-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fnk6wBcXecV1hW2TW4aIF7Ey08QrnUa3CBzIUQ9MArFLpIwYDAUpQ4ssuUZ54LgD aaRubZzAeph8jZLn9Ve/7Q== 0000950135-98-002114.txt : 19980401 0000950135-98-002114.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950135-98-002114 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORAVAX INC /DE/ CENTRAL INDEX KEY: 0000900122 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 043085209 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26034 FILM NUMBER: 98584205 BUSINESS ADDRESS: STREET 1: 38 SIDNEY ST 4TH FLOOR CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6175266000 10-K405 1 ORAVAX, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1997 Commission File No. 0-26034 ------------------------------------ ---------------------------- OraVax, Inc. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware 04-3085209 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 38 Sidney Street, Cambridge, Massachusetts 02139 ------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (617) 494-1339 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ----------------------------- Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ 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 the Form 10-K. [X] The aggregate market value of voting Common Stock held by nonaffiliates of the registrant was $18,222,638, based on the last reported sale price of the Common Stock on the Nasdaq consolidated transaction reporting system on March 13, 1998. Number of shares outstanding of the registrant's class of Common Stock as of March 13, 1998: 10,405,641 Page 1 2 PART I ITEM 1. BUSINESS OraVax, Inc. ("OraVax" or the "Company") was incorporated in Delaware in 1990 and has its principal offices and laboratories at 38 Sidney Street, Cambridge, Massachusetts (telephone: 617-494-1339) and manufacturing facilities in Canton, Massachusetts. OraVax's mission is the discovery, development and commercialization of biologic products for the prevention or treatment of human infectious diseases. The Company's products are vaccines that stimulate the body's own immunity to provide long term protection against disease, as well as antibody products that provide immediate passive immunity to treat existing infections or to protect against an acute disease risk. The Company employs both classical biologic product methods and innovative technologies to produce therapeutics and preventatives that meet the challenges of each infection and disease process. OraVax is currently pursuing four proprietary product development programs which target diseases that have high rates of incidence, compelling pharmaco-economic profiles, and against which no adequate therapeutic or preventive antibody products or vaccines are currently available. The diseases targeted by these products include, 1) peptic ulcers, gastritis and stomach cancer, 2) viral pneumonia in children, 3) antibiotic-associated colitis, and 4) a group of related viral diseases including Yellow Fever, Japanese encephalitis, dengue, tick borne encephalitis and hepatitis C. The Company's product candidates are designed to generate either mucosal or systemic immunity, as appropriate to each specific disease target. The Company has developed a portfolio of biologic production technologies appropriate to the biology of each infectious agent. The Company's principal product candidates are the following:
PRODUCT INDICATION TECHNOLOGY STATUS CANDIDATE Helicobacter pylori Prevention and Recombinant protein Phase II trials (H. pylori) vaccines treatment of peptic vaccine ulcers, gastritis and stomach cancer HNK 20 antibody Prevention of Monoclonal IgA Phase III trials pneumonia caused by nosedrop antibody respiratory syncytial virus in high risk children CdVax vaccine and CdIG Prevention/treatment Toxoid vaccine and Toxoid IND 1998 immune-globulin of hyper-immune antibiotic-associated globulin colitis ChimeriVax(TM) Prevention of Chimeric live IND 1998 Japanese encephalitis infection by the attenuated viral (dengue, hepatitis C, Japanese encephalitis vaccine TBE) virus Arilvax(R) YF vaccine Prevention of Single - dose live OraVax to facilitate (A product of Evans infection by the attenuated viral US registration Medical, Limited) Yellow Fever virus vaccine (already marketed in the UK and Europe) Phase III
