the fill and finish product lots produced by Althea. In the absence of FDA approvals for commercial sale of product manufactured from existing Work-In-Process inventory, commercial sales of Alferon® will not resume until new batches of API can be produced and released by the FDA (see “MANUFACTURING” and “MARKETING/DISTRIBUTION” below for more information).

 

The production of new Alferon® API inventory will not commence until the capital improvement and validation phases are complete at our New Brunswick, NJ manufacturing facility. Due to the necessity to redirect resources to the Ampligen® NDA application process, the validation phase of the Alferon® manufacturing project had been delayed but is currently underway. While the facility had been granted approval of its Biological License Application (“BLA”) by the FDA for Alferon®, this status will need to be reaffirmed upon the completion of the facility’s enhancements prior to commercial sale of newly produced inventory product. Once we have obtained a reaffirmation of FDA BLA status and have begun production of new Alferon® API, we will need FDA approval as to the quality and stability of the final product. We anticipate that it will take until the second half of 2014 before we will have newly produced Alferon® that can be commercially sold (see “MANUFACTURING” below for more information).

 

Alferon® LDO (Low Dose Oral)

 

Alferon® LDO [Low Dose Oral Interferon Alfa-n3 (Human Leukocyte Derived)] is an experimental low-dose, oral liquid formulation of Natural Alpha Interferon and like Alferon N Injection®, should not cause antibody formation, which is a problem with recombinant interferon. It is an experimental immunotherapeutic believed to work by stimulating an immune cascade response in the cells of the mouth and throat, enabling it to bolster systemic immune response through the entire body by absorption through the oral mucosa. Oral interferon could be economically feasible for patients and logistically manageable in development programs in third-world countries primarily affected by influenza and other emerging viruses. Oral administration of Alferon® LDO, with its anticipated affordability, low toxicity, no production of antibodies, and broad range of potential bioactivity, could be a breakthrough treatment or prevention for viral diseases.

 

In December 2010, the FDA authorized a protocol to conduct a Phase II, double-blind, adaptive-design, randomized, placebo-controlled, dose-ranging study of Alferon® LDO for the prophylaxis and treatment of seasonal and pandemic influenza of more than 200 subjects. Our Phase II study has been delayed as we have redirected many of our resources to the Ampligen® NDA submission.

 

HISTORICAL COSTS RELATED TO OUR PRODUCTS

 

The following table sets forth the costs related to our major products for each of the prior three years. Our aggregate expenses from the time that we first started developing nucleic acid pharmaceutical technology in the mid 1980’s through March 2003 were substantially related to the development of Ampligen®, and from that date through the current period were substantially related to Ampligen® and Alferon®.

 

8
 

 

   (dollars in thousands) 
   Year Ended December 31, 2012 
Costs and Expenses                    
   Ampligen®
NDA
   Alferon N
Injection®
   Alferon®
LDO
  

 

Other

  

 

Total

 
                     
Production/cost of goods sold  $0   $1,989   $0   $0   $1,989 
Research and development   6,775    0    2,245    488    9,508 
General and administrative   5,337    1,567    1,768    384    9,056 
                          
Total  $12,112   $3,556   $4,013   $872   $20,553 

 

   (dollars in thousands) 
   Year Ended December 31, 2011 
Costs and Expenses                    
   Ampligen®
NDA
   Alferon N
Injection®
   Alferon®
LDO
   Other   Total 
                     
Production/cost of goods sold  $0   $1,043   $0   $0   $1,043 
Research and development   2,310    0    4,080    332    6,722 
General and administrative   1,990    899    3,516    286    6,691 
                          
Total  $4,300   $1,942   $7,596   $618   $14,456 

 

   (dollars in thousands) 
   Year Ended December 31, 2010 
Costs and Expenses                    
   Ampligen®
NDA
   Alferon N
Injection®
   Alferon®
LDO
   Other   Total 
                     
Production/cost of goods sold  $0   $1,341   $0   $0   $1,341 
Research and development   2,787    0    4,658    168    7,613 
General and administrative   2,356    1,133    3,937    142    7,568 
                          
Total  $5,143   $2,474   $8,595   $310   $16,522 

 

PATENTS AND NON-PATENT EXCLUSIVITY RIGHTS

 

As of December 31, 2012, we had 20 patents worldwide with 70 additional pending patent applications comprising our intellectual property. Please see “Note 7: Patents, Trademark Rights and Other Intangibles (FASB ASC 350 General Intangibles Other than Goodwill)” under Notes To Consolidated Financial Statements for more information on these patents.

 

We continually review our patents’ rights to determine whether they have continuing value. Such review includes an analysis of the patent’s ultimate revenue and profitability potential. In addition, Management’s review addresses whether each patent continues to fit into our strategic business plans for Ampligen®, Alferon N Injection® and Alferon® LDO. The U.S. patents relating to our Alferon® products expire April 2, 2013 (#5,503,828), October 14, 2014 (#5,676,942) and December 22, 2017 (#5,989,441). In 2012, we were granted two new patents, one in Australia and the other in New Zealand, both for the use of Ampligen to initiate innate immunity and to treat or prevent viral infections and tumors. In December 2011, we were granted two new United States Patents for the use of Alferon® LDO for the treatment in a number of different human diseases.

 

9
 

 

Alferon® composition patent #5,503,828 relates to the manufacturing process for Alferon® Active Pharmaceutical Ingredient (“API”), a complex mixture of natural interferon species that ismanufactured from human leukocytes obtained from human blood donors. In addition, while it is the current standard by the FDA to treat biological drug products like interferon as “Well Characterized” biologics, a process for which chemical entities can have their identity, purity, impurities, potency, and quality controlled by chemical testing, Alferon®, as a natural interferon, does not lend itself well to such testing. Moreover, FDA continues to require that each lot or Alferon we produce be tested and released by the FDA before it can distributed for commercial sales. Because of the complexity of the Alferon manufacturing process and these additional regulatory requirements, we believe that potential manufacturers of generic, or so-called “bio-similar,” drug products are focused on developing recombinant interferon products, rather than natural interferon products. For these reasons, we believe the expiration of this Alferon® composition patent in April 2013 should have no or little impact on the Company. Additionally at the completion of the facility enhancement and receipt of the FDA certification for the revised Alferon® manufacturing process and techniques in New Brunswick, NJ, it is our intention to file for additional patent protection.

 

Alferon® patent #5,676,942 relates to a manufacturing methodology which is no longer in use.

 

With respect to Ampligen®, the main U.S. CFS treatment patent (#6,130,206) expires October 10, 2017. Our main patents covering HIV treatment (#4,820,696, #5,063,209, and #5,091,374) expired on April 11, 2006, November 5, 2008, and February 25, 2009, respectively; Hepatitis treatment coverage is conveyed by U.S. patent #5,593,973 which expires on January 14, 2014. Our U.S. Ampligen® Trademark (#73/617,687) has been renewed through December 6, 2018. New therapeutic use patent applications are pending including new patent applications for composition of alternative matter.

 

In addition to our patent rights relating to Ampligen®, the FDA has granted “orphan drug status” to the drug for CFS, HIV/AIDS, and renal cell carcinoma and malignant melanoma. Orphan drug status grants us protection against the potential subsequent approval of other sponsors’ versions of the drug for these uses for a period of seven years following FDA approval of Ampligen® for each of these designated uses. The first NDA approval for Ampligen® as a new chemical entity will also qualify for four or five years of non-patent exclusivity during which abbreviated new drug applications seeking approval to market generic versions of the drug cannot be submitted to the FDA. (See “GOVERNMENT REGULATION” below.)

 

In July 2011, a new United States Patent was granted for the use of Ampligen® as a vaccine adjuvant for use with seasonal influenza vaccine to induce an enhanced immune response against H5N1 avian influenza.

 

RESEARCH AND DEVELOPMENT (“R&D”)

 

Our general focus during the past three fiscal years has been on developing drugs for use in treating viral and immune based chronic disorders and diseases such as CFS, HIV, HPV, Cancer and Influenza. Our current R&D projects are targeting treatment therapies for CFS, various cancers (as adjunctive therapy) and other viral diseases such as prevention and treatment of seasonal and pandemic H1N1 or influenza.

 

The following table summarizes our research and development costs for the years 2012, 2011 and 2010 by project:

 

   2012   2011   2010 
Ampligen® New Drug Application for the treatment of Chronic Fatigue Syndrome  $6,775   $2,310   $2,787 
Alferon® LDO for influenza   2,245    4,080    4,658 
Alferon N Injection® for influenza   0    0    168 
Other projects   488    332    0 
Total research and development  $9,508   $6,722   $7,613 

 

10
 

 

Due to the inherent uncertainty involved in the design and conduct of clinical trials and the applicable regulatory requirements, including the factors discussed above in “OUR PRODUCTS”, we cannot predict what additional studies and/or additional testing or information may be required by the FDA. Accordingly, we are unable to estimate the nature, timing, costs and necessary efforts to complete these projects nor the anticipated completion dates. In addition, we have no basis for estimating when material net cash inflows may commence. We have yet to generate significant revenues from the sale of these developmental products. As of December 31, 2012, we had approximately $43,953,000 in Cash, Cash Equivalents and Marketable Securities, (inclusive of approximately $14,500,000 in Marketable Securities collateralizing certain debts). Please see ITEM 1A. Risk Factors; “We may require additional financing which may not be available” below.

 

In its CRL, the FDA communicated that Hemispherx should conduct at least one additional clinical trial, complete various nonclinical studies and perform a number of data analysis. Until we undertake the end-of-review conference(s) with the FDA, we are unable to reasonably estimate the nature, costs, necessary efforts to obtain FDA clearance or anticipated completion dates of any additional clinical study or studies. Utilizing the industry norms for undertaking a Phase III clinical study, we estimate upon acceptance of the study’s design that it would take approximately 18 months to three years to complete a new well-controlled Ampligen® clinical study for resubmission to the FDA. It can be reasonably anticipated that the time and cost to undertake clinical trial(s), studies and data analysis are beyond our current financial resources without gaining access to additional funding. The actual duration to complete the clinical study may be different based on the length of time it takes to design the study and obtain FDA’s acceptance of the design, the final design of an acceptable Phase III clinical study design, availability of suitable participants and clinical sites along with other factors that could impact the implementation of the study, analysis of results or requirements of the FDA and/or other governmental organizations. Please see “We most likely will require additional financing which may not be available. The limitation on the number of shares of common stock available for financing without prior stockholder approval eventually may hinder our ability to raise additional funding.” in Item 1A. Risk Factors below.

 

Chronic Fatigue Syndrome ("CFS")

 

Chronic Fatigue Syndrome (“CFS”), also known as Chronic Immune Dysfunction Syndrome (“CFIDS”) and Myalgic Encephalomyelitis (“ME”) is a serious and debilitating chronic illness and a major public health problem. CFS is recognized by both the government and private sector as a major health problem, including the U.S. National Institutes of Health (“NIH”), FDA and the CDC. The CDC states on its website at http://www.cdc.gov/cfs/index.html that “Chronic fatigue syndrome, or CFS, is a devastating and complex disorder characterized by overwhelming fatigue that is not improved by bed rest and that may be worsened by physical or mental activity. People with CFS most often function at a significantly lower level of activity than they were capable of before the onset of illness.”

 

Many severe CFS patients become completely disabled or totally bedridden and are afflicted with severe pain and mental confusion even at rest. CFS is characterized by incapacitating fatigue with profound exhaustion and extremely poor stamina, sleep difficulties and problems with concentration and short-term memory. It is also accompanied by flu-like symptoms, pain in the joints and muscles, tender lymph nodes, sore throat and new headaches. A distinctive characteristic of the illness is a worsening of symptoms following physical or mental exertion which do not subside with rest.

 

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For their Case Definition, the CDC states that the cause or causes of CFS have not been identified and no specific diagnostic tests are available. Therefore, in order to be diagnosed with chronic fatigue syndrome, a patient must satisfy three criteria:

1.The individual has had severe chronic fatigue for six or more consecutive months that is not due to ongoing exertion or other medical conditions associated with fatigue (these other conditions need to be ruled out by a doctor after diagnostic tests have been conducted;
2.The fatigue significantly interferes with daily activities and work; and
3.The individual concurrently has four or more of the following eight symptoms:
·post-exertion malaise lasting more than twenty-four hour;
·unrefreshing sleep;
·significant impairment of short-term memory or concentration;
·muscle pain;
·pain in the joints without swelling or redness;
·headaches of a new type, pattern, or severity;
·tender lymph nodes in the neck or armpit; or
·a sore throat that is frequent or recurring.

These symptoms should have persisted or recurred during six or more consecutive months of illness and they cannot have first appeared before the fatigue.

 

Because no cause for CFS has been identified, current treatment programs are directed at relieving symptoms, with the goal of the patient regaining some level of function and well-being. Diagnosis of CFS is a time-consuming and challenging process for which there is no FDA approved diagnostic test or biomarker to clearly identify the disorder. Diagnosis is primarily arrived at by taking a patient's medical history, completing a physical exam and lab tests to rule out other conditions and excluding other illnesses with similar symptoms and comparing a patient's symptoms with the case definition. Overlapping symptoms can occur with several diseases, such as fibromyalgia, Gulf War Illnesses, chronic Lyme disease and multiple chemical sensitivities. Many diseases have similar symptoms including Lupus and Lyme disease which may closely mimic CFS that need to be considered when making a diagnosis to rule them out. If there are no abnormal test results or other physical ailments identified, clinicians can use standardized tests to quantify the level of fatigue and evaluate symptoms. Diagnosis can be complicated by the fact that the symptoms and severity of CFS vary considerably from patient to patient. New diagnostic approaches to possibly accelerate the identification of CFS are being developed.

 

12
 

 

When she served as director of the CDC, Dr. Julie Gerberding stated that "The CDC considers Chronic Fatigue Syndrome to be a significant public health concern and we are committed to research that will lead to earlier diagnosis and better treatment of the illness." A variety of studies by the CDC and others have shown that between 1 and 4 million Americans suffer from CFS. In June 2012, U.S. Senators Robert P. Casey, Richard Blumenthal and Kay R. Hagan sent a letter to Health and Human Services Secretary Kathleen Sebelius requesting the FDA hold a stakeholders meeting on CFS. Senators Casey and Hagan serve on the Committee on Health, Education, Labor & Pensions, which has Congressional oversight responsibility for FDA. The letter stated, “CFS/ME represents a significant unmet medical need, one that confers on patients a lifetime of illness. A stakeholder meeting would be of great benefit, as it would offer an opportunity to examine existing treatment protocols known to FDA, address how risk/benefit determinations should be made in relation to CFS/ME treatments and identify a path forward for regulatory science in this area.”

 

Accordingly, the FDA’s Center for Drug Evaluation and Research has announced a public workshop on April 25 and 26, 2013, to discuss how best to facilitate and expedite the development of safe and effective drug therapies to treat signs and symptoms related to CFS and ME. On April 25, 2013, as part of FDA’s Patient-Focused Drug Development initiative, patients will provide feedback to FDA on issues like the disease impact on quality of life and individual experiences with current treatment options. On April 26, 2013, there will be discussions with academic and government experts, patient advocates, patients, and clinicians on how to identify sound, quantitative outcome measures that can be used in clinical trials to determine whether disease symptoms improve with specific drug interventions. For more information, see http://www.fda.gov/Drugs/NewsEvents/ucm319188.htm.

 

While CFS strikes people in all age, racial, ethnic, and socioeconomic groups, it is most prevalent amongst women. Research has shown that CFS is about three times as common in women as men, a rate similar to that of many autoimmune diseases, such as multiple sclerosis and lupus. To put this into perspective, CFS is over four times more common than HIV infection in women, and the rate of CFS in women is considerably higher than a woman's lifetime risk of getting lung cancer as published by the CFIDS Association of America.

 

Other Viral Diseases

 

In July 2011, we received FDA authorization to proceed with the initiation of a new clinical trial of intranasal Ampligen® to be used in conjunction with commercially approved seasonal influenza vaccine. On April 16, 2012, a clinical trial was initiated in which Ampligen® is being nasally administered in conjunction with FluMist® to healthy human volunteers at the University of Alabama at Birmingham under the auspices of Dr. Paul Goepfert, Associate Professor of Medicine in the Division of Infectious Diseases and Director of the Alabama Vaccine Research Clinic. This study is a first use of Ampligen® with a seasonal vaccine in humans to assess the safety of Ampligen® when nasally delivered as a vaccine adjuvant. Another objective of this study is to determine the extent to which Ampligen® mobilizes potential protections against pandemic influenza by utilization of a seasonal flu vaccine. The study will evaluate the potential immunologic enhancement of Ampligen® by comparing immune parameters in the group receiving Ampligen® plus FluMist® with another group receiving FluMist® plus placebo. We intend to conduct a broad array of immune tests to compare the immune response for both its magnitude and breadth. It is our objective to qualify and enroll 72 patients for this clinical trial. As of December 31, 2012, eight subjects have participated in this study. As required by the study’s protocol, a Data Monitoring Committee has reviewed the safety data on these subjects and approved the study to proceed at the next higher dosage level.

 

13
 

 

In April 2010, we began the process to undertake a clinical placebo-controlled study with Max Neeman International, a leading and large clinical research organization in India. This collaborative clinical research effort is intended to utilize Alferon N Injection® for treatment of seriously ill patients hospitalized with either seasonal influenza or pandemic influenza. The Indian site selection process was initiated and we obtained approval to begin the study from the Indian Drugs Controller General on July 13, 2010. As of June 2012, we had ten operational Clinical Investigative Sites. Thirty patients, of the planned total of sixty, have completed the study. Our study has progressed at a rate slower than originally projected due to difficulties encountered in the process of screening for subjects with influenza, rather than other illnesses with symptoms similar to influenza, along with India experiencing an unusually mild flu season during the past year. Due to the unexpectedly slow enrollment rate for this study, on June 20, 2012, we notified Max Neeman International that this study was suspended, pending an interim analysis of results to date on the thirty completed patients of the planned sixty patient study. Our interim analysis of results has been delayed as we have redirected many of our resources to the Ampligen® NDA submission. Upon completion of the Ampligen® NDA effort, we intend to undertake this analysis.

 

In June 2011, we entered into a Material Transfer and Research Agreement with the University of Pennsylvania’s School of Medicine to provide Ampligen® for testing as a vaccine adjuvant in a human clinical study in ovarian cancer. This study is a Phase I/II randomized clinical trial for subjects with recurring ovarian, fallopian tube or primary peritoneal cancer to determine the feasibility and safety as well as immunogenicity of a vaccine comprised of autologous oxidized tumor cell lysate (“OC-L”) administered by intradermal/subcutaneous injection in combination with intravenous Ampligen®. The OC-L vaccine is an experimental cancer immunotherapy under development by the University of Pennsylvania. This study represents the first use of Ampligen® as a cancer vaccine adjuvant in a randomized clinical study with and without Ampligen®. As of December 31, 2012, three patients have participated in this study. Further treatment of the existing three patients, as well as new enrollment into this study, are currently suspended pending additional data analyses and non-clinical experimentation by the University of Pennsylvania’s School of Medicine in an attempt to modify the immune response elicited by the vaccine adjuvant combination. To date, this treatment has been generally well-tolerated with no tumor regression seen in the first three patients.

 

In August 2011, a study utilizing Ampligen® was initiated by investigators from the Tumor Vaccine Group (“TVG”) at the University of Washington in Seattle, WA. As of December 31, 2012, forty patients have enrolled in this ninety-eight patient Phase I-II Study of HER2 vaccination with Ampligen® as an adjuvant in optimally treated breast cancer patients. The goal of this study is to see how well the combination works in treating patients with Stage II-IV human epidermal growth factor receptor 2 (“HER2”)-positive breast cancer. Vaccines made from synthetic HER2/neu peptides may help the body build an effective immune response to kill tumor cells that express HER-2/neu. The TVG has developed vaccines against several cancer proteins, and in this study, they are researching a new approach in an attempt to make the immune response to the vaccine even better. Compounds that specifically stimulate TLR receptors are promising immune stimulators, and Ampligen® has the potential to provide a profile of immune stimulation that could be clinically beneficial.

 

14
 

 

MANUFACTURING

 

We own and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ that produces Alferon® and Ampligen®. In December 2011, our Board of Directors (the “Board”) reevaluated the facility enhancement project to focus on upgrading the facility to provide for a high volume, more cost effective manufacturing process for Alferon N Injection®, Alferon® LDO and Ampligen®. In this regard, the Board increased the funding allocated to this project from $4.4 million to $6.5 million, and then again in June 2012 to $7.2 million. The facility enhancement project is in its final stage with construction complete and a Certificate of Approval issued by the Construction Official of New Brunswick, NJ for the work completed. Approximately $7,051,000 has been spent to date through December 31, 2012 and financed through a Margin Account with an effective interest rate of approximately 2.75%, as compared to $1,695,000 at December 31, 2011. While facility upgrades are being undertaken to the Alferon® manufacturing process, this project has not impacted our capability to manufacture the Ampligen® drug substance intermediates needed for the final production steps.

 

An element of the June 8, 2012 meeting with the FDA was the requirement that our New Brunswick manufacturing facility would be ready for the FDA to undertake a cGMP pre-approval inspection related to Ampligen® at the time of submission of our complete response submission. The FDA did not complete the inspection before the February 1, 2013 CRL and, as a result of the CRL, we do not anticipate a preapproval inspection at this time. We cannot provide any guarantee that the facility will pass a FDA pre-approval inspection for Ampligen® or Alferon® manufacture, which are conducted in separately dedicated areas within the overall New Brunswick manufacturing complex (see “Risks Associated With Our Business” in Item 1A. Risk Factors below for more information).

 

We outsource certain components of our research and development, manufacturing, marketing and distribution while maintaining control over the entire process through our quality assurance group and our clinical monitoring group. Accordingly in September 2011 and similar to our prior agreements, we executed an amendment to the Supply Agreement that will extend through March 11, 2014 with Jubilant Hollister-Stier Laboratories LLC of Spokane, Washington (“Hollister-Stier”). Pursuant to this agreement, Hollister-Stier will formulate, fill, finish and package (“fill and finish”) Ampligen® from the key raw materials that we would supply. Hollister-Stier would have the right of first refusal to manufacture certain Ampligen® related products.

 

Commercial sales of Alferon N Injection® were halted in March 2008 when our finished goods inventory expired. The production of Alferon N Injection® from the Work-In-Process Inventory was restarted in May 2010, continued into January 2011 with its conversion into API and is completed for the related Final Lot Release Test. We have manufactured purified drug concentrate utilized in the formulation of Alferon N Injection® in our New Brunswick, New Jersey facility. To formulate, fill, finish and package (“fill and finish”) Alferon N Injection® API that we have already produced, we require an FDA approved third-party CMO. In June 2011, our designated CMO reported to us that they had received an FDA 483 form that identified production issues that needed to be addressed prior to resumption of production. As a result, we evaluated alternative CMOs to undertake the fill and finish process.

 

On January 26, 2012, we agreed to a Technology, Transfer, Validation and Commercial Supply Agreement with Althea regarding the fill and finish process for Alferon N Injection®. The Technology Transfer process with Althea was completed in May 2012 and included the evaluation of manufacturing and technology transfer feasibility, equipment and/or equipment modification requirements, engineering runs, process definition along with development and approval of the Master Batch Record. As of December 31, 2012, all of our lots of Alferon® Work-In-Process Inventory have completed the fill, finish and packaging process. With the completion of the fill, finish and packaging protocol, Process Validation of Alferon® Work-In-Process lots need to be completed. With our redirection of resources to the Ampligen® NDA submission, this process had been delayed but is now underway. A minimum of three months of stability tests is required in a Pre-Approval Supplement (“PAS”). Upon submission of the PAS, the data would then be subjected to FDA review. The FDA could take up to six months to render an opinion as to the quality of the product as suitable for commercial sales. We are unable to provide any assurances that the FDA will approve the existing inventory finish product lots produced by Althea (see “MARKETING/DISTRIBUTION” below for more information).

 

15
 

 

The production of new Alferon® API inventory will not commence until the capital improvement and validation phases are complete at the New Brunswick, NJ manufacturing facility. Due to the necessity to redirect our resources to the Ampligen® NDA application process and efforts towards the pre-approval inspection for Ampligen® manufacturing, the validation phase of the Alferon® manufacturing project had been delayed, but we are now again dedicated to this process. While the facility had been granted approval of its Biological License Application (“BLA”) by the FDA for Alferon®, this status will need to be reaffirmed upon the completion of the facility’s enhancements prior to commercial sale of newly produced inventory product. Once we have obtained a reaffirmation of FDA BLA status and have begun production of new Alferon® API, we will be required to obtain FDA approval as to the quality and stability of the final product. We anticipate that it will take until the second half of 2014 before we will have newly produced Alferon® that can be commercially sold to meet potential patient demand in the Unites States and abroad.

 

While at December 31, 2011 and 2012, the Work-In-Process Inventory had no manufacturing steps to be undertaken at our New Brunswick, NJ facility, it will not be classified as Finished Goods unless and until the FDA confirms that the product can be commercially sold. We are unable to provide any assurances that the FDA will approve the finish product lots produced by Althea. In the absence of FDA approvals for commercial sale of product manufactured from existing Work-In-Process inventory, commercial sales of Alferon® will not resume until new batches of Alferon® API can be produced and formulated in order that finished product can be filled, finished, packaged and released by the FDA for commercial sale (see “Risks Associated With Our Business” in Item 1A. Risk Factors below for more information).

 

In the absence of FDA approvals for commercial sale of product manufactured from existing Work-In-Process inventory, commercial sales of Alferon® in the United States will not resume until new batches of Alferon® API can be produced and formulated in order that finished product can be filled, finished, packaged and released by the FDA for commercial sale.

 

MARKETING/DISTRIBUTION

 

Our marketing strategy for Ampligen® reflects the differing health care systems around the world along with the different marketing and distribution systems that are used to supply pharmaceutical products to those systems. We expect that, subject to receipt of FDA, ANMAT and/or other regulatory approval, Ampligen® may be utilized in four medical arenas: physicians’ offices; clinics; hospitals; and the home treatment setting. In preparation for the FDA’s consideration of our Ampligen® NDA, we undertook early stage development of pre-launch and launch driven marketing plans focusing on audience development, medical support and payor reimbursement initiatives which could facilitate product acceptance and utilization at the time of regulatory approval, if obtained. Similarly, we continued to consider distribution scenarios for the Specialty Pharmacy/Infusion channel which could provide market access, offer 3PL (third party logistics) capabilities and provide the requisite risk management control mechanisms. It is our intent to utilize third party service providers to execute elements of both the marketing/sales and distribution plans. As a possible option, we considered a plan to utilize a small group of Managed Market account managers to introduce the product to payor, employer and government account audiences. We believe that this approach could establish a market presence and facilitate the generation of revenue without incurring the substantial costs associated with a traditional sales force. Furthermore, Management believes that any approach considered should enable us to retain multiple options for future marketing strategies.

 

16
 

 

In December 2011, we entered into a Second Amended Adviser’s Agreement for twenty-four months with The Sage Group, Inc. ("Sage"), effective June 15, 2011, that amends and supersedes all other agreements and arrangements between the parties. Pursuant to this agreement, Sage is to assist us to identify, qualify, negotiate and close one or more licensing, partnering, alliance or similar transactions pertaining to our products and technology including, but not limited to, any and all uses of Ampligen®, Alferon® and related intellectual property as well as acquisition of companies in whole or in part and the sale or the merger of our Company (“Transactions”). In consideration for services performed or attributed to Sage resulting in Transactions, Sage is entitled to a monthly “Adviser’s Fee” of $20,000, reimbursement of preapproved expense, a one-time distribution of 200,000 Options that vest proportionately over 18 months with an exercise price of 110% of the closing price of our Stock on the NYSE MKT at the close of the day preceding the execution date of the agreement. The Agreement also allows us at our sole discretion to award a bonus for extraordinary performance or special projects not to exceed $250,000 per year, and provides for a “Success Fee” of five percent (5%) of all consideration that is capped at $5,000,000 per annum for Transactions introduced to us by Sage. A Transaction can occur during the term of the agreement or 18 months thereafter. This Agreement may be terminated by us for cause after we deliver written notice to Sage of a failure to perform and such failure is not cured within 15 days.

 

In January 2010, we engaged an Argentinean regulatory and business design entity to explore the possibility of initiating clinical trials of Alferon N Injection®, Ampligen® and Alferon® LDO during the influenza season in Argentina. On June 14, 2010, we executed a five year exclusive Sales, Marketing, Distribution and Supply Agreement for Argentina with GP Pharm Latinoamerica (“GP Pharm”), an affiliate company of Spanish GP Pharm SA. Under this Agreement, GP Pharm will be responsible for gaining regulatory approval in Argentina for Ampligen® to treat CFS in Argentina and for commercializing Ampligen® for this indication in Argentina. We granted GP Pharm the right to expand rights to sell this experimental therapeutic into other Latin America countries based upon GP Pharm achieving certain performance milestones. We also granted GP Pharm an option to market Alferon N Injection® in Argentina and other Latin America countries. Under these agreements, we will manufacture and supply Ampligen® and Alferon N Injection® to GP Pharm. On November 15, 2010, we amended our June 15, 2010 agreement with GP Pharm to include Mexico in the Territory under the Sales, Marketing, Distribution and Supply Agreement. Under this Agreement, GP Pharm Mexico will be responsible for seeking regulatory approval in Mexico for Ampligen®, an experimental therapeutic, to treat CFS in Mexico and, if approval is obtained, for commercializing Ampligen® for this indication in Mexico. We have granted GP Pharm the right to expand rights to sell this experimental therapeutic into other Latin America countries based upon GP Pharm achieving certain performance milestones.

 

Also on November 15, 2010, we executed a five year exclusive Alferon N Injection® Sales, Marketing, Distribution and Supply Agreement for Argentina and other Latin American countries with GP Pharm. The ANMAT (Administracion Nacional de Medicamentos, Alimentos y Tecnologia Medica) is the agency responsible for the national regulation of drugs, foods and medical technology in Argentina. In December 2010, GP Pharm exercised this right and in July 2011 GP Pharm submitted an application for approval to ANMAT. As a result of the efforts of GP Pharm, in January 2012 the ANMAT approved the sale and distribution of Alferon N Injection® (under the brand name “Naturaferon”) in Argentina. The receipt of the ANMAT approval is the first step of a regulatory process towards the commercial sales of Naturaferon. In February 2013, the ANMAT approved the use of Naturaferon for any patient in Argentina who fails or becomes intolerant to treatment with recombinant interferon (see “MANUFACTURING” above for more information).

 

17
 

 

On September 6, 2011 we executed an amended agreement with Armada Healthcare, LLC (“Armada”), effective August 15, 2011 through August 14, 2012, to undertake the marketing, education and sales of Alferon N Injection® throughout the United States. On August 14, 2012, the agreement with Armada was extended for one year under the same terms and conditions. Armada will also provide us with start-up and ongoing sales and marketing support.

 

Also on September 6, 2011, we executed a new agreement with licensed specialty distributor, BioRidge Pharma, LLC (”BioRidge”) to warehouse, ship and distribute Alferon N Injection® on an exclusive basis in support of U.S. sales. The term of this Agreement shall begin on the Effective Date and shall expire one (1) year thereafter unless earlier terminated in accordance with this Agreement. On August 14, 2012, the agreement with Bio Ridge was extended for one year under the same terms and conditions.

 

COMPETITION

 

RNA based products and toll-like receptors (“TLRs”) have demonstrated great promise in preclinical and limited clinical applications resulting in active research and development by large pharmaceutical companies and emerging Biotech firms. As such, our potential competitors are among the largest pharmaceutical companies in the world, are well known to the public and the medical community, and have substantially greater financial resources, product development, and manufacturing and marketing capabilities than we have.

 

These companies and their competing products may be more effective and less costly than our products. In addition, conventional drug therapy, surgery and other more familiar treatments will offer competition to our products. Furthermore, our competitors have significantly greater experience than we do in pre-clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA (in the US), European Medicines Agency (“EMA”) and Health Protection Branch ("HPB") (in Canada), and other regulatory approvals of products. Accordingly, our competitors may succeed in obtaining FDA, EMEA and HPB product approvals before we do. If any of our products receive regulatory approvals and we commence commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have no experience. Our competitors may possess or obtain patent protection or other intellectual property rights that prevent, limit or otherwise adversely affect our ability to develop or exploit our products.

 

The major pharmaceutical competitors with biotech capabilities/vaccine franchises include Pfizer, GlaxoSmithKline, Merck & Co., Novartis and AstraZeneca. Biotech competitors include Baxter International, Fletcher/CSI, AVANT Immunotherapeutics, AVI BioPharma and Genta. When we recommence sales of Alferon N Injection®, it will compete with Intron® A, an injectable from Merck & Co. that attempts to kill virus and prevent reproduction along with topical treatments that are normally applied by a doctor that have a risk of damaging the skin around the wart, such as:

·Aldara®, also known as Imiquimod®, is a cream which is marketed to boost the immune systems in an attempt to rid itself of genital warts;
·Veregen® is a herbal product made from green tea leaves which is self-administered as an ointment and is used to treat external genital warts in adult patients;
·Condylox® Solution (podofilox) and Podofin® (podophyllin resin) are liquids applied externally using a cotton applicator or finger which attempts to destroy genital warts by halting cell growth; and
·Trichloroacetic acid (TCA) or Bichloroacetic acid (BCA) are chemical treatments which attempt to externally burn off genital warts.

 

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GOVERNMENT REGULATION

 

Regulation by governmental authorities in the U.S. and foreign countries is and will be a significant factor in the manufacture and marketing of Alferon® products and our ongoing research and product development activities. Ampligen® and other products developed from the ongoing research and product development activities will require regulatory clearances prior to commercialization. In particular, new drug products for humans are subject to rigorous preclinical and clinical testing as a condition for clearance by the FDA and by similar authorities in foreign countries. The lengthy process of seeking these approvals, and the ongoing process of compliance with applicable statutes and regulations, has and will continue to require the expenditure of substantial resources. Any failure by us or our collaborators or licensees to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect the marketing of any products developed by us and our ability to receive product or royalty revenue. We have received Orphan Drug designation for certain therapeutic indications, which we believe might under certain conditions, help to accelerate the process of drug development and commercialization. Alferon N Injection® is only approved for use in intra-lesional treatment of refractory or recurring external genital warts in patients 18 years of age or older. Use of Alferon N Injection® for other applications requires regulatory approval.

 

We are subject to various federal, state and local laws, regulations and recommendations relating to such matters as safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use of and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work. Prior to our construction phase, our laboratory and production facility in New Brunswick, New Jersey was approved for the manufacture of Alferon N Injection®. While our facility had been granted approval of its BLA by the FDA for the manufacture of Alferon®, this status will need to be reaffirmed upon the completion of the facility’s enhancements. Upon completion of our enhanced manufacturing process, we believe it will again be able to obtain FDA approval. However, there can be no assurance that this facility, or facilities owned and operated by third parties that are utilized in the manufacture of our products, will obtain and/or continue to maintain FDA approval. For information about the current status of our Ampligen® NDA please see “Our Products; Ampligen®” above.

 

HUMAN RESOURCES

 

As of February 1, 2013, we had personnel consisting of 34 full-time employees and 3 part-time employees. Our employees are supported by 30 full-time and 11 part-time consultants, mostly undertaking regulatory, research and/or medical projects. Part-time personnel are paid on a per diem or monthly basis. Consultants are independent contractors that are paid on an hourly basis. 58 of the combined personnel are engaged in our research, development, clinical, and manufacturing effort with 20 performing regulatory, general administration, data processing, including bio-statistics, financial and investor relations functions. We have no union employees.

 

While we have been successful in attracting skilled and experienced scientific personnel, there can be no assurance that we will be able to attract or retain the necessary qualified employees and/or consultants in the future.

 

SCIENTIFIC ADVISORY BOARD AND DATA MONITORING COMMITTEE

 

Although we had a Scientific Advisory Board to conduct periodic meetings as needed, as previously disclosed, no Scientific Advisory Board meetings were held in the last four years. We do meet with experts from time to time in areas of clinical and scientific interest.

 

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In May 2010, we formed a Data Monitoring Committee (“DMC”) that consists of two independent regulatory and medical experts along with a Biostatistics expert. The function of the DMC is to perform independent safety and efficacy analyses on our clinical trials. During 2011 and 2012, the DMC focused its attention on the clinical trial (AMP-600) in which Ampligen® is being nasally administered in conjunction with FluMist® to healthy human volunteers at the University of Alabama at Birmingham under the auspices of Dr. Paul Goepfert. As of December 31, 2012, eight subjects have participated in this study. As required by the study’s protocol, the DMC held two meetings and has reviewed the safety data on these subjects and approved the study to proceed at the next higher dosage level.

 

ITEM 1A. Risk Factors.

 

The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this Form 10-K. Among the key factors that have a direct bearing on our results of operations are:

 

Risks Associated With Our Business

 

No assurance of successful product development.

 

Ampligen® and related products. The development of Ampligen® and our other related products is subject to a number of significant risks. Ampligen® may be found to be ineffective or to have adverse side effects, fail to receive necessary regulatory clearances, be difficult to manufacture on a commercial scale, be uneconomical to market or be precluded from commercialization by proprietary right of third parties. Our investigational products are in various stages of clinical and pre-clinical development and require further clinical studies and appropriate regulatory approval processes before any such products can be marketed. We do not know when, if ever, Ampligen® or our other products will be generally available for commercial sale for any indication. Generally, only a small percentage of potential therapeutic products are eventually approved by the FDA for commercial sale. (Please see the next Risk Factor and PART 1, ITEM I Business, “OUR PRODUCTS” “Ampligen®” above for more information).

 

Alferon N Injection®. Although Alferon N Injection® is approved for marketing in the United States for the intra-lesional treatment of refractory or recurring external genital warts in patients 18 years of age or older, to date it has not been approved for other indications. We face many of the risks discussed above, with regard to developing this product for use to treat other ailments. (Please see the next Risk Factor and PART 1, ITEM I Business, “OUR PRODUCTS” “Alferon N Injection®” above for more information).

 

Our drug and related technologies are investigational and subject to regulatory approval. If we are unable to obtain regulatory approval in a timely manner, or at all, our operations will be materially harmed and our stock adversely affected.

 

All of our drugs and associated technologies, other than Alferon N Injection®, are investigational and must receive prior regulatory approval by appropriate regulatory authorities for commercial distribution and sale and are currently legally available only through clinical trials with specified disorders. At present, Alferon N Injection® is only approved for the intra-lesional treatment of refractory or recurring external genital warts in patients 18 years of age or older. Use of Alferon N Injection® for other indications will require regulatory approval.

 

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Our products, including Ampligen®, are subject to extensive regulation by numerous governmental authorities in the United States (“U.S.”) and other countries, including, but not limited to, the FDA in the U.S., the Health Protection Branch (“HPB”) of Canada, the Agency for the European Medicines Agency (“EMA”) in Europe and the Administracion Nacional de Medicamentos, Alimentos y Tecnologia Medica (“ANMAT”) in Argentina. Obtaining regulatory approvals is a rigorous and lengthy process and requires the expenditure of substantial resources. In order to obtain final regulatory approval of a new drug, we must demonstrate to the satisfaction of the regulatory agency that the product is safe and effective for its intended uses and that we are capable of manufacturing the product to the applicable regulatory standards. We require regulatory approval in order to market Ampligen® or any other proposed product and receive product revenues or royalties. We cannot assure you that Ampligen® will ultimately be demonstrated to be safe and efficacious. While Ampligen® is authorized for use in clinical trials in the U.S., we cannot assure you that additional clinical trial approvals will be authorized in the United States or in other countries, in a timely fashion or at all, or that we will complete these clinical trials. In addition, although Ampligen® has been authorized by the FDA for treatment use under certain conditions, including provision for cost recovery, there can be no assurance that such authorization will continue in effect.

 

On February 1, 2013, we received a Complete Response Letter (“CRL”) from the FDA declining to approve our Ampligen® NDA for the treatment of CFS. The FDA communicated that we should conduct at least one additional clinical trial, complete various nonclinical studies and perform a number of data analysis. For more detailed information about the current status of our Ampligen® NDA please see “Our Products; Ampligen®” in Item 1. Business above.

 

The FDA's regulatory review and approval process is extensive, lengthy, expensive and inherently uncertain. To receive approval for a product candidate, we must, among other things, demonstrate to the FDA's satisfaction with substantial evidence from well-controlled pre-clinical and clinical trials that the product candidate is both safe and effective for each indication for which approval is sought. Before we can sell Ampligen® for any use, or Alferon® for any use other than as Alferon N Injection® for treatment of refractory or recurring genital warts, we will need to file the appropriate NDA with the FDA in the U.S. and the appropriate regulatory agency outside of the U.S. where we intend to market and sell such products. At present the only NDA we have filed with the FDA is the NDA for the use of Ampligen® to treat CFS. As discussed in the prior paragraph, the FDA declined to approve this NDA and indicated that we needed to conduct additional work. Therefore, ultimate FDA approval, if any, may be delayed by several years and may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be successful or considered sufficient by the FDA for approval or even to make our applications approvable. If any of these outcomes occur, we may be forced to abandon one or more of our future applications for approval, which might significantly harm our business and prospects. As a result, we cannot predict if or when we might receive regulatory approval for the use of Ampligen® to treat CFS or for the use of any other products. Even if regulatory approval from the FDA is received for the use of Ampligen® to treat CFS or eventually, for the use of any other product, any approvals that we obtain could contain significant limitations in the form of narrow indications, patient populations, warnings, precautions or contra-indications or other conditions of use, or the requirement that we implement a risk evaluation and mitigation strategy. In such an event, our ability to generate revenues from such products could be greatly reduced and our business could be harmed.