Page 2 3 In addition to its proprietary products, OraVax has also been selected as the manufacturer of certain live virus and bacterial vaccines for the US Department of Defense, through a program known as the Joint Vaccine Acquisition Program (JVAP). These vaccines include those against smallpox, tularemia, and arboviral encephalitis. While these diseases are found in nature, the objective of the program is to provide the US military with vaccines needed to protect against the potential use of these microbes as biologic warfare agents. Candidate vaccines developed by the Department of Defense will be transferred to OraVax for advanced development and completion of the FDA approval process for routine manufacture at OraVax's Canton, Massachusetts manufacturing facility. Page 3 4 BUSINESS STRATEGY Developing OraVax's Technology Platform. The Company has recruited a staff of experienced scientists, technicians and managers representing the range of skills the Company believes will be necessary to identify, evaluate and develop commercial technologies and product opportunities. In addition, the Company has developed collaborations and contracts with universities, government institutions and corporations to complement and extend its internal resources and assist in product development. The Company continues to build upon its understanding of the human immune system, passive antibody preparations and vaccine formulations, and to pursue product candidates that leverage the Company's technology and know-how. Identifying Medically and Economically Important Disease Targets. OraVax focused its development efforts on diseases that are preventable or treatable by either active (vaccine) or passive (antibody) immunity, have near-term commercialization potential and present large market opportunities. The Company's focus has been on diseases of the mucosal surfaces and has been broadened to include a series of arboviral (insect borne) diseases addressable by single-dose live viral vaccines. The Company considers medical need, product differentiation, market research and the potential for pharmaco-economic advantages during product selection and throughout development. Commercializing Products Efficiently. The Company evaluates and selects product commercialization strategies on a product-by-product basis. In March 1995, the Company formed a joint venture (the "Merieux Joint Venture") with Pasteur Merieux Serums & Vaccins S.A., now Pasteur Merieux Connaught ("Merieux"), to develop H. pylori therapeutic and preventive vaccines, to acquire complementary technology, marketing and distribution expertise and financial support for vaccines that the Company believes have global commercial prospects. In June 1996, the Company appointed CSL Limited as exclusive distributor of the Company's monoclonal IgA antibody against viral pneumonia in children, in Australia and selected other Southern Hemisphere countries. The Company is currently seeking corporate partnerships to assist in commercialization of HNK20 in the U.S. and Europe. The Company recently completed manufacture of its CdVax vaccine (for the prevention of antibiotic-associated diarrhea and colitis) at the Center for Applied Microbiology Research in England, and is seeking a partner for use of the vaccine in production of a hyper-immune globulin. The Company is pursuing clinical development with its own funds, supplemented with NIH SBIR grants and NIH clinical funding. In November 1997, the Company acquired exclusive U.S. sales, marketing and distribution rights to the Arilvax(R) Yellow Fever vaccine from Evans Medical, a subsidiary of Medeva, PLC. The Company believes it can market this product effectively, with a small sales force, since the market is currently restricted to the U.S. military and to physicians and travel medicine clinics approved by State Health Departments. The Company's current strategy for commercialization of the Japanese encephalitis (JE), dengue and related vaccines is to form marketing partnerships with U.S. or European multinational pharmaceutical companies for use in the traveler and military markets. The Company also seeks regional partners for the manufacture and sale of the vaccines in countries where the corresponding diseases are endemic. The vaccines acquired under the Department of Defense contract will be sold principally to the U.S. military through the JVAP program, to other military as approved and to the limited civilian markets directly or through partner companies in the JVAP program. Manufacturing Strategy. The Company's strategy is to share manufacturing rights with its partners on a regional basis. OraVax has retained the rights to manufacture H. pylori vaccines in the U.S., and its partner, Pasteur Merieux is expected to manufacture the vaccines for Europe at its facilities in Lyon, France. Depending on the future circumstances of this product development program, OraVax may expand its manufacturing capacity, subcontract manufacturing to third parties or source product through its partner. The Company acquired a 47,000 sq. ft., free-standing manufacturing facility in Canton, Page 4 5 Massachusetts, designed and equipped for the commercial production of biologic products in 1996. The Company anticipates that its initial use of the facility will be for the production of vaccines for the Joint Vaccine Acquisition Program. The facility will also accommodate production development activities for OraVax's proprietary products depending on the outcome of product development. SCIENTIFIC BACKGROUND The human immune system is comprised of two distinct compartments, systemic and mucosal, each including immunity mediated directly by the cells of the immune system, "cell mediated immunity" and immunity mediated by antibody proteins, "humoral immunity". Immunologically reactive cells