 

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Even if we believe that data collected from our preclinical studies and clinical trials of our product candidate are promising, these data have not been, and may not be in the future, sufficient to support marketing approval by the FDA, and regulatory interpretation of these data and procedures may continue to be unfavorable.

 

To the extent that we are required by the FDA pursuant to the Ampligen® NDA to conduct additional studies and take additional actions, approval of any applications that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be successful or considered sufficient by the FDA for approval or even to make our applications approvable. If any of these outcomes occur, we may be forced to abandon one or more of our future applications for approval, which might significantly harm our business and prospects. As a result, we cannot predict when or whether regulatory approval will be obtained for any product candidate we develop.

 

Obtaining approval of a NDA by the FDA, or a comparable foreign regulatory authority, is inherently uncertain. Even after completing clinical trials and other studies, a product candidate could fail to receive regulatory approval for many reasons, including the following:

·not be able to demonstrate to the satisfaction of the FDA that our product candidate is safe and effective for any indication;
·the FDA may disagree with the design or implementation of our clinical trials or other studies;
·the results of the clinical trials or other studies may not demonstrate that a product candidate's clinical and other benefits outweigh its safety risks;
·the FDA may disagree with our interpretation of data from clinical trials or other studies;
·the data collected from clinical trials and other studies of a product candidate may not be sufficient to support the submission of a NDA;
·the approval policies or regulations of the FDA may significantly change in a manner rendering our clinical and other study data insufficient for approval; and
·the FDA may not approve the proposed manufacturing processes and facilities for a product candidate.

 

In April 2012, FDA reviewers raised certain questions about the status of our existing lots of older Work-In-Process Alferon® materials and API, which would need to be released by FDA before those materials could be used in commercial product. We are unable to provide any assurances that the FDA will approve the final inventory lots produced by Althea. In the absence of FDA approvals for product manufactured from existing inventory, commercial sales of Alferon® will not resume until new batches of Alferon® inventory and API can be produced, filled and finished, and released by the FDA for commercial sale. (Please see PART 1, ITEM I Business, “OUR PRODUCTS” “Alferon N Injection®” above for more information).

 

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Alferon® LDO has been approved for pre-clinical testing for possible use as prophylaxis against influenza. While the studies to date have been encouraging, preliminary testing in the laboratory and in animal models is not necessarily predictive of successful results in clinical testing or human treatment. No assurance can be given that similar results will be observed in clinical trials. Use of Alferon® as a possible treatment of influenza requires prior regulatory approval. In October 2009, we originally submitted a protocol to the FDA proposing to conduct a Phase II, double-blind, adaptive-design, randomized, placebo-controlled, dose-ranging study of Alferon® LDO for the prophylaxis and treatment of seasonal and pandemic influenza of more than 200 subjects. In December 2010, the FDA authorized this Phase II, double-blind, adaptive-design, randomized, placebo-controlled, dose-ranging study of Alferon® LDO for the prophylaxis and treatment of seasonal and pandemic influenza of more than 200 subjects. Our Phase II study has been delayed. The outcome of this confirmatory study, if and when resumed, will allow us to better evaluate the potential effectiveness of this product and to proceed with this study of seasonal and pandemic influenza. We are unable to provide any assurances that the Phase II Alferon® LDO study for the prophylaxis and treatment of seasonal and pandemic influenza will be undertaken.

 

If we are unable to gain necessary FDA approvals related to Ampligen® and Alferon® on a timely basis, our operations most likely will be materially and/or adversely affected. Additionally, if we are unable to generate the additional data, successfully complete inspections or obtain approvals as required by the FDA on a timely manner, or at all, determine that any of our clinical studies are not cost/justified to undertake or if, for that or any other reason, Ampligen®, Alferon® or one of our other products or production processes do not receive necessary regulatory approval in the U.S. or elsewhere:

·Our ability to generate revenues to sustain our operations will be substantially impaired, which would increase the likelihood that we would need to obtain additional financing for our other development efforts;
·Our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all; and
·Our profitability would be delayed, our business will be materially harmed and our stock price may be adversely affected.

 

Biotechnology stock prices, including our stock price, have declined significantly in certain instances where companies have failed to meet expectations with respect to FDA approval or the timing for FDA approval.

 

We may continue to incur substantial losses and our future profitability is uncertain.

 

We began operations in 1966 and last reported net profit from 1985 through 1987. Since 1987, with a major emphasis on new drug diagnostic and development, we have incurred substantial operating losses, as we pursued our clinical trial effort to get our experimental drug, Ampligen®, approved. As of December 31, 2012, our accumulated deficit was approximately $(244,094,000). We have not yet generated significant revenues from our products and may incur substantial and increased losses in the future. We cannot assure that we will ever achieve significant revenues from product sales or become profitable. We require, and will continue to require, the commitment of substantial resources to develop our products. We cannot assure that our product development efforts will be successfully completed or that required regulatory approvals will be obtained or that any products will be manufactured and marketed successfully, or be profitable.

 

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We most likely will require additional financing which may not be available. The limitation on the number of shares of common stock available for financing without prior stockholder approval eventually may hinder our ability to raise additional funding.

 

The development of our products requires the commitment of substantial resources to conduct the time consuming research, preclinical development, and clinical trials that are necessary to bring pharmaceutical products to market. As of December 31, 2012, we had approximately $43,953,000 in cash, cash equivalents and marketable securities (inclusive of approximately $14,500,000 in Marketable Securities collateralizing certain debts). However, if we are unable to commercialize and sell Ampligen® or Alferon® LDO and/or recommence material sales of Alferon N Injection®, our operations, financial position and liquidity may be adversely impacted.

 

In its CRL, the FDA communicated that Hemispherx should conduct at least one additional clinical trial, complete various nonclinical studies and perform a number of data analysis. Until we undertake the end-of-review conference(s) with the FDA, we are unable to reasonably estimate the nature, costs, necessary efforts to obtain FDA clearance or anticipated completion dates of any additional clinical study or studies. Utilizing the industry norms for undertaking a Phase III clinical study, we estimate upon acceptance of the study’s design that it would take approximately 18 months to three years to complete a new well-controlled Ampligen® clinical study for resubmission to the FDA. It can be reasonably anticipated that the time and cost to undertake clinical trial(s), studies and data analysis are beyond our current financial resources without gaining access to additional funding. The actual duration to complete the clinical study may be different based on the length of time it takes to design the study and obtain FDA’s acceptance of the design, the final design of an acceptable Phase III clinical study design, availability of suitable participants and clinical sites along with other factors that could impact the implementation of the study, analysis of results or requirements of the FDA and/or other governmental organizations.

 

Given the challenging economic conditions, we continue to review every aspect of our operations for cost and spending reductions to assure our long-term financial stability while maintaining the resources necessary to achieve our primary objectives of obtaining NDA approval of Ampligen® along with the manufacturing, marketing and distribution of our products, including Alferon N Injection®. We may also need additional funds to eventually commercialize and sell Ampligen® or Alferon® LDO and/or recommence and increase sales of Alferon N Injection® or our other products. We anticipate considering multiple options as to securing other sources of funding, including but not limited to such methods as the sales of additional equity, licensing agreements, partnering with other organizations debt financing or other sources of capital.

 

In this regard, on July 23, 2012, we entered into a New Equity Distribution Agreement with Maxim (the “New Maxim EDA”) pursuant to which we may sell up to $75,000,000 worth of our shares of Common Stock from time to time through Maxim, as sales agent (See Part I; Item 2: “Management's Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources” above). We cannot assure how much funding will be obtained from the New Maxim EDA or whether it will be sufficient in conjunction with current financial resources to permit us to take all actions needed to obtain FDA approval for Ampligen® and manufacturing, commercialization, marketing and distribution of our products.

 

Our ability to raise additional funds from the sale of equity securities may be limited due to limitations on our ability to sell stock for funding purposes. Pursuant to our Amended and Restated Certificate of Incorporation, the purpose for which 75,000,000 of 150,000,000 of our authorized shares (the “Restricted Shares”) may be utilized is limited. Specifically, without stockholder approval, the Restricted Shares can only be issued where such issuance would be primarily in connection with strategic transactions or other non-fundraising purpose that met certain significant criteria. In this regard, approximately 66,862,000 shares are authorized but unissued and unreserved at December 31, 2012 with an additional 75,000,000 of the Restricted Shares approved by Stockholders for certain generally defined business purposes.

 

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There can be no assurances that we can obtain the requisite stockholder approval to use any additional Restricted Shares for funding purposes or raise adequate funds from other sources. If we are unable to obtain additional funding, through the New Maxim EDA or otherwise, our ability to develop our products, commercially produce inventory or continue our operations may be materially adversely affected.

 

Our Alferon N Injection® Commercial Sales were halted due to lack of finished goods inventory. If we are unable to gain the necessary FDA approvals related to Alferon®, our operations most likely will be materially and/or adversely affected.

 

Commercial sales of Alferon N Injection® were halted in March 2008 when our finished goods inventory expired. The production of Alferon N Injection® from the Work-In-Process Inventory was restarted in May 2010, continued into January 2011 with its conversion into API and is completed for the related Final Lot Release Test. To fill and finish Alferon N Injection® Drug Product, we required a FDA approved third party CMO in Althea.

 

In April 2012, FDA reviewers raised certain questions about the status of our existing lots of older Work-In-Process Alferon® materials and API, which would need to be released by FDA before those materials could be used in commercial product. We are unable to provide any assurances that the FDA will approve the final inventory lots of Alferon® produced by Althea. In the absence of FDA approvals for commercial sale of product manufactured from existing inventory, commercial sales of Alferon® will not resume until new batches of Alferon® inventory and API can be produced, filled and finished, and released by the FDA for commercial sale. Please see “There is no assurance that our existing Alferon N Injection® inventory will receive Release Approval from the FDA or that our manufacturing facility will again be granted a BLA certification by the FDA upon completion of the manufacturing enhancements or return to commercial, large-scale production” below for more information.

 

While the facility had been granted approval of its Biological License Application by the FDA for Alferon®, this status will need to be reaffirmed upon the completion of the facility’s upgrades for Alferon®. We cannot provide any guarantee that the facility will necessarily pass a pre-approval inspection for Ampligen® or Alferon® manufacture, which are conducted in separately dedicated areas within the overall New Brunswick manufacturing complex.

 

If we are unable to gain the necessary FDA approvals related to the manufacturing process and/or final product of new Alferon® inventory, our operations most likely will be materially and/or adversely affected. For more information on Alferon N Injection® regarding potential commercial sales, please see “Alferon N Injection®” in Item 2: “Management's Discussion and Analysis of Financial Condition and Results of Operations; Overview; General”.

 

In light of these contingencies, there can be no assurances that the approved Alferon N Injection® product will be returned to production on a timely basis, if at all, or that if and when it is again made commercially available, it will return to prior sales levels.

 

We may not be profitable unless we can protect our patents and/or receive approval for additional pending patents.

 

We need to preserve and acquire enforceable patents covering the use of Ampligen® for a particular disease in order to obtain exclusive rights for the commercial sale of Ampligen® for such disease. We obtained all rights to Alferon N Injection®, and we plan to preserve and acquire enforceable patents covering its use for existing and potentially new diseases. Our success depends, in large part, on our ability to preserve and obtain patent protection for our products and to obtain and preserve our trade secrets and expertise. Certain of our know-how and technology is not patentable, particularly the procedures for the manufacture of our experimental drug, Ampligen®. We also have been issued patents on the use of Ampligen® in combination with certain other drugs for the treatment of chronic Hepatitis B virus, chronic Hepatitis C virus, and a patent which affords protection on the use of Ampligen® in patients with Chronic Fatigue Syndrome. We have not yet been issued any patents in the United States for the use of Ampligen® as a sole treatment for any of the cancers which we have sought to target.

 

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One of our Alferon® composition patents (#5,676,942) expires in April 2013. This patent relates to the manufacturing process for Alferon® API, a complex mixture of natural interferon species that is manufactured from human leukocytes obtained from human blood donors. In addition, while it is the current standard by the FDA to treat biological drug products like interferon as “Well Characterized” biologics, a process for which chemical entities can have their identity, purity, impurities, potency, and quality controlled by chemical testing, Alferon®, as a natural interferon, does not lend itself well to such testing. Moreover, FDA continues to require that each lot or Alferon we produce be tested and released by the FDA before it can distributed for commercial sales. Because of the complexity of the Alferon manufacturing process and these additional regulatory requirements, we believe that potential manufacturers of generic, or so-called “bio-similar,” drug products are focused on developing recombinant interferon products, rather than natural interferon products. For these reasons, we believe the expiration of this Alferon® composition patent in April 2013 should have no or little impact on the Company.

 

Alferon® composition patent #5,676,942, relates to a methodology by which we no longer produce the product.

 

We cannot assure that our competitors will not seek and obtain patents regarding the use of similar products in combination with various other agents, for a particular target indication prior to our doing so. If we cannot protect our patents covering the use of our products for a particular disease, or obtain additional patents, we may not be able to successfully market our products.

 

The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves complex legal and factual questions.

 

To date, no consistent policy has emerged regarding the breadth of protection afforded by pharmaceutical and biotechnology patents. There can be no assurance that new patent applications relating to our products, process or technology will result in patents being issued or that, if issued, such patents will afford meaningful protection against competitors with similar technology. It is generally anticipated that there may be significant litigation in the industry regarding patent and intellectual property rights. Such litigation could require substantial resources from us and we may not have the financial resources necessary to enforce the patent rights that we hold. No assurance can be made that our patents will provide competitive advantages for our products, process and technology or will not be successfully challenged by competitors. No assurance can be given that patents do not exist or could not be filed which would have a materially adverse effect on our ability to develop or market our products or to obtain or maintain any competitive position that we may achieve with respect to our products. Our patents also may not prevent others from developing competitive products or process using related technology.

 

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There can be no assurance that we will be able to obtain necessary licenses if we cannot enforce patent rights we may hold. In addition, the failure of third parties from whom we currently license certain proprietary information or from whom we may be required to obtain such licenses in the future, to adequately enforce their rights to such proprietary information, could adversely affect the value of such licenses to us.

 

If we cannot enforce the patent rights we currently hold we may be required to obtain licenses from others to develop, manufacture or market our products. There can be no assurance that we would be able to obtain any such licenses on commercially reasonable terms, if at all. We currently license certain proprietary information from third parties, some of which may have been developed with government grants under circumstances where the government maintained certain rights with respect to the proprietary information developed. No assurances can be given that such third parties will adequately enforce any rights they may have or that the rights, if any, retained by the government will not adversely affect the value of our license.

 

There is no guarantee that our trade secrets will not be disclosed or known by our competitors.

 

To protect our rights, we require all employees and certain consultants to enter into confidentiality agreements with us. There can be no assurance that these agreements will not be breached, that we would have adequate and enforceable remedies for any breach, or that any trade secrets of ours will not otherwise become known or be independently developed by competitors.

 

We have limited marketing and sales capability. If we are unable to obtain additional distributors and our current and future distributors do not market our products successfully, we may not generate significant revenues or become profitable.

 

We have limited marketing and sales capability. We are dependent upon existing and, possibly future, marketing agreements and third party distribution agreements for our products in order to generate significant revenues and become profitable. As a result, any revenues received by us will be dependent in large part on the efforts of third parties, and there is no assurance that these efforts will be successful.

 

Our commercialization strategy for Ampligen® for CFS, if and when it is approved for marketing and sale by the FDA, may include licensing/co-marketing agreements utilizing the resources and capacities of a strategic partner(s). We continue to seek world-wide marketing partner(s), with the goal of having a relationship in place before approval is obtained. In parallel to partnering discussions, appropriate premarketing activities will be undertaken. It is our current intention to control manufacturing of Ampligen® on a world-wide basis.

 

Our commercialization strategy for Alferon N Injection® may include the utilization of internal functions and/or licensing/co-marketing agreements that would utilize the resources and capacities of one or more strategic partners. Accordingly, we have engaged Armada Healthcare to undertake the marketing, education and sales of Alferon N Injection® throughout the United States along with GP Pharm for both Ampligen® and Alferon® in Argentina along with other South and Latin American countries.

 

We cannot assure that our U.S. or foreign marketing strategy will be successful or that we will be able to establish future marketing or third party distribution agreements on terms acceptable to us, or that the cost of establishing these arrangements will not exceed any product revenues. Our inability to establish viable marketing and sales capabilities would most likely have a materially adverse effect on us. There can be no assurances that the approved Alferon N Injection® product will be returned to prior sales levels.

 

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There are no long-term agreements with suppliers of required materials and services for Ampligen® and there are a limited number of raw material suppliers. If we are unable to obtain the required raw materials and/or services, we may not be able to manufacture Ampligen®.

 

A number of essential raw materials that are used in the production of Ampligen® and packaging materials are used in the fill and finish process. We do not have, but continue to work towards having long-term agreements for the supply of such materials, when possible. There can be no assurance we can enter into long-term supply agreements covering essential materials on commercially reasonable terms, if at all.

 

There are a limited number of suppliers in the United States available to provide the raw and packaging materials for use in manufacturing Ampligen®. At present, we do not have any agreements with third parties for the supply of any of these materials. We have established relevant manufacturing operations within our New Brunswick, New Jersey facility for the production of Ampligen® polymers from raw materials in order to obtain a more consistent manufacturing basis in the quantities necessary for clinical testing. In September 2011 and similar to our prior agreements, Hollister-Stier has agreed to undertake the manufacturing sets to formulate, fill, finish and package Ampligen® from the key polymers that we would supply. Hollister-Stier would have the right of first refusal to manufacture certain Ampligen® related products. For more information on Ampligen®, please see the “Ampligen®” and “Manufacturing” sections in Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations; Overview; General.

 

If we are unable to obtain or manufacture the required materials, and/or procure services needed in the final steps in the manufacturing process, we may be unable to manufacture Ampligen®. The costs and availability of products and materials we need for the production of Ampligen® are subject to fluctuation depending on a variety of factors beyond our control, including competitive factors, changes in technology, ownership of intellectual property, FDA and other governmental regulations. There can be no assurance that we will be able to obtain such products and materials on terms acceptable to us or at all.

 

There are a limited number of organizations in the United States available to provide the final manufacturing steps of formulation, fill, finish and packing sets for Alferon N Injection® and Ampligen®.

 

There are a limited number of organizations in the United States available to provide the final steps in the manufacturing for Alferon N Injection® and Ampligen®. To formulate, fill, finish and package our products (“fill and finish”), we require a FDA approved third party CMO.

 

In January 2012, we agreed to a Technology, Transfer, Validation and Commercial Supply Agreement with Althea Technologies, Inc. regarding the fill and finish process for Alferon N Injection® (see “MANUFACTRING” in Item 1. Business above). As of December 31, 2012, all of our lots of Alferon® Work-In-Process Inventory have completed the fill, finish and packaging process. However, Process Validation of Alferon® Work-In-Process lots need to be completed. With our redirection of resources to the Ampligen® NDA submission, this process had been delayed but is now underway. We are unable to provide any assurances that the FDA will approve finish product lots produced by Althea.

 

Pursuant our Supply Agreement with Hollister-Stier, they will formulate, fill, finish and package Ampligen® from the key raw materials that we would supply. We are unable to provide any assurances that the FDA will approve the inventory manufactured by us or produced by Hollister-Stier. If this finish goods inventory is not granted approval by the FDA, our operations may be materially adversely affected. This Supply Agreement, as amended extends through March 11, 2014.

 

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If we are unable to procure services needed in the final steps in the manufacturing process, we may be unable to manufacture Alferon N Injection® and/or Ampligen®. The costs and availability of products and materials we need for the production of Ampligen® and the commercial production of Alferon N Injection® and other products which we may commercially produce are subject to fluctuation depending on a variety of factors beyond our control, including competitive factors, changes in technology, and FDA and other governmental regulations and there can be no assurance that we will be able to obtain such products and materials on terms acceptable to us or at all. For more information on Ampligen® and Alferon N Injection®, please see “Ampligen®”, “Alferon N Injection®” and “Manufacturing” in Item 2: “Management's Discussion and Analysis of Financial Condition and Results of Operations; Overview; General”.

 

There is no assurance that our existing Alferon N Injection® inventory will receive Release Approval from the FDA or that our manufacturing facility will again be granted a BLA certification by the FDA upon completion of the manufacturing enhancements or return to commercial, large-scale production.

 

The production of Alferon N Injection® from the Work-In-Process Inventory was restarted in May 2010, continued into January 2011 with its conversion into API and is completed for the related Final Lot Release Test.

 

The production of new Alferon® API inventory will not commence until the capital improvement and validation phases are complete at the New Brunswick, NJ manufacturing facility. Due to the necessity to redirect our resources to the Ampligen® NDA application, the validation phase of the Alferon® manufacturing project has been delayed but is again underway. While the facility had been granted approval of its Biological License Application (“BLA”) by the FDA for Alferon®, this status will need to be reaffirmed upon the completion of the facility’s enhancements prior to commercial sale of newly produced inventory product. Once we have obtained a reaffirmation of FDA BLA status and have begun production of new Alferon® API, the FDA will be required to provide approval as to the quality and stability of the final product. We anticipate that it will take until the second half of 2014 before we will have newly produced Alferon® that can be commercially sold in the Unites States. For more information, please see “Alferon N Injection®” and “Manufacturing” in Item 1: “Business”. There can be no assurance the BLA status will be recertified by the FDA upon the completion of the enhancement process or that the manufacturing facility will return to commercial, large-scale production for Alferon®. Additionally, there can be no assurance that the capital improvements will be completed on a timely basis or successfully, that any given product will be determined to be safe and effective, or capable of being manufactured under applicable quality standards.

 

Only if and when our BLA status is recertified by the FDA to produce new lots of Alferon® at our enhanced manufacturing facility can batches of Alferon® API can be produced, formulated, filled, finished, packaged and then approved for release by the FDA. We are unable to provide any assurances that the FDA will approve our enhanced manufacturing process and/or newly created finish product lots. Without FDA approval, our Alferon N Injection® will not be considered suitable for commercial sales.

 

In light of these contingencies, there can be no assurances that the approved Alferon N Injection® product will be returned to commercial production or sale on a timely basis, if at all, or that if and when it is again made commercially available, it will return to prior sales levels.

 

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There is no assurance that upon successful manufacture of a drug on a limited scale basis for investigational use will lead to a successful transition to commercial, large-scale production.

 

Changes in methods of manufacturing, including commercial scale-up, may affect the chemical structure of Ampligen® and other RNA drugs, as well as their safety and efficacy. The transition from limited production of pre-clinical and clinical research quantities to production of commercial quantities of our products will involve distinct management and technical challenges and may require additional management, technical personnel and capital to the extent such manufacturing is not handled by third parties. While we believe that the Company could successfully upgrade our production capability at our New Brunswick, NJ facility in a commercial scale-up of Ampligen®, there can be no assurance that our manufacturing will be successful or that any given product will be determined to be safe and effective, or capable of being manufactured under applicable quality standards, economically, and in commercial quantities, or successfully marketed.

 

We have limited manufacturing experience for Ampligen® and Alferon®. We may not be profitable unless we can produce Ampligen®, Alferon® or other products in commercial quantities at costs acceptable to us.

 

Satisfactory inspection by the FDA of both our Ampligen® and Alferon® manufacturing process is required before commercial sale of project would be allowed. The CRL from the FDA on February 1, 2013 requests evaluation of variation between lots of Ampligen® tested in the development process and recommends tighter control of the Ampligen® manufacturing process. We cannot provide any guarantee that the facility will pass a FDA pre-approval inspection for Ampligen® or Alferon® manufacture, which are conducted in separately dedicated areas within the overall New Brunswick manufacturing complex. The failure to obtain FDA approval for either of our manufacturing process would most likely have a materially adverse impact upon us.

 

Ampligen® has been produced to date in limited quantities for use in our clinical trials, and we are dependent upon a qualified third party supplier for the manufacturing, filling, finish and packaging process. The failure to continue these arrangements or to achieve other such arrangements on satisfactory terms could have a material adverse effect on us.

 

We continue to undertake at our New Brunswick, NJ facility a major capital improvement program to upgrade our manufacturing capability to produce bulk quantities of Alferon N Injection® API. The facility enhancement project is in its final stage with construction complete and a Certificate of Approval issued by the Construction Official of New Brunswick, NJ for the work completed. The production of new API inventory will not commence until the capital improvement and validation phases are complete. Due to the necessity to redirect our resources to the Ampligen® NDA application process and efforts towards the pre-approval inspection for Ampligen® manufacturing, the validation phase of the Alferon® manufacturing project has been delayed. While the facility had been granted approval of its BLA by the FDA for Alferon®, this status will need to be reaffirmed upon the completion of the facility’s upgrades for Alferon®. In light of these contingencies, there can be no assurances that the approved Alferon N Injection® product will be returned to production on a timely basis, if at all. The failure to obtain FDA approval of any of our manufacturing process would most likely have a materially adverse impact upon us.

 

Also to be successful, our products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. We believe, but cannot assure, that our enhancements to our manufacturing facilities will be adequate for our future needs for the production of our proposed products for large-scale commercialization. We intend to ramp up our existing facility and/or utilize third party facilities if and when the need arises or, if we are unable to do so, to build or acquire commercial-scale manufacturing facilities. We will need to comply with regulatory requirements for such facilities, including those of the FDA pertaining to cGMP requirements or maintaining our BLA status. There can be no assurance that such facilities can be used, built, or acquired on commercially acceptable terms, or that such facilities, if used, built, or acquired, will be adequate for the production of our proposed products for large-scale commercialization or our long-term needs.

 

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We have never produced Ampligen®, Alferon® or any other products in large commercial quantities. We must manufacture our products in compliance with regulatory requirements in large commercial quantities and at acceptable costs in order for us to be profitable. We intend to utilize third party manufacturers and/or facilities if and when the need arises or, if we are unable to do so, to build or acquire commercial-scale manufacturing facilities. If we cannot manufacture commercial quantities of Ampligen® and/or Alferon®, or continue to maintain third party agreements for its manufacture at costs acceptable to us, our operations will be significantly affected. If and when the Ampligen® NDA is approved, we may need to find an additional vendor to manufacture the product for commercial sales. Also, each production lot of Alferon N Injection® is subject to FDA review and approval prior to releasing the lots to be sold. This review and approval process could take considerable time, which would delay our having product in inventory to sell, nor can we provide any assurance as to the receipt of FDA approval of our finished inventory product. There can be no assurances that the Ampligen® and/or Alferon® can be commercially produced at costs acceptable to us.

 

Rapid technological change may render our products obsolete or non-competitive.

 

The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research and development capabilities than us, as well as substantial marketing, financial and managerial resources, and represent significant competition for us. There can be no assurance that developments by others will not render our products or technologies obsolete or noncompetitive or that we will be able to keep pace with technological developments.

 

Our products may be subject to substantial competition.

 

Ampligen®. Competitors may be developing technologies that are, or in the future may be, the basis for competitive products. Some of these potential products may have an entirely different approach or means of accomplishing similar therapeutic effects to products being developed by us. These competing products may be more effective and less costly than our products. In addition, conventional drug therapy, surgery and other more familiar treatments may offer competition to our products. Furthermore, many of our competitors have significantly greater experience than us in preclinical testing and human clinical trials of pharmaceutical products and in obtaining FDA, HPB and other regulatory approvals of products. Accordingly, our competitors may succeed in obtaining FDA, HPB or other regulatory product approvals more rapidly than us. There are no drugs approved for commercial sale with respect to treating CFS in the United States. The dominant competitors with drugs to treat disease indications in which we plan to address include Pfizer, GlaxoSmithKline, Merck & Co., Novartis and AstraZeneca. Biotech competitors include Baxter International, Fletcher/CSI, AVANT Immunotherapeutics, AVI BioPharma and Genta. These potential competitors are among the largest pharmaceutical companies in the world, are well known to the public and the medical community, and have substantially greater financial resources, product development, and manufacturing and marketing capabilities than we have. Although we believe our principal advantage is the unique mechanism of action of Ampligen® on the immune system, we cannot assure that we will be able to compete.

 

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Alferon N Injection®. Our competitors are among the largest pharmaceutical companies in the world, are well known to the public and the medical community, and have substantially greater financial resources, product development, and manufacturing and marketing capabilities than we have. Alferon N Injection® currently competes with Merck’s injectable recombinant alpha interferon product (INTRON® A) for the treatment of genital warts. In addition, other pharmaceutical firms offer self-administered topical cream, for the treatment of external genital and perianal warts such as Graceway Pharmaceuticals (Aldara®), Watson Pharma (Condylox®) and MediGene (Veregen®). Alferon N Injection® also competes with surgical, chemical, and other methods of treating genital warts. We cannot assess the impact products developed by our competitors, or advances in other methods of the treatment of genital warts, will have on the commercial viability of Alferon N Injection®. If and when we obtain additional approvals of uses of this product, we expect to compete primarily on the basis of product performance. Our competitors have developed or may develop products (containing either alpha or beta interferon or other therapeutic compounds) or other treatment modalities for those uses. There can be no assurance that, if we are able to obtain regulatory approval of Alferon N Injection® for the treatment of new indications, we will be able to achieve any significant penetration into those markets. In addition, because certain competitive products are not dependent on a source of human blood cells, such products may be able to be produced in greater volume and at a lower cost than Alferon N Injection®. Currently, our wholesale price on a per unit basis of Alferon N Injection® is higher than that of the competitive recombinant alpha and beta interferon products.

 

General. Other companies may succeed in developing products earlier than we do, obtaining approvals for such products from the FDA more rapidly than we do, or developing products that are more effective than those we may develop. While we will attempt to expand our technological capabilities in order to remain competitive, there can be no assurance that research and development by others or other medical advances will not render our technology or products obsolete or non-competitive or result in treatments or cures superior to any therapy we develop.

 

Possible side effects from the use of Ampligen® or Alferon N Injection® could adversely affect potential revenues and physician/patient acceptability of our product.

 

Ampligen®. We believe that Ampligen® has been generally well tolerated with a low incidence of clinical toxicity, particularly given the severely debilitating or life threatening diseases that have been treated. A mild flushing reaction has been observed in approximately 15-20% of patients treated in our various studies. This reaction is occasionally accompanied by a rapid heart beat, a tightness of the chest, urticaria (swelling of the skin), anxiety, shortness of breath, subjective reports of “feeling hot”, sweating and nausea. The reaction is usually infusion-rate related and can generally be controlled by reducing the rate of infusion. Other adverse side effects include liver enzyme level elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash, visual disturbances, slow or irregular heart rate, decreases in platelets and white blood cell counts, anemia, dizziness, confusion, elevation of kidney function tests, occasional temporary hair loss and various flu-like symptoms, including fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side effects typically subside within several months.

 

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The FDA in its February 1, 2013, CRL set forth the reasons for not approving Ampligen at this time and provided recommendations to address certain of the outstanding issues. The Agency stated that the submitted data do not provide substantial evidence of efficacy of Ampligen® for the treatment of CFS and that the data do not provide sufficient information to determine whether the product is safe for use in CFS due to the limited size of the safety database and multiple discrepancies within the submitted data.

 

If approved, one or more of the potential side effects of the drug might deter usage of Ampligen® in certain clinical situations and therefore, could adversely affect potential revenues and physician/patient acceptability of our product.

 

Alferon N Injection®. At present, Alferon N Injection® is only approved for the intra-lesional (within the lesion) treatment of refractory or recurring external genital warts in adults. In clinical trials conducted for the treatment of genital warts with Alferon N Injection®, patients did not experience serious side effects; however, there can be no assurance that unexpected or unacceptable side effects will not be found in the future for this use or other potential uses of Alferon N Injection® which could threaten or limit such product’s usefulness.

 

We may be subject to product liability claims from the use of Ampligen®, Alferon N Injection®, or other of our products which could negatively affect our future operations. We have limited product liability insurance.

 

We maintain Products Liability and Clinical Trial insurance coverage world-wide for Ampligen® and Alferon®. However even with retaining Products Liability and Clinical Trial insurance coverage for Ampligen®, Alferon N Injection® and Alferon® LDO, a claim against the products could have a materially adverse effect on our business and financial condition.

 

We face an inherent business risk of exposure to product liability claims in the event that the use of Ampligen®, Alferon N Injection® or other of our products results in adverse effects. This liability might result from claims made directly by patients, hospitals, clinics or other consumers, or by pharmaceutical companies or others manufacturing these products on our behalf. Our future operations may be negatively affected from the litigation costs, settlement expenses and lost product sales inherent to these claims. While we will continue to attempt to take appropriate precautions, we cannot assure that we will avoid significant product liability exposure.

 

The loss of services of key personnel including Dr. William A. Carter could hurt our chances for success.

 

Our success is dependent on the continued efforts of our staff, especially certain doctors and researchers along with the continued efforts of Dr. William A. Carter because of his position as a pioneer in the field of nucleic acid drugs, his being the co-inventor of Ampligen®, and his knowledge of our overall activities, including patents and clinical trials. The loss of the services of Dr. Carter or other personnel key to our operations, could have a material adverse effect on our operations and chances for success. As a cash conservation measure, we have elected to discontinue the Key Man life insurance on the life of Dr. Carter. An employment agreement continues to exist with Dr. Carter that, as amended, runs until December 31, 2016. However, Dr. Carter has the right to terminate his employment upon not less than 30 days prior written notice. The loss of Dr. Carter or other key personnel or the failure to recruit additional personnel as needed could have a materially adverse effect on our ability to achieve our objectives.

 

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Uncertainty of health care reimbursement for our products.

 

Our ability to successfully commercialize our products will depend, in part, on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and from time to time legislation is proposed, which, if adopted, could further restrict the prices charged by and/or amounts reimbursable to manufacturers of pharmaceutical products. We cannot predict what, if any, legislation will ultimately be adopted or the impact of such legislation on us. There can be no assurance that third party insurance companies will allow us to charge and receive payments for products sufficient to realize an appropriate return on our investment in product development.

 

There are risks of liabilities associated with handling and disposing of hazardous materials.

 

Our business involves the controlled use of hazardous materials, carcinogenic chemicals, flammable solvents and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply in all material respects with the standards prescribed by applicable regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident or the failure to comply with applicable regulations, we could be held liable for any damages that result, and any such liability could be significant. We do not maintain insurance coverage against such liabilities.

 

A Securities Federal Class Action and Two Shareholder Derivative Actions Have Been Filed Against Us and We May Be Subject to Civil Liabilities.

 

As described below in Item 3. Legal Proceedings, paragraphs (a), (b) and (c), three actions have been filed against Hemispherx and certain of its Officers and Directors: a putative class action alleging violations of the federal securities laws and seeking monetary damages, costs, and attorneys’ fees; and two shareholder derivative actions alleging various state law breach of fiduciary duty claims and seeking monetary damages, costs, attorneys’ fees, and equitable and injunctive relief. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management.

 

The existence of these proceedings could have a material adverse effect on our ability to access the capital markets to raise additional funds. While management believes that the lawsuits are without merit, we cannot predict or determine the timing or final outcomes of the lawsuits and are unable to estimate the amount or range of loss that could result from unfavorable outcomes. Adverse results in some or all of these legal proceedings could be material to our results of operations, financial condition or cash flows.

 

Risks Associated With an Investment in Our Common Stock:

 

The market price of our stock may be adversely affected by market volatility.

 

The market price of our common stock has been and is likely to be volatile. This is especially true given the current significant instability in the financial markets. In addition to general economic, political and market conditions, the price and trading volume of our stock could fluctuate widely in response to many factors, including:

 

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·announcements of the results of clinical trials by us or our competitors;
·announcement of legal actions against us and/or settlements or verdicts adverse to us;
·adverse reactions to products;
·governmental approvals, delays in expected governmental approvals or withdrawals of any prior governmental approvals or public or regulatory agency comments regarding the safety or effectiveness of our products, or the adequacy of the procedures, facilities or controls employed in the manufacture of our products;
·changes in U.S. or foreign regulatory policy during the period of product development;
·developments in patent or other proprietary rights, including any third party challenges of our intellectual property rights;
·announcements of technological innovations by us or our competitors;
·announcements of new products or new contracts by us or our competitors;
·actual or anticipated variations in our operating results due to the level of development expenses and other factors;
·changes in financial estimates by securities analysts and whether our earnings meet or exceed the estimates;
·conditions and trends in the pharmaceutical and other industries;
·new accounting standards;
·overall investment market fluctuation;
·restatement of prior financial results;
·notice of NYSE MKT non-compliance with requirements; and
·occurrence of any of the risks described in these "Risk Factors".

 

Our common stock is listed for quotation on the NYSE MKT. For the 12 month period ended December 31, 2012, the closing price of our common stock has ranged from $0.19 to $1.10 per share. We expect the price of our common stock to remain volatile. The average daily trading volume of our common stock varies significantly.

 

In the past, following periods of volatility in the market price of the securities of companies in our industry, securities class action litigation has often been instituted against companies in our industry. In this regard, please see “A Federal Securities Class Action and Two Shareholder Derivative Actions Have Been Filed Against Us and We May Be Subject to Civil Liabilities” above.

 

Our stock price may be adversely affected if a significant amount of shares are sold in the public market.

 

In May 2009, we issued an aggregate of 25,543,339 shares and warrants to purchase an additional 14,708,687 shares under a Universal Shelf Registration Statement. 4,895,000 of these warrants have been exercised as of December 31, 2012. Depending upon market conditions, we anticipate selling 9,813,687 shares pursuant to the conversion of remaining warrants.

 

Additionally, we registered with the SEC on September 29, 2009, 1,038,527 shares issuable upon exercise of certain other warrants. To the extent the exercise price of our outstanding warrants is less than the market price of the common stock, the holders of the warrants are likely to exercise them and sell the underlying shares of common stock and to the extent that the exercise price of certain of these warrants are adjusted pursuant to anti-dilution protection, the warrants could be exercisable or convertible for even more shares of common stock. We also may issue shares to be used to meet our capital requirements or use shares to compensate employees, consultants and/or directors. In this regard, we have registered $150,000,000 of securities for public sale pursuant to a universal shelf registration statement and we have been selling shares under this shelf registration statement and the New Maxim EDA. Through December 31, 2012, we had sold an aggregate of approximately 29,500,000 shares under this EDA.

 

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Pursuant to the New Maxim EDA, we may sell up to $75,000,000 worth of our shares of Common Stock from time to time through Maxim, as sales agent. While we have no obligation to sell any of the Shares and may at any time suspend offers under the New Maxim EDA or terminate the EDA, the sale of substantial numbers of Shares under the EDA may have an adverse impact on the trading value of the stock.

 

We are unable to estimate the amount, timing or nature of future sales of outstanding common stock or instruments convertible into or exercisable for our common stock. Sales of substantial amounts of our common stock in the public market, including additional sale of securities pursuant to the New Maxim EDA or otherwise under the universal shelf registration statement or upon exercise of outstanding options, could cause the market price for our common stock to decrease. Furthermore, a decline in the price of our common stock would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities.

 

Provisions of our Certificate of Incorporation and Delaware law could defer a change of our management which could discourage or delay offers to acquire us.

 

Provisions of our Certificate of Incorporation and Delaware law may make it more difficult for someone to acquire control of us or for our stockholders to remove existing management, and might discourage a third party from offering to acquire us, even if a change in control or in Management would be beneficial to our stockholders. For example, our Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In this regard, on November 2, 2012, we amended and restated our Stockholder Rights Plan (“Rights Plan”) and, under the Rights Plan, our Board of Directors declared a dividend distribution of one Right for each outstanding share of Common Stock to stockholders of record at the close of business on November 29, 2002. Each Right initially entitles holders to buy one-hundredth unit of preferred stock for $30.00 and may be redeemed prior to November 19, 2017, the expiration date, at $0.001 per Right under certain circumstances. The Rights generally are not transferable apart from the common stock and will not be exercisable unless and until a person or group acquires or commences a tender or exchange offer to acquire, beneficial ownership of 15% or more of our common stock. However, for Dr. Carter, our Chief Executive Officer, who already beneficially owns 4.99% of our common stock, the Rights Plan’s threshold will be 20%, instead of 15%. For more information, see Part II; Item 5: “Other Information”.

 

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Special Note Regarding Forward Looking Statements

 

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our research in clinical efforts may continue for the next several years and we may continue to incur losses due to clinical costs incurred in the development of Ampligen® for commercial application. Possible losses may fluctuate from quarter to quarter as a result of differences in the timing of significant expenses incurred and receipt of licensing fees and/or cost recovery treatment revenue.

 

ITEM 1B.Unresolved Staff Comments.

 

None.

 

ITEM 2.Properties.

 

We currently lease through April 2013, our headquarters located in Philadelphia, Pennsylvania consisting of a suite of offices of approximately 9,000 square feet. We are currently evaluating various options with regards to the leasing of offices for our headquarters.

 

We also own, occupy and use our New Brunswick, New Jersey laboratory and production facility that we acquired from ISI. These facilities consist of two buildings located on 2.8 acres. One building is a two story facility consisting of a total of 31,300 square feet. This facility contains offices, laboratories and production space. It also contains space designated for research and development, packaging, quality assurance and quality control laboratories. Building Two has 11,670 square feet consisting of offices, laboratories, warehouse space, shipping, receiving and packaging areas. The property has parking space for approximately 100 vehicles.