react directly with the target antigens on viruses or bacteria to inactivate them and also have direct cytotoxic effects on virally infected cells. The systemic humoral immune system, which protects the blood and deep tissues of the body, relies on antibodies composed principally of IgG and IgM immunoglobulins. The mucosal immune system, which protects mucosal surfaces, such as the digestive, respiratory and genitourinary tracts and the surface of the eye, relies on antibodies composed principally of the IgA class of immunoglobulins. Historically, vaccine or antibody development has been focused on the systemic immune system, with the objective of increasing IgG antibodies in the blood by injecting vaccines or specific preformed immunoglobulins. However, this approach alone often does not provide protection for mucosal surfaces as they do not effectively induce or provide IgA immunoglobulin. The mucosal surfaces, which comprise a total surface area of over 3,600 square feet, represent either the site of disease or the portal of entry into the body for most infectious agents. Furthermore, IgA antibodies produced by the mucosal immune system constitute over 75% of all antibodies produced by the human immune system. Accordingly, the Company believes that its understanding of both systemic and mucosal immunity provides an attractive opportunity for developing products that treat or prevent infectious disease. Such products include specific antibodies that are applied directly to mucosal surfaces and vaccines that are designed to stimulate the body to produce immunity that is effective in both the mucosal and / or systemic compartments. Such vaccines are composed of one or more antigens of the pathogen and are specifically formulated to induce the form of immunity most effective against each disease agent. Benefits of Mucosal Immunity. Conventional vaccines and antibodies are designed to provide systemic, as opposed to mucosal immunity and are administered by injection. Such products include routine childhood vaccines (e.g., Diphtheria/Tetanus/Pertussis, Hepatitis B and Measles/Mumps/Rubella), adult vaccines (e.g., influenza and Hepatitis B) and immune globulins (e.g., rabies and cytomegalovirus). These products provide immunity to infection only after the infecting organism has entered the bloodstream or deep tissues of the body. In contrast, mucosal vaccines and antibody products are not injected but rather are applied to mucosal surfaces (e.g., orally or intranasally). Mucosal vaccines are designed to prevent infection at the point of entry into the body, prior to deep tissue penetration. Mucosal vaccine and antibody products may prevent or treat infections that are not susceptible to a systemic immunity approach and can complement the effectiveness of systemic immunity. The Company believes that oral and other non-injected products based upon mucosal immunity will offer a number of important clinical and commercial advantages relative to injected antibody or vaccine products, including: Greater Clinical Efficacy. Mucosal immunity to specific antigens has been demonstrated to be capable of preventing or eliminating mucosal infections in cases where systemic immune responses have not been effective. The Company believes that its approach to the generation of immunity will result in products that more effectively prevent or treat many infectious diseases. In particular, the Company expects that it will be able to develop vaccines to provide mucosal immunity against diseases for which there are no current vaccines or for which the protection afforded by systemic immunity has not been adequate. Page 5 6 Higher Level of Safety. Injected vaccines and antibody products can cause fever, inflammation, acute allergic reactions and, although rare, severe reactions resulting in disability or death. The Company believes oral vaccines and non-injected antibody products will generally result in a lower incidence of adverse reactions. However, the Company has pursued injected product strategies for some product targets when injection has been determined to be the most effective or cost efficient method of administration of a particular product. Lower Cost of Administration. It is anticipated that the Company's products will generally be administered orally or through nose drops, nasal sprays, eye drops, suppositories or other methods involving direct contact with mucosal surfaces. In contrast to products that require intravenous or intramuscular injection, these methods of administration will not require trained personnel or utilization of hospital or outpatient facilities, effectively lowering the cost of administration. However, for certain vaccines and antibodies the dose of product required may be significantly lower when given by injection, resulting in a lower cost of treatment; in such cases, the Company may elect to develop injected products. Improved Patient Compliance. The Company believes that the greater ease of administration of its products will result in increased patient compliance. In the case of the oral or nosedrop products, the need for doctor or hospital visits to receive the product may be avoided. Products such as the Company's live viral vaccines, the single dose live-attenuated vaccine against Japanese encephalitis is intended to replace current vaccines which require eight doses to be given by the time a child is fifteen years old. PRODUCTS UNDER DEVELOPMENT VACCINES AGAINST H. PYLORI Market Opportunity. OraVax is developing vaccines designed to prevent and treat peptic ulcers and chronic gastritis caused by H. pylori. According to an NIH Consensus Statement dated February 1994, H. pylori has been associated with virtually all duodenal ulcer cases and more than 80% of gastric ulcer cases. In 1994, H. pylori was classified as a Category 1 carcinogen, causing the majority of stomach cancer, by the World Health Organization. Although frequently asymptomatic, all persons infected by H. pylori have chronic stomach inflammation (gastritis). It is estimated that at least five million people suffer from active peptic ulcers each year and approximately 350,000 to 500,000 new cases are diagnosed annually in the United States. Approximately 600,000 patients are hospitalized each year in the United States with peptic ulcers. Serious complications occur in approximately one-third of these cases, including intestinal obstruction, upper gastrointestinal hemorrhage and perforation. Further, each year over 6,000 deaths in the United States are directly caused by ulcers, and peptic ulcers are a contributing factor in an additional 11,000 deaths. Approximately 10% of the population will develop peptic ulcer disease during its lifetime. The Company estimates that the direct medical costs of treating peptic ulcers in the United States exceed $5 billion per year. The Company estimates that approximately 30% of the United States population is infected with H. pylori, while infection rates in most parts of the world exceed those in the United States. In Japan and parts of Europe (including Greece, Germany and all of Eastern Europe), the prevalence of infection is nearly twice that of the United States. In Korea the infection rate approximates 90% while in developing countries nearly 100% of the population is infected at an early age. The increased prevalence of infection in these areas is associated with a high risk of developing peptic ulcers and gastric cancer. In Japan, for example, the risk of dying of gastric cancer is estimated to be as high as 8% as compared with 0.8% in the United States. In 1996 the World Health Organization estimated that H. pylori was responsible for approximately 550,000 new cases per year of stomach cancer. Until recently, treatment of peptic ulcers focused on the use of antagonists of acid secretion, such as the H-2 antagonists, Tagamet (cimetidine) and Zantac (ranitidine), and the proton pump inhibitors, Prilosec (omeprazole) and Lanzor (lansoprazole). High rates of recurrence and the need for chronic therapy are associated with anti-secretory disease management. Several regimens that include antibiotics and inhibitors of acid secretion are now licensed in the U.S. for the treatment of peptic ulcer disease and Page 6 7 prevention of ulcer recurrence. These regimens have shown 70-90% rates of cure in clinical trials. However, antibiotic treatments have been complicated by the need to treat for prolonged periods with multiple drugs, by side effects and problems with patient compliance, by relapses if treatment is interrupted, and, most importantly, by the development of antibiotic-resistant strains of the bacteria. Moreover, in some areas of the world, antibiotic treatment has been ineffective, due in part to a high rate of reinfection. OraVax Approach. The Company is developing vaccines to treat H. pylori infection, to prevent reinfection in previously-infected persons and to stimulate immunity in uninfected persons. The Company believes that vaccines directed against H. pylori, if successfully developed, would eventually be considered for routine administration as treatment for peptic ulcer disease and chronic gastritis and as a preventive for the full spectrum of H. pylori-caused diseases The Company is evaluating antigens derived from H. pylori bacteria, as well as several formulation technologies for use in vaccines designed to combat existing infections (treatment of chronic gastritis or recurrent peptic ulcer) and/or to prevent primary infection or reinfection. Preclinical and clinical studies have confirmed the activity of OraVax's leading, proprietary vaccine candidate antigen, the urease protein. When given by the mucosal route or by injection, urease has both prophylactic and therapeutic activity in pre-clinical studies. In 1997, the Company and its partner, PMC licensed the genome of H. pylori from Human Genome Sciences, Inc. and initiated the investigation of gene products of the bacteria as additional antigens for incorporation into a vaccine formulation. To date, over 350 genes have been cloned and the gene products tested. Experimental vaccines incorporating eight of these