 

Our subsidiary, Hemispherx Biopharma Europe N.V./S.A. subleases on an informal basis a 2,000 sq. ft., fully furnished and equipped office at 97 Rue Jean Jaures, Levallois, Perret, France.

 

ITEM 3.Legal Proceedings.

 

(a)Stephanie A. Frater v. Hemispherx Biopharma, Inc., William A. Carter, Thomas Equels and Charles Bernhardt, U.S. District Court for Eastern District of Pennsylvania, Case No. 2:12-cv-07152-WY.
(b)Mark Zicherman v. Hemispherx Biopharma, Inc., William A. Carter, Thomas K. Equels, Iraj E. Kiani, William M. Mitchell, Richard C. Piani and Charles T. Bernhardt, U.S. District Court for Eastern District of Pennsylvania, Case No. 2:13-cv-00243-WY.
(c)Michael Desclos v. Hemispherx Biopharma, Inc., William A. Carter, Charles T. Bernhardt, Thomas K. Equels, David R. Strayer, Richard C. Piani, William M. Mitchell, and Iraj E. Kiani, First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia, March 2013 Term, No. 110.

 

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On December 21, 2012, a putative federal securities class action complaint was filed against the Company and three of its officers in the United States District Court for the Eastern District of Pennsylvania. This action, Stephanie A. Frater v. Hemispherx Biopharma, Inc., et al., was purportedly brought on behalf of a putative class of Hemispherx investors who purchased the Company’s publicly traded securities between March 19, 2012 and December 17, 2012. The complaint generally asserts that Defendants made material misrepresentations and omissions regarding the status of the Company’s New Drug Application for Ampligen®, which had been filed with the United States Food and Drug Administration, in alleged violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. On February 22, 2013, several putative members of the alleged plaintiff class filed motions to be appointed Lead Plaintiff pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4. Pursuant to Court order, within 15 calendar days following the Court’s appointment of a lead plaintiff and approval of the lead plaintiff’s selection of lead counsel, the parties will submit an additional stipulation and proposed order setting forth a mutually agreeable schedule for the filing of any amended complaint and the briefing of Defendants’ motion to dismiss. Under the PSLRA, discovery will be stayed pending the Court’s decision on Defendants’ motion to dismiss.

 

On January 15, 2013, a shareholder derivative complaint was filed against the Company, as nominal defendant, and certain of its Officers and Directors in the United States District Court for the Eastern District of Pennsylvania. The complaint in this action, Mark Zicherman v. Hemispherx Biopharma, Inc., et al., alleges violations of state law, including breaches of fiduciary duties, waste of corporate assets, and unjust enrichment, arising from the alleged federal securities violations asserted in the securities class action. On February 22, 2013, the Court entered an order staying this case pending the outcome of Defendants’ motion to dismiss the securities class action.

 

On March 4, 2013, a shareholder derivative and putative class action complaint was filed against the Company, as nominal defendant, and certain of its officers and directors in the First Judicial District of Pennsylvania of the Court of Common Pleas of Philadelphia. The complaint alleges violations of state law, including breaches of fiduciary duties, waste of corporate assets, and unjust enrichment. As of today’s date, none of the defendants has been served with the complaint.

 

The Company intends to vigorously defend these actions. The potential impact of these actions, which seek unspecified damages, equitable relief, attorneys’ fees and expenses, is uncertain. There can be no assurance that an adverse result in these proceedings would not have a potentially material adverse effect on the Company’s business, results of operations and financial condition.

 

(d)Hemispherx Biopharma, Inc. v. Johannesburg Consolidated Investments, et al.,U.S. District Court for the Southern District of Florida, Case No. 04-10129-CIV.

 

In December 2004, the Company filed a multi-count complaint in U.S, Federal Court (Southern District of Florida) which was granted by the Court in August 2010 whereby Hemispherx was awarded $188 million, plus interest against Johannesburg Consolidated Investments (“JCI”) and former JCI officers R.B. Kebble and H.C. Buitendag. The Company is attempting to domesticate the Final Judgment in South Africa and is being assisted by the South African law firm of Webber Wentzel. The action to domesticate has been filed in South Africa. No gain has been recorded for this judgment as it is too early in these proceedings to predict an outcome. As required by South African law, on October 11, 2011, Hemispherx has posted security bond of $66,873 related to the JCI proceedings and a second bond of $25,200 was posted in July 2012 related our proceedings against the Estate of Kebble.

 

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(e)MidSouth Capital, Inc. v. Hemispherx Biopharma, Inc., Civil Action No. 1:09-CV-03110-CAP.

 

On June 4, 2009, the Company filed suit in the United States District Court for the Southern District of Florida against MidSouth Capital, Inc. (“MidSouth”) and its principals (Adam Cabibi and Robert Rosenstein) seeking monetary and injunctive relief against MidSouth's tortious interference with certain financing transactions in which the Company was engaged. The case was transferred to the Northern District of Georgia, and Holland & Knight was engaged as local counsel for the Company on November 13, 2009. On November 19, 2009, MidSouth answered the Company's Complaint and filed a Counterclaim against the Company and The Sage Group, Inc. (“Sage”) seeking to recover between $3,900,000 and $4,800,000 for fees allegedly owed to it as a result of the same financing transactions, plus attorneys' fees and punitive damages, under various contractual, quasi contractual, and tort theories. On January 12, 2010, the Company and Sage filed a Motion for Judgment on the Pleadings as to all parts of MidSouth's Counterclaim. By Order dated March 31, 2010, the Court granted the Motion with respect to MidSouth's contract claim but denied it with respect to MidSouth's other claims.

 

The parties conducted Discovery and subsequently, all parties filed Motions for Summary Judgment. By Order dated March 9, 2011, the Court granted the Company's Motion on all the remaining counts of MidSouth's counterclaim, granted Sage's Motion with respect to MidSouth's claims against Sage, and granted MidSouth's Motion with respect to the Company's original Complaint against MidSouth. Costs were taxed in the Trial Court in favor of the Company and against MidSouth in the amount of $8,631.82, and in favor of MidSouth and against the Company in the amount of $7,916.90.

 

In April 2011, MidSouth filed a Notice of Appeal from the Order disposing of its claims against the Company and Sage, and the Company filed a Notice of Cross Appeal from the Order granting the Defendants' Motion for Summary Judgment on the original Complaint. MidSouth’s appeal was assigned Case No. 11-11618-E and the Company’s Cross-Appeal was assigned Case No. 11-11650-E. Mediation ordered by the Court of Appeals was unsuccessful. Oral arguments on consolidated appeals took place before the Eleventh Circuit Court of Appeals on February 1, 2012.

 

In early April 2012, the Company received notice that Robert Rosenstein, a principal of MidSouth, filed a petition under Chapter 7 of the Bankruptcy Code in the Northern District of Georgia. The Company elected not to contest the dischargability of its claim against Mr. Rosenstein.

 

On August 14, 2012, the panel to which the Appeal and Cross-Appeal had been assigned issued an opinion affirming in part and reversing in part the decisions of the Trial Court. The Court of Appeals affirmed both the Trial Judge’s grant of Summary Judgment in favor of the Company and Sage on MidSouth’s fraud Counterclaim and the grant of Summary Judgment in favor of MidSouth, Cabibi, and Rosenstein on the Company’s tortious interference claims. The Court of Appeals reversed the Trial Court’s Order dismissing MidSouth’s Counterclaim for breach of contract and the Order granting Summary Judgment in favor of the Company on MidSouth’s Counterclaims based on promissory estoppel, quantum meruit, and unjust enrichment.

 

39
 

 

After remand to the District Court, a Scheduling Order proposed by the parties was entered by the Court on October 17, 2012. In light of the Court of Appeals’ Ruling, the parties were realigned with MidSouth as the Plaintiff and the Company as the Defendant. The Company deposed representatives of two more of the investors to preserve their testimony for trial. Neither witness testified that MidSouth’s activity significantly influenced the decision to invest. The Company has moved for leave to designate an expert witness, and that Motion is awaiting a decision by the Trial Court. If leave is granted, there will be an additional period of discovery limited to expert issues. If the Motion is denied, the parties will prepare and submit a proposed pretrial Order together with any other pretrial Motions. In either event, the Company will vigorously defend the remaining claims. No date has been set for trial.

 

As of March 6, 2013, no informed judgment can be made as to the likely outcome and Counsel is unable to provide a precise estimate of the merits or probability of success of the MidSouth claims or a range of potential recovery or loss.

 

(f)Cato Capital, LLC v. Hemispherx Biopharma, Inc., U.S. District Court for the District of Delaware, Case No. 09-549-GMS.

 

On July 31, 2009, Cato Capital LLC (“Cato”) filed suit asserting that under a November 2008 agreement, the Company owes Cato a placement fee for certain investment transactions. The Complaint sought damages in the amount of $5,000,000 plus attorneys’ fees. The Company filed an Answer on August 20, 2009. On October 13, 2009, Cato filed a Motion seeking leave to file an Amended Complaint which proposed that Cato be permitted to add The Sage Group as an additional defendant and to bring additional causes of action against the Company arising from the defenses contained in the Answer, and increase the total amount sought to $9,830,000, plus attorneys’ fees and punitive damages. On September 14, 2010, the Court granted Cato’s Motion for Leave to file an Amended Complaint, but specifically indicated that the Company could file a Motion to Dismiss, raising the arguments that the Company had previously made in response to Cato’s Motion for Leave to file an Amended Complaint. On September 16, 2010, Cato filed its Amended Complaint, and on September 30, 2010, the Company filed a Motion to dismiss all the counts of the Amended Complaint against the Company other than the breach of contract count. In addition, pursuant to an indemnification responsibility, the Company has also retained counsel to undertake the defense of the Sage Group, and a motion to dismiss was filed on behalf of the Sage Group seeking to dismiss all claims against the Sage Group. On July 28, 2011, the Court denied the Company’s motion to dismiss and the motion to dismiss of the Sage Group. On August 11, 2011, the Court entered a Scheduling Order that set Discovery, Motion and other applicable dates, including a trial date. On August 30, 2011, the Company and the Sage Group filed an Answer with Affirmative Defenses to the Plaintiff’s Amended Complaint. On October 24, 2011, Cato filed a Motion for a Partial Summary Judgment, seeking a determination that two of the Company’s affirmative defenses to Cato’s breach of contract cause of action should be stricken. On November 10, 2011, the Company filed a response controverting Cato’s Motion on factual and legal basis. Also on November 10, 2011, the Company filed its own Motion for Partial Summary Judgment, seeking dismissal of Cato’s claim for breach of contract. In accordance with a Scheduling Order set by the Court, the parties concluded fact and expert discovery on April 16, 2012. On April 30, 2012 the Company filed Motions for Summary Judgment seeking dismissal of all counts. The Sage Group also filed a Motion for Summary Judgment seeking dismissal of all counts asserted against Sage.

 

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The parties concluded Fact and Expert Discovery on April 16, 2012. On April 30, 2012 the Company filed Motions for Summary Judgment seeking dismissal of all counts. The Sage Group (“Sage”) also filed a Motion for Summary Judgment seeking dismissal of all counts asserted against Sage. On September 10, September 12, and September 13, 2012 the Court entered Orders denying all pending Motions by all parties.

 

The Parties had a Non-Jury trial on March 4, 5 and 6, 2013, before the United States District Court for the District of Delaware. The Court has Ordered the Parties to submit additional briefing and other documentation to the Court on or before April 22, 2013. There can be no estimate of when the Court may rule on the case.

 

As of March 6, 2013, no informed judgment can be made as to the likely outcome and Counsel is unable to provide an estimate of the merits or probability of success of the Cato claims or a range of potential recovery or loss.

 

ITEM 4.         Mine Safety Disclosures.

 

Not Applicable.

 

PART II

 

ITEM 5.         Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

In 2011, we issued 145,440 shares of common stock in payment to vendors and consultants for services rendered and 255,254 shares to Ronald Ritz, Sr. Director of Manufacturing in payment of 50% of his compensation. In 2012, we issued 1,111,397 shares of common stock in payment to vendors and consultants for services rendered along with 189,674 shares and 50,073 shares issued to two individuals formerly serving as our Senior Director of Manufacturing, in payment of 50% of their respective compensation.

 

The foregoing issuances of securities were private transactions and exempt from registration under section 4(2) of the Securities Act and/or regulation D rule 506 promulgated under the Securities Act.

 

Since October 1997 our common stock has been listed and traded on the NYSE MKT (formerly Amex) under the symbol HEB. The following table sets forth the high and low list prices for our Common Stock for the last two fiscal years as reported by the NYSE MKT. Such prices reflect inter-dealer prices, without retail mark-up, mark-downs or commissions and may not necessarily represent actual transactions.

 

   High   Low 
COMMON STOCK          
Time Period:          
January 1, 2012 through March 31, 2012  $0.50   $0.19 
April 1, 2012 through June 30, 2012  $0.40   $0.25 
July 1, 2012 through September 30, 2012  $1.10   $0.27 
October 1, 2012 through December 31, 2012  $0.85   $0.25 
           
January 1, 2011 through March 31, 2011  $0.61   $0.45 
April 1, 2011 through June 30, 2011  $0.57   $0.33 
July 1, 2011 through September 30, 2011  $0.44   $0.24 
October 1, 2011 through December 31, 2011  $0.33   $0.17 

 

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As of March 1, 2013, there were approximately 220 holders of record of our Common Stock. This number was determined from records maintained by our transfer agent and does not include beneficial owners of our securities whose securities are held in the names of various dealers and/or clearing agencies.

 

On March 1, 2013, the last sale price for our common stock on the NYSE MKT was $0.22 per share.

 

We have not paid any cash dividends on our Common Stock in recent years. It is management's intention not to declare or pay dividends on our Common Stock, but to retain earnings, if any, for the operation and expansion of our business.

 

The following table gives information about our Common Stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2012:

 

Plan Category  Number of
Securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
   Weighted-average
Exercise price of
Outstanding
options, warrants
and rights
   Number of
securities
Remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column) (a)
 
   (a)   (b)   (c) 
             
Equity compensation plans approved by security holders:   13,069,912   $1.87    6,936,892 
                
Equity compensation plans not approved by security holders:   11,128,246   $1.44    0 
                
Total   24,198,158   $1.67    6,936,892 

 

PERFORMANCE GRAPH

 

   Total Return To Shareholders 
   (Includes reinvestment of dividends) 
   ANNUAL RETURN PERCENTAGE 
       Years Ending     
Company Name / Index  Dec.
2008
   Dec.
2009
   Dec.
2010
   Dec.
2011
   Dec.
2012
 
Hemispherx Biopharma, Inc.   -52.63    55.56    -11.88    -60.47    28.55 
S&P SmallCap 600 Index   -31.07    25.57    26.31    1.02    16.33 
Peer Group   -70.17    67.87    -44.07    -60.97    -29.17 

 

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   Base       INDEXED RETURNS     
   Period       Years Ending     
Company Name / Index  Dec.
2007
   Dec.
2008
   Dec.
2009
   Dec.
2010
   Dec.
2010
   Dec.
2011
 
Hemispherx Biopharma, Inc.   100    43.37    73.68    64.93    25.67    33.00 
S&P SmallCap 600 Index   100    68.93    86.55    109.32    110.43    128.46 
Peer Group   100    29.83    50.07    28.00    10.93    7.74 
                               
Peer Group Companies                              
CARDIUM THERAPEUTICS INC                              
CYTRX CORP                              
GENVEC INC                              
OXIGENE INC                              
REGENERX BIOPHARMACEUTICALS                              

 

 

ITEM 6.        Selected Financial Data (in thousands except for share and per share data).

 

The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements, and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in this Annual Report. The statement of operations and balance sheet data presented below for, and as of the end of, each of the years in the five year period ended December 31, 2012 are derived from our audited consolidated financial statements. Historical results are not necessarily indicative of the results to be expected in the future.

 

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Year Ended

December 31

 

 

2008

  

 

2009

  

 

2010

  

 

2011

  

 

2012

 
Statement of Operations Data:                         

Revenues and License fee Income

  $265   $111   $135   $161   $213 
Total Costs and Expenses(1)   13,076    13,375    16,522    14,456    20,553 
Interest Expense and Financing Costs(2)   0    241    11    41    24 
Redeemable warrants valuation adjustment   0    (6,258)   (879)   (2,425)   (85)
Net loss   (12,219)   (7,180)   (13,136)   (9,015)   (17,354)

Net loss applicable to common stockholders

   (12,219)   (7,180)   (13,136)   (9,015)   (17,354)
Basic and diluted net loss per share  $(0.16)  $(0.07)  $(0.10)  $(0.07)  $(0.12)
Shares used in computing basic and diluted net loss per share   75,142,075    109,514,401    134,018,243    135,432,395    141,016,935 

Balance Sheet Data:

                         
Working Capital  $5,646   $55,789   $33,842   $26,717   $32,079 
Total Assets   13,211    64,994    51,680    43,513    57,699 
Debt, net of discount   0    0    0    1,695    7,051 
Stockholders’ Equity   11,544    58,695    45,947    37,965    44,700 
Cash Flow Data:                         
Cash used in operating activities   (9,358)   (9,297)   (11,886)   (10,096)   (13,136)
Capital expenditures  $(73)  $(332)  $(729)  $(1,802)  $(5,755)

 

(1)General and Administrative expenses include stock compensation expense of $573, $826, $740, $377 and $356 for the years ended December 31, 2008, 2009, 2010, 2011 and 2012, respectively.

 

(2)For information concerning our financing see Note 20 “Margin Account Loan” to our consolidated financial statements for the year ended December 31, 2012 contained herein.

 

ITEM 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis is related to our financial condition and results of operations for the three years ended December 31, 2012. This information should be read in conjunction with ITEM 6 – “Selected Financial Data” and our consolidated financial statements and related notes thereto beginning on F-1 of this Form 10-K.

 

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Statement of Forward-Looking Information

 

Certain statements in the section are “forward-looking statements”. You should read the information before ITEM 1B above, “Special Note” Regarding Forward-Looking Statements” for more information about our presentation of information.

 

Background

 

We are a specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged in the clinical development of new drug therapies based on natural immune system enhancing technologies for the treatment of viral and immune based chronic disorders. Our flagship products include Alferon N Injection® and the experimental therapeutic Ampligen®. Alferon N Injection® is approved for a category of STD infection, and Ampligen® represents an experimental RNA nucleic acid being developed for globally important viral diseases and disorders of the immune system. Hemispherx' platform technology includes large and small agent components for potential treatment of various severely debilitating and life threatening diseases.

 

We have reported net income only from 1985 through 1987. Since 1987, we have incurred, as expected, substantial operating losses due to our conducting research and development programs.

 

Fair Value

 

In connection with equity financings on May 11 and 19, 2009, we issued warrants (the “Warrants”) that are single compound derivatives containing both an embedded right to obtain stock upon exercise (a “Call”) and a series of embedded rights to settle the Warrants for cash upon the occurrence of certain events (each, a “Put”). Generally, the Put provisions allow the Warrant Holders liquidity protection; the right to receive cash in certain situations where the Holders would not have a means of readily selling the shares issuable upon exercise of the Warrants (e.g., where there would no longer be a significant public market for our common stock). However because the contractual formula used to determine the cash settlement value of the embedded Put requires use of certain assumptions, the cash settlement value of the embedded Put can differ from the fair value of the unexercised embedded Call option at the time the embedded Put option is exercised. Specifically, the Put rights would be triggered upon the happening of a “Fundamental Transaction” (as defined below) that also is (1) an all cash transaction; (2) a “Rule 13e-3 transaction” under the Exchange Act (where the Company would be taken private); or (3) a transaction involving a person or entity not traded on a national securities exchange. “Fundamental Transactions” include (i) a merger or consolidation of the Company with or into another person or entity; (ii) a sale, lease, license, transfer or other disposition of all or substantially all of the Company’s assets; (iii) any purchase offer, tender offer or exchange offer in which holders of Company Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property, which offer has been accepted by the holders of 50% or more of the Company’s outstanding Common Stock; (iv) a reclassification, reorganization or recapitalization of the Common Stock pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property; or (v) a stock purchase or other business combination with another person or entity is effected pursuant to which such other person or entity acquires more than 50% of the outstanding shares of Common Stock. Pursuant to the Warrants, the Put rights enable the Warrant Holders to receive cash in the amount of the Black-Scholes-Merton value obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Warrant expiration date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Warrant expiration date.

 

45
 

 

The Company recomputes the fair value of the Warrants at the end of each quarterly reporting period. Such value computation includes subjective input assumptions that are consistently applied each period. If the Company were to alter its assumptions or the numbers input based on such assumptions, the resulting fair value could be materially different.

 

Fair value at measurement dates during the period from Warrants’ issued May 10, 2009, May 18, 2009 and May 21, 2009 to December 31, 2010, 2011 and 2012, were estimated using the following assumptions:

 

    2010    2011    2012 
Underlying price per share   $0.47-$0.74    $0.20-$0.46    $0.25-$0.80 
Exercise price per share   $1.31-$1.65    $1.31-$1.65    $1.31-$1.65 
Risk-free interest rate   0.83%-2.36%    0.29%-1.58%    0.19%-0.44% 
Expected holding period   3.38-4.63 years    2.38-3.63 years    1.38-2.63 years 
Expected volatility   112.16%-122.02%    74.55%-120.55%    69.21%-110.27% 
Expected dividend yield   None    None    None 

 

The significant assumptions using the Monte Carlo Simulation approach for valuation of the Warrants are:

 

(i)      Risk-Free Interest Rate. The risk-free interest rates for the Warrants are based on U.S Treasury constant maturities for periods commensurate with the remaining expected holding periods of the warrants.

(ii)     Expected Holding Period. The expected holding period represents the period of time that the Warrants are expected to be outstanding until they are exercised. The Company utilizes the remaining contractual term of the Warrants at each valuation date as the expected holding period.

(iii)    Expected Volatility. Expected stock volatility is based on daily observations of the Company’s historical stock values for a period commensurate with the remaining expected holding period on the last day of the period for which the computation is made.

(iv)    Expected Dividend Yield. Expected dividend yield is based on the Company’s anticipated dividend payments over the remaining expected holding period. As the Company has never issued dividends, the expected dividend yield is $-0- and this assumption will be continued in future calculations unless the Company changes its dividend policy.

(v)     Expected Probability of a Fundamental Transaction. The possibility of the occurrence of a Fundamental Transaction triggering a Put right is extremely remote. As discussed above, a Put right would only arise if a Fundamental Transaction 1) is an all cash transaction; (2) results in the Company going private; or (3) is a transaction involving a person or entity not traded on a national securities exchange. The Company believes such an occurrence is highly unlikely because:

 

a.The Company only has one product that is FDA approved for sale, but such product will not be available for commercial sales any sooner than the second half of 2013;
b.The production of new Alferon N Injection® API inventory will not commence until the capital improvement and validation phases are complete;

 

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c.The Company is expected to be required to perform additional clinical trials for FDA approval of its flagship product as well as to diversify the applications of its FDA approved product;
d.Industry and market conditions continue to include a global market recession, adding risk to any transaction;
e.Available capital for a potential buyer in a cash transaction continues to be limited;
f.The nature of a life sciences company is heavily dependent on future funding and high fixed costs, including Research & Development;
g.The Company has minimal revenue streams which are insufficient to meet the funding needs for the cost of operations or construction at their manufacturing facility; and
h.The Company's Rights Plan and Executive Employment Agreements make it less attractive to a potential buyer.

 

With the above factors utilized in analysis of the likelihood of the Put's potential Liability, the Company estimated the range of probabilities related to a Put right being triggered as:

 

Range of Probability  Probability 
Low   0.5%
Medium   1.0%
High   5.0%

 

The Monte Carlo Simulation has incorporated a 5.0% probability of a Fundamental Transaction for the life to date for these securities.

 

(vi)    Expected Timing of Announcement of a Fundamental Transaction. As the Company has no specific expectation of a Fundamental Transaction, for reasons elucidated above, the Company utilized a discrete uniform probability distribution over the Expected Holding Period to model in the potential announcement of a Fundamental Transaction occurring during the Expected Holding Period.

(vii)   Expected 100 Day Volatility at Announcement of a Fundamental Transaction. An estimate of future volatility is necessary as there is no mechanism for directly measuring future stock price movements. Daily observations of the Company’s historical stock values for the 100 days immediately prior to the Warrants’ grant dates, with a floor of 100%, were utilized as a proxy for the future volatility.

(viii)  Expected Risk-Free Interest Rate at Announcement of a Fundamental Transaction. The Company utilized a risk-free interest rate corresponding to the forward U.S. Treasury rate for the period equal to the time between the date forecast for the public announcement of a Fundamental Transaction and the Warrant expiration date for each simulation.

(ix)   Expected Time Between Announcement and Consummation of a Fundamental Transaction. The expected time between the announcement and the consummation of a Fundamental Transaction is based on the Company’s experience with the due diligence process performed by acquirers, and is estimated to be six months. The Monte Carlo Simulation approach incorporates this additional period to reflect the delay Warrant Holders would experience in receiving the proceeds of the Put.

 

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RESULTS OF OPERATIONS

 

Year ended December 31, 2012 versus December 31, 2011

 

Net Loss

 

Our net loss of approximately $17,354,000 for the year ended December 31, 2012 was 93% higher when compared to the same period in 2011. This $8,339,000 increase in loss was primarily due to:

 

1)an increase in Research and Development costs in 2012 of approximately $2,786,000 or 41% as compared to the same period in 2011;

 

2)an increase in Production/Cost of Goods Sold in 2012 of approximately $946,000 or 91%;

 

3)an increase in General and Administrative expenses of approximately $2,365,000 or 35% as compared to the same period in 2011;

 

4)the revaluation of the Liability related to the Redeemable Warrants resulting in a non-cash gain of approximately $85,000 in 2012 as compared to non-cash gain of approximately $2,425,000 for the same period in 2011, resulting in an increased loss of $2,340,000;

 

5)sale in January 2012 of $16,000,000 of our New Jersey state Net Operating Loss carry-forwards (for the years 2009 and 2010) for approximately $1,328,000 as compared to February 2011, when we effectively sold $28,000,000 of our New Jersey state Net Operating Loss carry-forwards (for the years 2003 through 2008) for approximately $2,272,000, representing a decrease in income of $944,000 or 42%; offset by

 

6)an increase in interest and other income of approximately $973,000 from funds invested in marketable securities.

 

Net loss per share was $(0.12) for the current twelve month period versus $(0.07) per share for the same period in 2011. The weighted average number of shares of our common stock outstanding as of December 31, 2012 was 141,016,935 as compared to 135,432,395 as of December 31, 2011.

 

Revenues

 

Revenues from our Ampligen® Cost Recovery Treatment Program for the year ended December 31, 2012 were approximately $213,000 compared to revenues of $161,000 for the same period in 2011, an increase of $52,000 or 32%. The number of patients increased 25% in 2012. There were 45 patients in 2012 and 36 patients in 2011 participating in the program. Commercial sales of Alferon N Injection® were halted in March 2008 when our Finished Goods Inventory expired. As a result, we had no Alferon N Injection® product to commercially sell in 2012 or 2011 and all sales revenue in 2012 and 2011 has been generated from the Ampligen® Cost Recovery Treatment Program.

 

Production/Cost of Goods Sold

 

Production/Cost of Goods Sold was approximately $1,989,000 and $1,043,000, respectively, for the twelve months ended December 31, 2012 and 2011. This increase of $946,000 or 91% was primarily due to cost of fill, finish and packaging of Alferon N Injection® Work-In-Process inventory along with a related valuation write-down reserve of approximately $1,024,000 to the lower of cost or market.

 

Research and Development Costs

 

Overall Research and Development (“R&D”) costs for the year ended December 31, 2012 were approximately $9,508,000 as compared to $6,722,000 for the same period a year ago, reflecting an increase of approximately $2,786,000 or 41%. The increased R&D efforts during the year 2012 were primarily due to approximately $2,290,000 spent on our efforts regarding the Ampligen® NDA and preparedness for the FDA pre-approval inspections of the New Brunswick manufacturing facility along with approximately $1,159,000 of employment agreement incentive payment to Dr. William A. Carter, our Chief Executive Officer, President and Chief Scientific Officer, with these expenses offset by approximately $663,000 of cost savings achieved by suspending Alferon® related R&D projects.

 

48
 

 

General and Administrative Expenses

 

General and Administrative (“G&A”) expenses for the year ended December 31, 2012 and 2011 were approximately $9,056,000 and $6,691,000, respectively, reflecting an increase of approximately $2,365,000 or 35%. The higher G&A expenses in 2012 consisted primarily of an increase of approximately $446,000 in legal fees due to the Cato Capital, LLC litigation and efforts to domesticate the judgment against JCI in South Africa, approximately $229,000 of prior year’s Director’s fees paid to Dr. Iraj E. Kiani, approximately $1,159,000 of employment agreement incentive payment to Thomas K. Equels, in his role as our General Counsel, and $250,000 bonus to The Sage Group for consulting fees. For detailed information on the sources of legal fees, see “Note 16 – Contingencies” under Notes to Consolidated Financial Statements.

 

Interest and Other Income

 

Interest and other income for the years ended December 31, 2012 and 2011 was approximately $1,597,000 and $624,000, respectively, representing an increase of $973,000 or 156%. The primary causes for the increase of investment income was a higher rate of return from our portfolio of short and long-term bond and fixed-income type investments during 2012, an increase in the size of our portfolio as proceeds were realized from sale of stock through the Maxim ATM in the latter part of 2012 and capital gain distributions of approximately $409,000 from the mutual funds investments. The interest income from the investments is recognized over the life of the instrument.

 

Interest Expense

 

In 2010 and 2011, we financed through capital leases some office equipment vital to our overall operations as well as manufacturing equipment utilized in the production of Alferon®. For the years ended December 31, 2012 and 2011, we had interest expense of approximately $24,000 and $41,000, respectively from these capital leases.

 

Sale of New Jersey Tax Net Operating Loss

 

In January 2012, we effectively sold $16,000,000 of our approximately $25,000,000 of New Jersey state Net Operating Loss carry-forwards (for the years 2009 and 2010) for approximately $1,328,000 as compared to February 2011, when we effectively sold $28,000,000 of our New Jersey state Net Operating Loss carry-forwards (for the years 2003 through 2008) for approximately $2,272,000, representing a decrease in gain of approximately $944,000 or 42% (see “Note 15: Income Taxes (FASB ASC 740 Income Taxes) and Subsequent Event”).

 

Redeemable Warrants Valuation Adjustment

 

The quarterly fiscal revaluations resulted in non-cash adjustments to the redeemable warrants liability for the twelve months ended December 31, 2012 and 2011 of approximately $85,000 gain and $2,425,000 gain, respectively, representing a decrease of $2,339,000 (see “Note 19: Fair Value”).

 

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RESULTS OF OPERATIONS

 

Year ended December 31, 2011 versus December 31, 2010

 

Net Loss

 

Our net loss of approximately $9,015,000 for the year ended December 31, 2011 was 31% lower when compared to the same period in 2010. This $4,121,000 decrease in loss was primarily due to:

 

1.a decrease in Research and Development costs in 2011 of approximately $891,000 or 12% as compared to the same period in 2010;

 

2.a decrease in Production/Cost of Goods Sold in 2011 of approximately $298,000 or 22%;

 

3.a decrease in General and Administrative expenses of approximately $877,000 or 12% as compared to the same period in 2010;

 

4.an adjustment at December 31, 2011 to record the change in fair value for a Liability related to certain redeemable warrants originally issued in May 2009. This Liability was recorded in May 2009, adjusted and revalued to $2,805,000 at December 31, 2010, resulting in a related non-cash gain of $879,000 in 2010. The value of this Liability at December 31, 2011 was $380,000. The cumulative quarterly adjustments needed during 2011 to revalue the liability resulted in a related non-cash gain of $2,425,000 for year ended December 31, 2011. This resulted in a decrease in loss of $1,545,000 in 2011 compared to 2010;

 

5.the 2011 receipt of funds from the sale of State New Jersey tax net operating losses for years 2003 to 2008 for $2,272,000; which were offset by

 

6.a decrease in interest and other income in 2011 of approximately $1,759,000 or 74% as compared to the same period in 2010.

 

Net loss per share for the year ended 2011 was approximately $(0.07) versus approximately $(0.10) for the same period in 2010. The weighted average number of shares of our common stock outstanding as of December 31, 2011 was 135,432,395 as compared to 134,081,243 as of December 31, 2010.

 

Revenues

 

Revenues from our Ampligen® cost recovery treatment program for the year ended December 31, 2011 were approximately $161,000 compared to revenues of $135,000 for the same period in 2010, an increase of $26,000 or 19% for 36 patients in 2011 and 21 patients in 2010 participating in the program. Commercial sales of Alferon N Injection® were halted in March 2008 when our Finished Goods Inventory expired. As a result, we had no Alferon N Injection® product to commercially sell in 2011 or 2010 and all sales revenue in 2011 and 2010 has been generated from Ampligen® cost recovery clinical treatment programs.

 

Production/Cost of Goods Sold

 

Production/Cost of Goods Sold was approximately $1,043,000 and $1,341,000, respectively, for the twelve months ended December 31, 2011 and 2010. This decrease of $298,000 or 22% was primarily due to the shrinkage of work-in-process due to restarting the manufacturing process and the resulting necessary additional testing of equipment, work-in-process and finished goods inventory for quality control. The additional costs related to addressing manufacturing issues were approximately $259,000 and the lower cost to maintain existing Alferon N Injection® and Ampligen® inventory including storage, stability testing, transport and reporting costs due to our efforts to reduce the production costs of Alferon N Injection® for potential future commercial sales. These savings achieved in 2011 were somewhat offset by comparison to 2010 due to last year’s recognition of insurance proceeds of approximately $96,000 received for storm damages which occurred at the New Brunswick, NJ facility and September 2011 costs related to the transfer of existing Alferon N Injection® and Ampligen® inventory to a new vendor (BioRidge) in coordination with the sales, marketing and education effort to be undertaken by Armada Healthcare for Alferon N Injection®.

 

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Research and Development Costs

 

Overall Research and Development costs for the year ended December 31, 2011 were approximately $6,722,000 as compared to $7,613,000 for the same period a year ago, reflecting a decrease of $891,000 or 12%. In 2011 we spent approximately $2,310,000 for the Ampligen® new drug treatment of Chronic Fatigue Syndrome, approximately $4,080,000 for Alferon® LDO for influenza and approximately $332,000 for other projects. The primary factors for the decrease in research and development costs were a suspension of some clinical, research and development costs related to Alferon® LDO as we work to select a vendor to conduct a confirmatory study, which will help us to further evaluate the potential effectiveness of this product and determine the cost/benefit of proceeding with the planned study of seasonal and pandemic influenza.

 

General and Administrative Expenses

 

General and Administrative expenses for the year ended December 31, 2011 and 2010 were approximately $6,691,000 and $7,568,000, respectively, reflecting a decrease of $877,000 or 12%. The primary reason for this decrease in expense in 2011 consisted primarily of a decrease in legal fees totaling approximately $941,000 due to settlement in 2010 of various legal proceedings.

 

Interest and Other Income

 

Interest and other income for the years ended December 31, 2011 and 2010 was approximately $625,000 and $2,383,000, respectively, representing a decrease of $1,759,000 or 74%. The primary causes for the decrease of interest income in 2011 were (1) the use of some of the proceeds from investments in operations, thereby diminishing the amounts available for investments and proportionately reducing the flow of interest income; and (2) the receipt of capital gain distributions in 2010 of approximately $1,079,000 which did not re-occur in 2011.

 

Interest Expense and Financing Costs

 

In 2011 and 2010 prior to the establishment of the Margin Account Loan, we financed through capital leases some office equipment vital to our overall operations as well as manufacturing equipment utilized in the production of Alferon®. For the year ended December 31, 2011 and 2010, we had interest expense of approximately $41,000 and $11,000, respectively.

 

Sale of New Jersey Tax Net Operating Loss

 

In February 2011, we received approximately $2,272,000 from the sale of the State of New Jersey tax net operating losses for years 2003 to 2008. No such sale occurred in 2010.

 

Redeemable Warrants Valuation Adjustment

 

The December 31, 2011 and 2010 revaluations resulted in non-cash adjustments to the Redeemable Warrants Liability as of December 31, 2011 and 2010 of approximately $2,425,000 and $879,000, respectively, representing an increase of $1,545,000.

 

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Liquidity and Capital Resources

 

Cash used in operating activities for the twelve months ended December 31, 2012, was approximately $13,136,000 compared to $10,096,000 for the same period in 2011, an increase of $3,040,000 or 30%. Excluding the proceeds from the sale of New Jersey Net Operating Loss carry-forwards, cash used in operating activities for the twelve months ended December 31, 2012, was approximately $14,464,000 compared to $12,368,000. Cash used in operating activities increased by approximately $2,096,000 or 17% over the comparable period in 2011. This increase was primarily due to our efforts regarding the Ampligen® NDA and preparedness for the FDA pre-approval inspections of the New Brunswick manufacturing facility.

 

In January 2012, we effectively sold $16,000,000 of our New Jersey state Net Operating Loss carry-forwards (for the years 2009 and 2010) for approximately $1,328,000 as compared to February 2011, when we effectively sold $28,000,000 of our New Jersey state Net Operating Loss carry-forwards (for the years 2003 through 2008) for approximately $2,272,000. As of December 31, 2012, we had approximately $8,500,000 of New Jersey state net operating loss carry forwards (expiring in the years 2021 through 2022) available to offset future state taxable income or possibly sell though the State of New Jersey’s Corporate Business Tax Transfer Program.

 

As of December 31, 2012, we had approximately $43,953,000 in Cash, Cash Equivalents and Marketable Securities (inclusive of $14,500,000 in Marketable Securities collateralizing certain debts), or an increase of approximately $9,562,000 from December 31, 2011. However, if we are unable to commercialize and sell Ampligen® or Alferon® LDO and/or recommence material sales of Alferon N Injection®, our operations, financial position and liquidity may be adversely impacted, and additional financing may be required, however, there is no assurance that such financing will be available.

 

In its CRL, the FDA communicated that Hemispherx should conduct at least one additional clinical trial, complete various nonclinical studies and perform a number of data analysis. Until we undertake the end-of-review conference(s) with the FDA, we are unable to reasonably estimate the nature, costs, necessary efforts to obtain FDA clearance or anticipated completion dates of any additional clinical study or studies. Utilizing the industry norms for undertaking a Phase III clinical study, we estimate upon acceptance of the study’s design that it would take approximately 18 months to three years to complete a new well-controlled Ampligen® clinical study for resubmission to the FDA. It can be reasonably anticipated that the time and cost to undertake clinical trial(s), studies and data analysis are beyond our current financial resources without gaining access to additional funding. The actual duration to complete the clinical study may be different based on the length of time it takes to design the study and obtain FDA’s acceptance of the design, the final design of an acceptable Phase III clinical study design, availability of suitable participants and clinical sites along with other factors that could impact the implementation of the study, analysis of results or requirements of the FDA and/or other governmental organizations. Please see “Part I; ITEM 1A. Risk Factors; “We may require additional financing which may not be available. The limited number of shares of common stock available for financing without prior stockholder approval may hinder our ability to raise additional funding”.

 

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A “Margin Account” loan was established with Wells Fargo Advisors for which the proceeds of this flexible form of indebtedness effectively serves us as a line of credit to finance the capital improvement project underway at the New Brunswick, New Jersey Manufacturing facility. In order to maintain this Margin Account, established on July 26, 2011, we needed to pledge, restrict from sale and segregate to a Margin Account our Marketable Securities at an approximate ratio of two to one, based on the diversity of securities pledged as collateral, for debt undertaken. With the exception of collateral requirements, we maintain all the rights and benefits of ownership including receipt of interest, dividends or proceeds from the securities. While this Margin Account has no material establishment or maintenance fees, from its inception in October 2011 through September 2012, it carried an effective interest rate of 2.75% per annum applied against the “Margin Debit Balance” (i.e., those funds withdrawn and outstanding), based on the prevailing “Wells Fargo Base Rate” less 2.50%. Currently, an effective interest rate of 2.50% per annum is being applied against the Margin Debit Balance by Wells Fargo Advisors. As of December 31, 2012, the principal loan balance of the Margin Account was approximately $7,051,000, for which approximately $14,500,000 in Marketable Securities were restricted as dedicated collateral for the indebtedness. At December 31, 2011, the principal loan balance of the Margin Account was approximately $1,695,000, for which approximately $3,101,000 in Marketable Securities were restricted as dedicated collateral. The finance and construction period interest charges were approximately $85,000 and $6,000 for the twelve months ended December 31, 2012 and three months ended December 31, 2011, respectively. (see “Note 20: Margin Account Loan”).