antigens have shown prophylactic or therapeutic activity in preclinical studies. The Company has filed patent applications or secured access to the patents or patent applications of others on over 740 antigens, including urease and each of the other eight active vaccine antigens. A wide variety of formulation technologies are also being evaluated by the Company and its collaborators. In animal studies, the LT mucosal adjuvant has shown the highest level of activity to date, but very promising results have been obtained following injection of antigen with conventional and novel adjuvants all of which are acceptable for human use. The Company's approach may result in separate vaccine products for (1) treatment of existing infection and disease, (2) prevention of reinfection in patients cleared of their infections by antibiotics, and (3) routine prophylactic immunization early in life to prevent initial infection. The Company is in Phase II clinical trials with its leading candidate vaccine called UreAB. The vaccine is based on urease, a major component of the H. pylori bacteria with characteristics that make it an excellent vaccine antigen. Urease is present in all strains of H. pylori and is exposed on the surface of the bacteria as a target for antibody. OraVax has cloned the urease gene and developed methods for efficiently producing purified non-toxic urease as an oral vaccine candidate. The Company's preclinical studies in several species, including nonhuman primates, have demonstrated that the urease antigen, in combination with one of several adjuvants, stimulates a strong immune response and has prophylactic and therapeutic activities. In December 1995 the Company conducted a Phase I therapeutic clinical safety study in chronically infected adults at the Centre Hospital Universitaire Vaudois ("CHUV") in Lausanne, Switzerland, which was completed, and demonstrated the safety of the UreAB oral vaccine without any adjuvant. In October 1996 the Company announced results of a randomized, double-blind, placebo- controlled Phase II safety and immunogenicity study of recombinant urease, formulated with a mucosal adjuvant. The study, conducted at the CHUV and the Center for Vaccine Development in Baltimore, Page 7 8 involved 24 healthy adults with chronic gastritis due to H. pylori infection. Subjects were assigned to one of five treatment groups, and received either placebo, urease at graded doses of 20, 60 or 180 mg plus LT (heat-labile toxin of Escherichia coli) as a mucosal adjuvant, or adjuvant alone. The study medications were orally administered weekly for four consecutive weeks. Participants underwent gastroscopy and four gastric biopsies were taken both prior to and one month following immunization to monitor the status of their infection by quantitative bacterial culture, by breath tests and by histological examination of the biopsies. Administration of urease with LT was generally well-tolerated, with immune responses - as measured by the ELISPOT assay for IgA antibody secreting cells observed in 6 of 14 (43%) subjects in the urease treatment groups. In contrast, 0 of 10 (0 percent) placebo or LT recipients had a response. Results demonstrated that the UreAB vaccine elicits a mucosal immune response and that LT acts as a mucosal adjuvant. The level of infection in each patient was assessed by quantitative culture of multiple gastric biopsies taken before and after treatment. The significance of the mean change from baseline to post- immunization bacterial density was assessed using statistical methods within each treatment group. In addition, subjects in the treatment groups which contained an active dose of urease were combined into one group and subjects in the treatment groups containing the placebo dose of urease were combined into another group. Treatment group comparisons were carried out on these two combination groups. All three treatment groups containing an active dose of urease showed a decrease in H. pylori bacterial density from baseline to post-immunization, indicating a favorable response to treatment. Subjects receiving active urease experienced a larger decrease in gastric bacterial densities from baseline to post-immunization than did those subjects receiving placebo. The decrease for subjects receiving active urease was significantly different from zero (p=0.032), whereas the decrease for subjects receiving a placebo dose of urease was not significantly different from zero (p=0.425). While the study was in a small population, it provided the first statistically significant evidence that a vaccine could have therapeutic activity in humans naturally infected with H. pylori. These results are consistent with earlier results in animal models, and demonstrate the feasibility of vaccine development. Based on the results indicating therapeutic activity of UreAB, efforts are being directed toward optimizing the vaccine formulation. These efforts include combining additional novel, proprietary antigens with UreAB, optimization of dosing, schedule of immunization, adjuvants and delivery systems. Consequently, in October, 1997 the Company initiated a second Phase II safety and immunogenicity clinical study at the Beth Israel-Deaconess Medical Center, Boston, the objective of which was to optimize the formulation of UreAB. In this study, conducted in 42 healthy subjects without H. pylori, UreAB is given by two different routes (oral liquid or enterically coated capsules) and with graduated doses of the LT adjuvant. Multiple immunological measurements are being made to define the optimal route of immunization and dose of LT. The study is in progress. The Company is also undertaking three other clinical studies, with the objective of identifying populations in which vaccine efficacy can be measured. In January, 1997 the Company initiated a study in Mexico City in which up to 200 H. pylori-infected children and adults are being followed after antibiotic cure to determine the incidence of reinfection. A similar study in Lima, Peru was initiated in January, 1998. The results of these studies, which are expected to take 18-24 months, will provide a basis for Phase II and III trials of the ability of immunization to prevent reinfection. In a third study, initiated in October 1997 at the Veterans Administration Medical Center and Baylor University, Houston, Texas, healthy uninfected volunteers will be challenged with Helicobacter pylori. This study will provide a human challenge model in which the prophylactic activity of UreAB can be determined. Results are expected within approximately 14 months. Page 8 9 The Company expects to initiate at least one further trial in the 4th Quarter of 1998, the objective of which is to compare the activity of UreAB administered by the mucosal vs. the parenteral route. To undertake this study, the Company has prepared a new formulation of UreAB suitable for injection and expects to file an amendment to its IND for this new formulation in the third quarter. OraVax has entered into several agreements with corporate and academic collaborators relating to the development of H. pylori vaccines. See "Patents and Proprietary Rights; Technology Agreements -- H. pylori Product Development Program." Collaboration for H. pylori Product with Merieux. In March 1995, the Company entered into a collaboration with Merieux, for the development, manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines against H. pylori infections in humans. Under the Joint Venture, OraVax and Merieux agreed to co-develop vaccines which use the urease protein or any of its sub-units as an antigen (the "Target Products"). OraVax and Merieux share equally in profits from the sales of the Target Products and in all future research, development, clinical and commercialization costs. OraVax and Merieux estimate that research, development and clinical costs will exceed $50.0 million. Merieux is providing technical expertise and will also provide marketing expertise to the Joint Venture. Merieux made an initial payment of $3.2 million directly to OraVax which included $0.6 million to recognize the value of research and development conducted by OraVax in the first quarter of 1995 prior to the formation of the Joint Venture, and a milestone payment of $2.6 million to recognize the value of technology previously developed by OraVax and made available to the Joint Venture. In addition, Merieux purchased $2.5 million of the Company's Series Preferred Stock. Subsequently, Merieux purchased an additional $1.0 million of common stock in the Company's initial public offering. In addition, Merieux agreed to pay the Company directly up to $12.0 million during the development period, subject to the achievement of certain clinical and regulatory milestones, of which $0.6 million was paid to OraVax in December 1995. However, there can be no assurance that the milestones which trigger such future payments will be achieved. Beginning in the second quarter of 1995, research, development and commercialization activities of the Joint Venture were conducted through two equally controlled partnerships which have contracted with the Company to perform the research, development and clinical trial activities. OraVax earned $7.6 million, $6.6 million and $4.8 million under these contracts during 1997, 1996 and 1995, respectively. In addition, during 1996, the Joint Venture entered into research and development contracts with Merieux and third parties. The research and development budgets of the two partnerships comprising the Joint Venture are established by joint committees in which each of the parties has an equal participation and role. The venturers will pay approximately equal shares of the agreed budgets. OraVax will receive revenue from the partnerships for the research and development work which is requested to be performed by OraVax and funded by the Partnerships. There can be no assurance, however, that OraVax will be selected to perform such work. OraVax and Merieux each licensed to the Joint Venture upon its formation the right to use all of their respective existing proprietary technologies relating to vaccines for the