 

On July 23, 2012, we entered into a new EDA with Maxim (the New EDA”) pursuant to which we may sell up to $75,000,000 worth of our shares of common stock from time to time through Maxim, as sales agent. Under the New EDA, Maxim is entitled to a fixed commission rate of 4.0% of the gross sales price of Shares sold under the New EDA, up to aggregate gross proceeds of $10,000,000, and thereafter, at a fixed commission rate of 3.0% of the gross sales price of Shares sold under the EDA. Sales of the Shares, if any, may be made in transactions that are deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on the NYSE MKT, at market prices or as otherwise agreed with Maxim. We have no obligation to sell any of the Shares and may at any time suspend offers under the New EDA or terminate the New EDA. The Shares are being sold pursuant to our Universal Shelf Registration Statement on Form S-3, declared effective by the Securities and Exchange Commission on July 2, 2012. On September 14, 2012, we filed a Prospectus Supplement with the Securities and Exchange Commission related to the offering of 20,000,000 shares under the ATM. On October 5, 2012, we filed an updated Prospectus Supplement. As a result, as of the date of this report, an aggregate of 40,000,000 shares are allocated for public sale under the Prospectus Supplement pursuant to the ATM. As of December 31, 2012, we had sold an aggregate of approximately 29,500,000 shares that resulted in net cash proceeds of approximately $23,003,000 after direct expenses along with commissions paid to Maxim of approximately $820,000. (see “Note 9: Stockholders’ Equity”). During the twelve months ended December 31, 2011, we sold no shares through this program and received no net cash proceeds.

 

There can be no assurances that, if needed, we will be able to raise adequate funds from these or other sources or enter into licensing, partnering or other arrangements to advance our business goals. Our inability to raise such funds or enter into such arrangements, if needed, could have a material adverse effect on our ability to develop our products. Also, we have the ability to curtail discretionary spending, including some research and development activities, if required to conserve cash. Because of our long-term capital requirements, we may seek to access the public equity market whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock or instruments convertible into or exercisable for our common stock. Any additional funding may result in significant dilution and could involve the issuance of securities with rights, which are senior to those of existing stockholders. We may also need additional funding earlier than anticipated, and our cash requirements, in general, may vary materially from those now planned, for reasons including, but not limited to, changes in our research and development programs, clinical trials, acquisitions of intellectual property or assets, enhancements to the manufacturing process, competitive and technological advances, the regulatory processes including the commercializing of Ampligen® products or new utilization of Alferon® products. See Part I, ITEM 1A. Risk Factors; “We may require additional financing which may not be available. The limited number of shares of common stock available for financing without prior stockholder approval may hinder our ability to raise additional funding.”

 

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The proceeds from our financing have been used to fund infrastructure growth including manufacturing, regulatory compliance and market development along with our efforts regarding the Ampligen® NDA and preparedness for the FDA pre-approval inspections of the New Brunswick manufacturing facility. There can be no assurances that, if needed, we will raise adequate funds from these or other sources, which may have a material adverse effect on our ability to develop our products. Also, we have the ability to curtail discretionary spending, including some research and development activities, if required to conserve cash.

 

   (dollars in thousands) 
   Obligations Expiring by Period 
Contractual Cash Obligations  Total   2013   2014   2015   2016 
                     
Margin Account Loan  $7,051   $7,051   $0   $0   $0 
Capital Leases   125    61    40    23    1 
Operating Leases   65    65    0    0    0 
                          
Total  $7,241   $7,177   $40   $23   $1 

 

Certain Relationships and Related Transactions

 

Refer to PART III, ITEM 13. “Certain Relationships and Related Transactions, and Director Independence.”

 

New Accounting Pronouncements

 

Refer to “Note 2(i) – Recent Accounting Standards and Pronouncements” under Notes to Consolidated Financial Statements.

 

Disclosure About Off-Balance Sheet Arrangements

 

None.

 

Critical Accounting Policies

 

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The significant accounting policies that we believe are most critical to aid in fully understanding our reported financial results are the following:

 

Revenue

 

Revenue from the sale of Ampligen® under cost recovery clinical treatment protocols approved by the FDA is recognized when the treatment is provided to the patient.

 

Revenues from the sale of product are recognized when the product is delivered, as title is then transferred to the customer. We have no other obligation associated with our products once shipment has been accepted by the customer.

 

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Inventories

 

We use the lower of first-in, first-out (“FIFO”) cost or market method of accounting for inventory.

 

Patents and Trademarks

 

Patents and trademarks are stated at cost (primarily legal fees) and are amortized using the straight-line method over the estimated useful life of 17 years. We review our patents and trademark rights periodically to determine whether they have continuing value. Such review includes an analysis of the patent and trademark’s ultimate revenue and profitability potential. In addition, Management’s review addresses whether each patent continues to fit into our strategic business plans.

 

Stock-Based Compensation

 

Under FASB ASC 718-Compensation-Stock Compensation (“ASC 718”) share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. We adopted the provisions of ASC-718, using a modified prospective application. Under this method, compensation cost is recognized for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption.

 

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton pricing option valuation model. Expected volatility is based on the historical volatility of the price of our common stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. We use historical data to estimate expected dividend yield, expected life, which represents the period of time the options are expected to be outstanding until they are exercised, and forfeiture rates.

 

Redeemable Warrants

 

We utilize the guidance contained in ASC 480 (formerly SFAS 150) in the determination of whether to record warrants and options as Equity and/or Liability. If the guidance of ASC 480 is deemed inconclusive, we continue our analysis utilizing ASC 815 (formerly EITF 00-19).

 

Our method of recording the related value attempts to be consistent with the standards as defined by the Financial Accounting Standards Board utilizing the concept of “Fair Value” from ASC 820-10-55-1 that states that any fair value measurement requires that the reporting entity to determine the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level in the fair value hierarchy within which the inputs fall.

 

We recomputed the value of the redeemable warrants at the end of each quarterly period. We use the Monte Carlo Simulation approach which includes subjective input assumptions that are consistently applied each quarter. If we were to alter our assumptions or the numbers input based on such assumptions, the resulting fair value could be materially different. As discussed in greater detail in “Fair Value” at the beginning of this ITEM 7, the significant assumptions using this model are: (i) Risk-Free Interest Rate; (ii) Expected Holding Period; (iii) Expected Volatility; (iv) Expected Dividend Yield; (v) Expected Probability of a Fundamental Transaction; (vi) Expected Timing of Announcement of a Fundamental Transaction; (vii) Expected 100 Day Volatility at Announcement of a Fundamental Transaction; (viii) Expected Risk-Free Interest Rate at Announcement of a Fundamental Transaction; and (ix) Expected Time Between Announcement and Consummation of a Fundamental Transaction.

 

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Concentration of Credit Risk

 

Our policy is to limit the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as being credit worthy, or in short-term money markets, which are exposed to minimal interest rate and credit risks. At and since January 1, 2011, we have had bank deposits and overnight repurchase agreements that exceed federally insured limits.

 

Concentration of credit risk, with respect to receivables, is limited through our credit evaluation process. We do not require collateral on our receivables. Our receivables historically consisted principally of amounts due from wholesale drug companies. At both December 31, 2012 and 2011 there were no receivables.

 

All sales for years ended December 31, 2012 and 2011 were prepaid by the customer related to the Ampligen® cost recovery treatment program.

 

ITEM 7A.      Quantitative And Qualitative Disclosures About Market Risk.

 

We had approximately $43,953,000 in cash, cash equivalents and Marketable Securities (restricted and non-restricted) at December 31, 2012. To the extent that our cash and cash equivalents exceed our near term funding needs, we intend to invest the excess cash in money market accounts or three to twelve month financial instruments. We employ established conservative policies and procedures to manage any risks with respect to investment exposure.

 

ITEM 8.         Financial Statements and Supplementary Data.

 

The consolidated balance sheets as of December 31, 2012 and 2011, and our consolidated statements of comprehensive loss, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2012, together with the report of McGladrey LLP (formerly known as McGladrey & Pullen, LLP), independent registered public accountants, is included at the end of this report. Reference is made to the "Index to Financial Statements and Financial Statement Schedule" on page F-1.

 

ITEM 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.

 

None.

 

ITEM 9A.      Controls and Procedures.

 

Effectiveness of Control Procedures

 

As of December 31, 2012, the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our Management, including our Chief Executive Officer and our Chief 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) promulgated under the Exchange Act. Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow final decisions regarding required disclosures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the controls and procedures were effective as of December 31, 2012 to ensure that material information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management has concluded that the financial statements included in this Form 10-K present fairly, in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

 

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Changes in Internal Control over Financial Reporting

 

We made no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 

Management’s Report on Internal Control Over Financial Reporting

 

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) or 15d-15(f), under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and affected by our Board of Directors, Management and other personnel, and to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on its financial statements.

 

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

 

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, Management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control—Integrated Framework, (COSO). Based on this assessment, Management has not identified any material weaknesses as of December 31, 2012. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

Management has concluded that we did maintain effective internal control over financial reporting as of December 31, 2012, based on the criteria set forth in “Internal Control—Integrated Framework” issued by the COSO.

 

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Our internal control over financial reporting as of December 31, 2012 has been audited by McGladrey LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

ITEM 9B.      Other Information.

 

None.

 

PART III

 

ITEM 10.       Directors and Executive Officers and Corporate Governance.

 

The following sets forth biographical information about each of our Directors and Executive Officers as of the date of this report:

 

Name   Age   Position
         
William A. Carter, M.D.   75   Chairman of the Board, Chief Executive Officer, President and Chief Scientific Officer
         
Thomas K. Equels, Esq.   60   Executive Vice Chairman of the Board, Secretary and General Counsel
         
Richard C. Piani   86   Lead Independent Director
         
William M. Mitchell, M.D., Ph.D.   78   Director
         
Iraj E. Kiani, N.D., Ph.D.   67   Director
         
Charles T. Bernhardt, CPA   51   Chief Financial Officer and Chief Accounting Officer
         
David R. Strayer, M.D.   67   Chief Medical Officer and Medical Director
         
Robert Dickey IV   57   Senior Vice President
         
Wayne Springate   41   Senior Vice President of Operations

 

Each Director has been elected to serve until the next annual meeting of stockholders, or until his earlier resignation, removal from office, death or incapacity. Each Executive Officer serves at the discretion of the Board of Directors, subject to rights, if any, under contracts of employment.

 

We believe our Board Members represent a desirable diversity of backgrounds, skills, education and experiences, and they all share the personal attributes of dedication to be effective directors. In recommending Board candidates, Corporate Governance and Nomination Committee considers a candidate’s: (1) general understanding of elements relevant to the success of a publicly traded company in the current business environment; (2) understanding of our business; and (3) diversity in educational and professional background. The Committee also gives consideration to a candidate’s judgment, competence, dedication and anticipated participation in Board activities along with experience, geographic location and special talents or personal attributes. The following are qualifications, experience and skills for Board members which are important to Hemispherx’ business and its future:

 

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Leadership Experience: We seek directors who have demonstrated strong leadership qualities. Such leaders bring diverse perspectives and broad business insight to our Company. The relevant leadership experience that we seek includes a past or current leadership role in a large or entrepreneurial company, a senior faculty position at a prominent educational institution or a past elected or appointed senior government position.

 

Industry or Academic Experience: We seek directors who have relevant industry experience, both with respect to the disease areas where we are developing new therapies as well as with the economic and competitive dynamics of pharmaceutical markets, including those in which our drugs will be prescribed.

 

Scientific, Legal or Regulatory Experience: Given the highly technical and specialized nature of biotechnology, we desire that certain of our directors have advanced degrees, as well as drug development experience. Since we are subject to substantial regulatory oversight, both here and abroad by the FDA and other agencies, we also desire directors who have legal or regulatory experience.

 

Finance Experience: We believe that our directors should possess an understanding of finance and related reporting processes, particularly given the complex budgets and long timelines associated with drug development programs.

 

WILLIAM A. CARTER, M.D., the co-inventor of Ampligen®, joined us in 1978, and has served as: (a) our Chief Scientific Officer since May 1989; (b) the Chairman of our Board of Directors since January 1992; (c) our Chief Executive Officer since July 1993; (d) our President from April 1995 to November 2006; and (e) a Director since 1987. From 1987 to 1988, Dr. Carter served as our Chairman. Dr. Carter was a leading innovator in the development of human interferon for a variety of treatment indications including various viral diseases and cancer. Dr. Carter received the first FDA approval to initiate clinical trials on a beta interferon product manufactured in the U.S. under his supervision. From 1985 to October 1988, Dr. Carter served as our Chief Executive Officer and Chief Scientist. He received his M.D. degree from Duke University and underwent his post-doctoral training at the National Institutes of Health and Johns Hopkins University. Dr. Carter also served as Professor of Neoplastic Diseases at Hahnemann Medical University, a position he held from 1980 to 1998. Dr. Carter served as Professor and Director of Clinical Research for Hahnemann Medical University's Institute for Cancer and Blood Diseases, and as a member of the faculty at Johns Hopkins School of Medicine and the State University of New York at Buffalo. Dr. Carter is a Board certified physician and author of more than 200 scientific articles, including the editing of various textbooks on anti-viral and immune therapy.

 

WILLIAM A. CARTER, M.D. - Director Qualifications:

·Leadership Experience – Chairman, CEO, President and Chief Scientific Officer of Hemispherx;
·Industry Experience - Knowledge of new and existing technologies, particularly as they relate to anti-viral and immune therapies;
·Scientific, Legal or Regulatory Experience - M.D., co-inventor of Ampligen®, leading innovator in the development of interferon-based drugs and expertise in patent development; and
·Finance Experience – Extensive knowledge of financial markets and successfully completed numerous financing efforts on behalf of Hemispherx.

 

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THOMAS K. EQUELS, Esq., has been a Director since 2008 and presently serves as our Executive Vice Chairman, Secretary and General Counsel. Mr. Equels is the President and Managing Director of the Equels Law Firm headquartered in Miami, Florida that focuses on litigation. For over a quarter century, Mr. Equels has represented national and state governments as well as companies in the banking, insurance, aviation, pharmaceutical and construction industries. Mr. Equels received his Juris Doctor degree with high honors from Florida State University. He is a summa cum laude graduate of Troy University and also obtained his Masters' Degree from Troy. He is a member of the Florida Bar Association and the American Bar Association.

 

THOMAS K. EQUELS, Esq. - Director Qualifications:

·Leadership Experience – President, Managing Director of Equels Law Firm;
·Industry Experience –legal counsel to Hemispherx; and
·Scientific, Legal or Regulatory Experience - Law degree with over 25 years as a practicing attorney specializing in litigation.

 

RICHARD C. PIANI has been a Director since 1995 and our Lead director since April, 2005. Mr. Piani has been employed as a principal delegate for Industry to the City of Science and Industry, Paris, France, a billion dollar scientific and educational complex. Mr. Piani provided consulting to us in 1993, with respect to general business strategies for our European operations and markets. Mr. Piani served as Chairman of Industrielle du Batiment-Morin, a building materials corporation, from 1986 to 1993. Previously Mr. Piani was a Professor of International Strategy at Paris Dauphine University from 1984 to 1993. From 1979 to 1985, Mr. Piani served as Group Director in Charge of International and Commercial Affairs for Rhone-Poulenc and from 1973 to 1979 he was Chairman and Chief Executive Officer of Societe "La Cellophane", the French company which invented cellophane and several other worldwide products. Mr. Piani has a Law degree from Faculte de Droit, Paris Sorbonne and a Business Administration degree from Ecole des Hautes Etudes Commerciales, Paris.

 

RICHARD C. PIANI - Director Qualifications:

·Leadership Experience – Chairman of Industrielle du Batiment-Morin, Chairman and CEO of Societe "La Cellophane";
·Industry Experience - Rhone-Poulenc (now Sanofi Aventis);
·Scientific, Legal or Regulatory Experience – Law degree, delegate for Industry to the City of Science and Industry; and
·Finance Experience – over 40 years of diverse international business experience.

 

WILLIAM M. MITCHELL, M.D., Ph.D., has been a Director since July 1998. Dr. Mitchell is a Professor of Pathology at Vanderbilt University School of Medicine and is a board certified physician. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from Johns Hopkins University, where he served as House Officer in Internal Medicine, followed by a Fellowship at its School of Medicine. Dr. Mitchell has published over 200 papers, reviews and abstracts that relate to viruses, anti-viral drugs, immune responses to HIV infection, and other biomedical topics. Dr. Mitchell has worked for and with many professional societies that have included the American Society of Investigative Pathology, the International Society for Antiviral Research, the American Society of Biochemistry and Molecular Biology and the American Society of Microbiology. Dr. Mitchell is a member of the American Medical Association. He has served on numerous government review committees, among them the National Institutes of Health, AIDS and Related Research Review Group. Dr. Mitchell previously served as one of our Directors from 1987 to 1989.

 

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WILLIAM M. MITCHELL, M.D., Ph.D. - Director Qualifications:

·Leadership Experience – Professor at Vanderbilt University School of Medicine. He is a member of the Board of Directors for Chronix Biomedical and is Chairman of its Medical Advisory Board. Additionally, he has served on multiple governmental review committees of the National Institutes of Health, Centers for Disease Control and Prevention and for the European Union, including key roles as Chairman;
·Academic and Industry Experience – Well published medical researcher with extensive investigative experience on virus and immunology issues relevant to the scientific business of Hemispherx along with being a Director of an entrepreneurial diagnostic company (Chronix Biomedical) that is involved in next generation DNA sequencing for medical diagnostics; and
·Scientific, Legal or Regulatory Experience - M.D., Ph.D. and professor at a top ranked school of medicine, and inventor of record on numerous U.S. and international patents who is experienced in regulatory affairs through filings with the FDA.

 

IRAJ E. KIANI, N.D., Ph.D., was appointed to the Board of Directors on May 1, 2002. Dr. Kiani is a citizen of the United States and England and resides in Newport Beach, California. Dr. Kiani served in various local government positions including the Mayor and Governor of Yasoug, Capital of Boyerahmand, Iran. In early 1980, Dr. Kiani moved to England, where he established and managed several trading companies over a period of some 20 years. Dr. Kiani is a planning and logistic specialist who is now applying his knowledge and experience to build a worldwide immunology network. Dr. Kiani received his Ph.D. degree from the University of Ferdosi in Iran, and his ND from American University.

 

IRAJ E. KIANI, N.D., Ph.D. - Director Qualifications:

·Leadership Experience – former Mayor and Governor of Yasoi in Iran;
·Industry Experience – Broad international network and contacts within the field of immunology;
·Scientific, Legal or Regulatory Experience – N.D. and Ph.D. with trading company management experience; and
·Finance Experience – over 30 years of international business experience.

 

CHARLES T. BERNHARDT is a Certified Public Accountant who has served as our Chief Financial Officer and Chief Accounting Officer since January 1, 2009. He attained an undergraduate in Accountancy from Villanova University and received a Masters’ Degree in Business Administration from West Chester University of Pennsylvania. Mr. Bernhardt was formerly the Director of Accounting for Healthcare Division of Thomson Reuters, where he was responsible for their accounting operations including the Physicians’ Desk Reference business and shared financial services for the Healthcare and Scientific Divisions from 2006 to 2008. He was also the Regional Controller for Comcast Cable during 1999 to 2002, Director of Finance for TelAmerica Media from 2003 to 2006 and earlier in his career a member of the Internal Audit management teams for American Stores Corporation and ICI Americas/Zeneca (currently AstraZeneca Pharmaceuticals). In 1986, he became a C.P.A. licensed in Pennsylvania and New Jersey while with public accounting’s “Big Four” firm of KPMG.

 

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DAVID R. STRAYER, M.D. has acted as our Medical Director since 1986. He has served as Professor of Medicine at the Medical College of Pennsylvania and Hahnemann University. Dr. Strayer is Board Certified in Medical Oncology and Internal Medicine with research interests in the fields of cancer and immune system disorders. He has served as principal investigator in studies funded by the Leukemia Society of America, the American Cancer Society, and the National Institutes of Health. Dr. Strayer attended the School of Medicine at the University of California at Los Angeles where he received his M.D. in 1972.

 

ROBERT DICKEY IV has served as Senior Vice President since June 2009. He has approximately 15 years of previous experience in biotech management as a CFO, COO and CEO following a career as an investment banker. His experience spans startups to revenue stage companies involved in cancer and CNS drug development, transplantation and computational drug design. Mr. Dickey has specific expertise in fund-raising, business development, project management, restructuring and international operations. Previously he spent 18 years as an investment banker, 14 of those at Lehman Brothers, with his background evenly split between M&A and capital markets transactions across a variety of industries. He has an undergraduate degree from Princeton University and an MBA from The Wharton School, University of Pennsylvania.

 

WAYNE S. SPRINGATE was promoted to Senior Vice President of Operations on May 1, 2011. Mr. Springate joined Hemispherx in 2002 as Vice President of Business Development when Hemispherx acquired Alferon N Injection® and its New Brunswick, NJ manufacturing facilities. He led the consolidation of our Rockville facility to our New Brunswick location as well as coordinated the relocation of manufacturing polymers from South Africa to our production facility in New Brunswick. He was also responsible for preparing and having a successful Preapproval Inspection by the FDA for our New Brunswick manufacturing plant in connection with the filing of our Ampligen® NDA. Currently he is managing a capital improvement budget to enhance our Alferon® facility in accordance with cGMP. Previously, Mr. Springate served as President for World Fashion Concepts in New York and oversaw operations at several locations throughout the United States and overseas. Mr. Springate assists the CEO in details of operations on a daily basis and is involved in all aspects of manufacturing, warehouse management, distribution and logistics.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires our Officers and Directors, and persons who own more than ten percent of a registered class of equity securities, to file reports with the Securities and Exchange Commission reflecting their initial position of ownership on Form 3 and changes in ownership on Form 4 or Form 5. Based solely on a review of the copies of such Forms received by us, we found that, during the fiscal year ended December 31, 2012, all of our Officers and Directors had complied with all applicable Section 16(a) filing requirements on a timely basis with regard to transactions occurring in 2012.

 

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Audit Committee and Audit Committee Expert

 

The Audit Committee of our Board of Directors consists of Richard Piani, Committee Chairman, William Mitchell, M.D. and Iraj E. Kiani, N.D., Ph.D. Mr. Piani, Dr. Mitchell, and Dr. Kiani are all determined by the Board of Directors to be Independent Directors as required under Section 121B(2)(a) of the NYSE MKT Company Guide. We do not have a “Financial Expert” as defined in the SEC rules on the committee in the true sense of the description because we believe that Richard Piani, an existing Director, has sufficient experience. Mr. Piani has 40 years of experience in business and has served in senior level and leadership positions for international businesses. His working experience includes reviewing and analyzing financial statements and dealing with financial institutions. We believe Mr. Piani, Dr. Mitchell, and Dr. Kiani to be independent of management and free of any relationship that would interfere with their exercise of independent judgment as members of this Committee. The principal functions of the Audit Committee are to (i) assist the Board in fulfilling its oversight responsibility relating to the annual independent audit of our consolidated financial statements and internal control over financial reporting, the engagement of the independent registered public accounting firm and the evaluation of the independent registered public accounting firm’s qualifications, independence and performance; (ii) prepare the reports or statements as may be required by NYSE MKT or the securities laws; (iii) assist the Board in fulfilling its oversight responsibility relating to the integrity of our financial statements and financial reporting process and our system of internal accounting and financial controls; (iv) discuss the financial statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; and (v) review disclosures by our independent registered public accounting firm concerning relationships with us and the performance of our independent accountants. This Committee formally met seven times in 2012 with all committee members in attendance for at least 80% of the meetings. Our General Counsel and Chief Financial Officer support the Audit Committee in its work. The full text of the Audit Committee’s Charter, as approved by the Board, is available on our website: www.hemispherx.net in the “Investor Relations” tab under “Corporate Governance”.

 

In September 2011, the Audit Committee engaged the services of a consultant who meets the SEC criteria of a Financial Expert to enhance the current structure and expertise of the Committee. After an extensive search, the Audit Committee selected Stewart L. Appelrouth, a Florida and North Carolina licensed Certified Public Accountant to directly support the efforts of the Audit Committee on an as-needed basis. Mr. Appelrouth is a Certified Valuation Analyst, Accredited in Business Valuation and a Diplomate of the American Board of Forensic Accounting. Mr. Appelrouth has a Masters’ Degree in Finance from Florida International University and an undergraduate degree in Business Administration from Florida State University. He is one of the founding partners of Appelrouth Farah & Co., which serves Southern Florida as a full service accounting and international business advisory firm specializing in auditing, domestic and international taxation, litigation support, forensic accounting, fraud examination and business valuation. The Firm is affiliated with MGI, a worldwide association of independent auditing and accounting firms.

 

Disclosure Controls Committee

 

In August 2011, our Board formed the Disclosure Controls Committee (“DCC”). The DCC reports to the Audit Committee and is responsible for procedures and guidelines on managing disclosure information.

 

The purpose of the DCC is to make certain that information required to be publicly disclosed is properly accumulated, recorded, summarized and communicated to the Board and management. This process is intended to allow for timely decisions regarding communications and disclosures and to help ensure that we comply with related SEC rules and regulations. Robert Dickey, one of our Senior Vice Presidents, is the DCC’s Investor Relations Coordinator and Chairperson. The other members of the DCC are Thomas K. Equels, our General Counsel, Charles Bernhardt, our Chief Financial Officer, William A. Carter, our Chief Scientific Officer, William Mitchell, one of our Independent Directors. Nancy McGrory Richardson, of Providence Management & Communication, serves the DCC as Deputy Investor Relations Coordinator. The full text of the DCC’s Charter, as approved by the Board, is available on our website: www.hemispherx.net in the “Investor Relations” tab under “Corporate Governance”.

 

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Code of Ethics

 

Our Board of Directors adopted a revision to the 2003 Code of Ethics and business conduct for officers, directors, employees, agents and consultants on October 15, 2009. The principal amendments included broadening the Code's application to our agents and consultants, adoption of a regulatory compliance policy and adoption of a policy for protection and use of Company computer technology for business purposes only. On an annual basis, this Code is reviewed and signed by each Officer, Director, employee and strategic consultants with none of the amendments constituting a waiver of provision of the Code of Ethics on behalf of our Chief Executive Officer, Chief Financial Officer, Controller, or persons performing similar functions.

 

You may obtain a copy of this Code by visiting our web site at www.hemispherx.net (Investor Relations / Corporate Governance) or by written request to our office at 1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103.

 

ITEM 11.       Executive Compensation.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This discussion and analysis describes our executive compensation philosophy, process, plans and practices as they relate to our “Named Executive Officers” (“NEO”) listed below and gives the context for understanding and evaluating the more specific compensation information contained in the narratives, tables and related disclosures that follow:

·Dr. William A. Carter, Chief Executive Officer (“CEO”), President and Chief Scientific Officer (“CSO”);
·Charles T. Bernhardt, Chief Financial Officer (“CFO”) & Chief Accounting Officer (“CAO”);
·Thomas K. Equels, General Counsel;
·Dr. David Strayer, Chief Medical Officer (“CMO”) and Medical Director; and
·Robert Dickey, IV, Senior Vice President (“SVP”).

 

Overview of Our Business Environment

 

Hemispherx is a specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged in the clinical development of new drug therapies based on natural immune system enhancing technologies for the treatment of viral and immune based chronic disorders. We were founded in the early 1970s doing contract research for the National Institutes of Health. Since that time, we have established a strong foundation of laboratory, pre-clinical and clinical data with respect to the development of natural interferon and nucleic acids to enhance the natural antiviral defense system of the human body and to aid the development of therapeutic products for the treatment of certain chronic diseases.

 

Our current strategic focus is derived from four applications of our two core pharmaceutical technology platforms Ampligen® and Alferon N Injection®. The commercial focus for Ampligen® includes application as a treatment for CFS and as an influenza vaccine enhancer (adjuvant) for both therapeutic and preventative vaccine development. Alferon N Injection® is a FDA approved product for refractory or recurring genital warts. Alferon® LDO (Low Dose Oral) is a formulation that is currently approved to undertake clinical testing targeting influenza.

 

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Governance of Compensation Committee

 

The Compensation Committee consists of the following three directors, each of whom is “independent” under applicable NYSE MKT rules, a “Non-Employee Director” as defined in Rule 16b-3 under the Exchange Act, and an “Outside Director” as defined under the U.S. Treasury regulations promulgated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”): Dr. Iraj E. Kiani, N.D (Chair), Dr. William Mitchell, M.D. and Richard C. Piani. The Compensation Committee makes recommendations concerning salaries and compensation for senior management and other highly paid professionals or consultants to Hemispherx. The full text of the Compensation Committee’s Charter, as approved by the Board, is available on our website: www.hemispherx.net in the “Investor Relations” tab under “Corporate Governance”. This Committee formally met four times in 2012 and all committee members were in attendance for at least 75% of the meetings. Our General Counsel, Chief Financial Officer and Director of Human Resources support the Compensation Committee in its work.

 

Results of Stockholder Advisory Vote on Executive Compensation

 

At the September 19, 2012 Annual Meeting of Stockholders, the Stockholders approved the annual, non-binding “say on pay” advisory vote on Executive Compensation with 85.35% of the shares cast to affirm the plan.

 

Our Compensation Committee reviews its executive compensation policies annually and takes into account the results of prior say-on-pay advisory votes. After reviewing the results of the 2011 say-on-pay advisory vote, the Committee had:

·Developed Company-wide goals and objectives with the intent to increase Stockholder value, enhance the “pay for performance” concept, attempted to address the needs of patients and enhance financial factors such as raising capital, reestablishing revenue streams, cost containment and/or improving the results of operations;
·Attempted to reinforce a Pay for Performance environment for the Executive Team with emphasis of sharing the economic goals of the Stockholders;
·Reviewed the Executive Team’s Company-wide goals and individuals specific goals in relation to each job performance for each given year. In its review of each member of the Executive Team, the Committee utilized a weighted-average rating process regarding the goals and responsibilities specific to each individual as well as their contribution in meeting Company’s overall goals;
·Reviewed peer group financial data of comparable publicly-traded companies for 2011 and 2010 with emphasis on a comparison of executive compensation as a factor to various Balance Sheet ratios to determine reasonableness to the respective companies;
·Considered the change in the market value of the Company’s stock during the year in relation to Management’s efforts and ability to impact the results;
·Mandated that the standard terms of future employee options issued by the Company require that such options not vest sooner than one year from the date of issuance and that, to the extent that any such options have not vested on the date of an Executive’s termination, the options will expire;
·Issued new options to employees at the rate of 110% of the Company’s NYSE MKT stock market trading value at the time of award; and
·Adopted a policy to facilitate compliance with Dodd-Frank’s Claw-Back Compensation Recoupment provisions.

 

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Process

 

Our Compensation Committee is responsible for determining the compensation of our NEO included in the “Summary Compensation Table” below. For purposes of determining compensation for our NEO, our Compensation Committee takes into account the recommendation of our Chief Executive Officer. The Compensation Committee is also responsible for overseeing our incentive compensation plans and equity-based plans, under which stock option grants have been made to employees, including the NEO, as well as non-employee Directors and strategic consultants.

 

The following table summarizes the roles of each of the key participants in the executive compensation decision-making process:

 

Compensation Committee Fulfills the Board of Directors' responsibilities relating to compensation of Hemispherx’ NEO, other non-officer Executives and non-Executives.
     
  Oversees implementation and administration of Hemispherx’ compensation and employee benefits programs, including incentive compensation and equity compensation plans.
     
  Reviews and approves Hemispherx’ goals and objectives and, in light of these, evaluates each NEO's performance and sets their annual base salary, annual incentive opportunity, long-term incentive opportunity and any special/supplemental benefits or payments.
     
  Reviews and approves compensation for all other non-officer Executives of Hemispherx including annual base salary, annual incentive opportunity, long-term incentive opportunity and any special/supplemental benefits or payments.
     
  In consultation with the CEO and CFO, reviews the talent development process within Hemispherx to ensure it is effectively managed and sufficient to undertake successful succession planning.
     
  Reviews and approves employment agreements, severance arrangements, issuances of equity compensation and change in control agreements.
     
Chairman and CEO Presents to the Compensation Committee the overall performance evaluation of, and compensation recommendations for, each of the NEO and other non-officer Executives.
     
Chief Financial Officer and Director of Human Resources Reports directly or indirectly to the Chief Executive Officer.
     
  Assists the Compensation Committee with the data for competitive pay and benchmarking purposes.
     
  Reviews relevant market data and advises the Compensation Committee on interpretation of information, including cost of living statistics, within the framework of Hemispherx.

 

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  Informs the Compensation Committee of regulatory developments and how these may affect Hemispherx’ compensation program.

 

Objectives and Philosophy of Executive Compensation

 

The primary objectives of the Compensation Committee of our Board of Directors with respect to Executive compensation are to attract and retain the most talented and dedicated Executives possible, to tie annual and long-term cash and stock incentives to achievement of measurable performance objectives, and to align Executives' incentives with stockholder value creation. To achieve these objectives, the Compensation Committee expects to implement and maintain compensation plans that tie a substantial portion of Executives' overall compensation to key strategic financial and operational goals such as the establishment and maintenance of key strategic relationships, the development of our products, the identification and advancement of additional products and the performance of our common stock price. The Compensation Committee evaluates individual Executive performance with the goal of setting compensation at levels the Committee believes are comparable with Executives in other companies of similar size and stage of development operating in the biotechnology industry while taking into account our relative performance, our own strategic goals, governmental regulations and the results of Stockholder Advisory Votes regarding executive compensation.

 

Use of Compensation Data

 

Our compensation plans are developed by utilizing publicly available compensation data for national and regional companies in the biopharmaceutical industry as well as web sites that specialize in compensation and/or employment data. We believe that the practices of this group of companies and/or data obtained from employment industry organizations, provide us with appropriate compensation benchmarks necessary to review the compensation recommendations by the CEO, CFO and/or Human Resources Department. In 2012 and 2011, the Committee did not engage the services of an independent compensation consultant, but alternatively utilized web-based organizations and data bases such as Salary.com, to help them analyze compensation data and compare our programs with the practices of similar national and/or regional companies represented in the biopharmaceutical industry.

 

Elements of Executive Compensation

 

The Compensation Committee has adopted a mix among the compensation elements in order to further our compensation goals. The elements include:

·Base salary (impacted by cost of living adjustments);
·Variable compensation consisting of a cash bonus based upon individual and overall Company performance;
·Performance incentive bonus based on the accomplishment of Company sales milestones or activity;
·Long-term bonus incentive programs consisting of the Employee Bonus Pool Program;
·Stock option grants with exercise prices set in excess of fair market value at the time of grant and, effective December 2011, not vesting sooner than one year from the date of issuance; and
·Adoption of a policy to facilitate compliance with Dodd-Frank’s Claw-Back Compensation Recoupment provisions.

 

Executive compensation consists of the following elements:

 

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Base Salary

 

Base salaries for our Executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, we believe that Executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. For those NEO with employment agreements, base salary is determined and set forth in the agreement and the Compensation Committee reviews the base salary prior to renewal of such agreement. Base salaries for the other NEO are normally reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. While this review process would normally occur in the fourth quarter of each year, in recent years this review has occurred when NEO’s employment agreements required restatement, amendment or replacement. However after analysis of overall Company compensation, the Committee authorized a non-discriminatory and universally applied cost of living increase to the base salaries of all full-time employees of record effective December 31, 2012, 2011 and 2010 at the rates of 2.1%, 3.6% and 3.0%, respectively. Additional changes to our NEO’s base salaries could be undertaken in a future determination by the Compensation Committee at its discretion. During 2012, none of the employment contracts of NEOs were created, amended or restated. During 2011, employment agreements were amended and restated for the following NEOs: Dr. William Carter, Charles Bernhardt and Thomas Equels. Robert Dickey’s employment agreement was last renewed in September 2010 and Dr. David Strayer does not currently have an employment agreement with the Company.

 

Annual Bonus

 

Our compensation program includes eligibility for an annual performance-based cash bonus in the case of all NEO and certain senior, non-officer Executives. The amount of the cash bonus depends on the level of achievement of the stated corporate, department, and individual performance goals, with a target bonus generally set as a percentage of base salary. As provided in their respective employment agreement, during the year ended December 31, 2012, the following NEO were eligible for an annual performance bonus based on their salaries, the amount of which, if any, is determined by the Board of Directors in its sole discretion based on the recommendation of the Compensation Committee:

 

·Dr. William Carter, Chairman & CEO (bonus opportunity up to 25%);
·Thomas Equels, General Counsel, Litigation Counsel, Secretary and Executive Vice Chairman of the Board (bonus opportunity up to 25%); and
·Charles Bernhardt, Chief Financial Officer and Chief Accounting Officer (bonus opportunity up to 25%).

 

The Compensation Committee utilizes annual incentive bonuses to compensate NEO and certain senior, non-officer executives (the “Executive Team”) for attainment or success towards overall corporate financial and/or operational goals along with achieving individual annual performance objectives. These objectives will vary depending on the individual Executive, but generally relate to strategic factors such as establishment and/or maintenance of key strategic relationships, development of our products, identification, research and/or development of additional products, enhancing financial factors such as raising capital, cost containment and/or improving the results of operations. The Compensation Committee, in light of established individual and Company-wide goals and objectives, evaluated the performance of each NEO, key executive and overall staff in order to determine each respective annual incentive opportunity including an analysis by the Compensation Committee that provides the following information:

 

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1.The Company-wide goals and objectives along with individual performance goals for each NEO used to determine annual bonuses for the fiscal year;
2.How each goal individually or in totality was weighted, if applicable, to the extent that any of the performance goals were quantitatively and/or quantitatively measurable;
3.The threshold, target, and maximum levels of achievement of each performance goal, if applicable;
4.The intended relationship between the level of achievement of Company-wide performance goals and the amount of bonus to be awarded;
5.The intended relationship between the level of achievement of each NEO’s individual performance goals and the amount of bonus to be awarded;
6.The evaluation by the Committee of the level of achievement by each NEO of the Company-wide and individual performance goals applicable to him/her individually;
7.If applicable, whether the Committee reviewed any report(s) from compensation consultant(s) and/or web based organizations and data bases;
8.How this level of achievement translated into the actual bonuses awarded for the 2011 fiscal year;
9.The adequate disclosure of the percentage of base salary awarded in the form of an incentive bonus to each NEO as a result of their or the Company’s performance; and
10.If applicable, how the Company’s compensation policies and practices relate to the Company’s risk management.

 

The Compensation Committee also undertook the initial steps to review and reestablish goals and objectives for the Executive Team regarding possible bonuses for the year ending December 31, 2012. On an overall basis, all bonus eligible member of the Executive Team would share the following Company-wide goals:

 

A.Continued productive interaction with the FDA concerning issues necessary for approval of Ampligen for CFS;
B.Continued progress towards non-USA approval of Ampligen® for Chronic Fatigue Syndrome;
C.An overall strategic plan for Ampligen® and Alferon® to be submitted to the Board;
D.Strategic plans for the marketing and partners for Ampligen® to be submitted to the Board;
E.Continued development of enhancement of vaccines requiring Ampligen®;
F.Success in the protection of Company Intellectual Property;
G.Continued development of Alferon® LDO;
H.Progress in the return to commercialization of Alferon N Injection®;
I.Continued development of Ampligen® and Alferon N Injection® for treatment of influenza;
J.Maintaining the overall financial strength of the Company and operations consistent with the budget;
K.Implementation of research & development partnerships;
L.Implementation of Ampligen® clinical trials in cancer with commercial partner(s);
M.Implementation of Ampligen® clinical trials in cancer with academic partner(s);
N.Increase in clinical trials of Alferon N Injection® and additional indications; and
O.Acquisition of complimentary pharmaceutical technologies and/or drugs/vaccines.

 

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On an annual basis and at the sole discretion of the Compensation Committee, with input from the CEO or the Executive’s direct supervisor, the Committee evaluates the individual performance of each member of the Executive Team as to his/her achievement and/or contribution towards meeting the overall Company-wide goals along with his/her accomplishments specific to his/her job description. The outcome of the Committee’s analysis is utilized to determine if a bonus is warranted, and if so, the dollar amount or percentage of the Executive Team member’s year-end base pay rate to be awarded.

 

Prior to year-end or during the first fiscal quarter of the subsequent year, the Compensation Committee would complete their analysis utilizing any internal and external documentation desired, including but not limited to reports from independent analysts and/or corporate benchmarking organizations. Upon analysis completion, the Compensation Committee made formal recommendations to the Board based on their findings with regard to bonuses for the respective year ended. Due to the subjective nature of the Company-wide goals regarding the success and analysis of an Executive in meeting or exceeding elements of his/her specific job duties, the goals were not designed to be weighted in value or quantitative in nature. The bonuses were designed to be awarded based on a subjective cumulate nature of the goals deemed attainable, employee performance and progress towards achievement. The bonus threshold was designed to range from zero percent to twenty-five percent, with a target bonus of approximately twenty or twenty-five percent, calculated from the individual’s year-end base pay rate.

 

In December 2012 and January 2013, the Compensation Committee reviewed the Executive Team’s Company-wide goals as detailed in the Committee’s prior 2012 Meeting Minutes along with specific goals documented in each individual’s job description. Upon individual review of each member of the Executive Team, the Committee concluded that the Executive Team members had excelled in meeting their goals and responsibilities as documented in each individual’s job description as well as made significant progress in meeting corporate goals with outstanding success. Additionally upon analysis of publicly-traded Peer Group companies, the Committee observed that, for 2011 and 2010, Hemispherx’ Officer Compensation Expense as compared to various Balance Sheet ratios were consistently less than that of the average of the Peer Group. Finally, the Committee considered the change in the market value of the Company’s stock during 2012 and reached a consensus that the impact of the stock’s trading value should be considered to have a neutral effect on employees’ performance evaluation due to their conclusion of the following observations:

1.The overall devaluation in the trading value of U.S. bio-pharmaceutical companies;
2.The market value of the Company’s stock had been volatile during 2012 and traded from a high of $1.10 to a low of $0.19;
3.Confidence that Company’s employees