treatment or prevention of H. pylori, except for so-called naked DNA technology (for an injectable vaccine) which is the subject of a separate collaboration by Merieux with a third party. Additional technology in the H. pylori field acquired by either party since the formation of the Joint Venture is required to be offered to the Joint Venture. The Joint Venture itself has also obtained licenses to relevant technology from third parties, including a license in November, 1996 of the complete genome sequence of H. pylori from MedImmune and Human Genome Sciences. It is the current intention of OraVax and Merieux that OraVax will manufacture the Target Products in sufficient quantities for clinical trials and for sales by the Joint Venture in the United States. It is also the current intention of OraVax and Merieux that Merieux will manufacture the Target Products for sale by the Joint Venture in non-U.S. markets. Page 9 10 The marketing activities of the Joint Venture will be managed by the Joint Venture's Marketing Committee with equal control by each party. The corporate names of both OraVax and Merieux will be prominently displayed on the label of the Target Products to the extent consistent with regulatory agency requirements. Marketing and sales of Target Products are expected to be carried out principally by Merieux with the exception that OraVax is expected to market and sell directly to the United States military and the National Centers for Disease Control ("CDC"). The Company or Merieux may withdraw from the Joint Venture only in the event that there is a failure to efficiently and effectively carry out the research and development program or a failure both of urease, and of any other antigen or combination of antigens or formulations to work and irreconcilable differences on how to proceed, in either case subject to arbitration. In the event of termination, in all cases except breach, both parties can commercialize the Target Products upon payment of cross-royalties. HNK20 INTRANASAL IGA ANTIBODY AGAINST RSV Market Opportunity. The Company is developing HNK20, a monoclonal IgA antibody product designed to prevent viral pneumonia in children caused by respiratory syncytial virus (RSV). In the United States, approximately 250,000 children annually have moderate to severe underlying medical problems that put them at risk of contracting viral pneumonia from RSV infection. These are children who are born prematurely or who have bronchopulmonary dysplasia, congenital heart disease, leukemia, cystic fibrosis or various immunodeficiency disorders. Approximately 36% of these children require hospitalization due to severe lower respiratory infections from RSV and up to 1% of these hospitalized cases prove to be fatal. The Company estimates that the direct medical costs associated with treatment of the disease exceed $500 million annually in the United States. The Company believes there is a need for a cost-effective approach to the prevention of RSV pneumonia that can be used in both home and hospital settings. Current treatment for RSV pneumonia involves hospitalization, often in an intensive care unit, and administration of ribavirin, an anti-viral drug. The disadvantages of such treatment include difficulty of administration, low efficacy and high cost. One company recently received marketing approval for an intravenous (systemic) IgG product derived from adult plasma donors. This approach involves the high cost of the product and its intravenous administration in a hospital or outpatient setting with doses varying with the infant's weight and the risks inherent in the systemic administration of large volumes of a human blood derived product to an infant. The same company has developed a monoclonal IgG antibody for administration by injection and submitted an application for marketing approval to the U.S. FDA in late 1997. While the monoclonal IgG is anticipated to be safer than the blood derived IgG, cost of the product is expected to be similar and the product would still require administration by a health care professional. The Company believes that its intranasally-administered HNK20 will have the advantages of being non-invasive, designed for home administration by a family member, and of limiting the upper respiratory infection at the outset, before it develops into viral pneumonia. OraVax Approach. The Company is developing its HNK20, a monoclonal IgA antibody, designed for administration by nose drop. Based on the results of primate studies, the OraVax product candidate appears to be safe and provide protection with small doses of antibody administered daily by nose drop. Studies in several species, including nonhuman primates, indicate that HNK20 is effective when administered at the convenient dosing interval of once daily. The Company expects that its product, if successfully developed, would be used to protect those children at risk from RSV infection, particularly during the winter season when RSV infection is most prevalent. The Company received approval from the United States Food and Drug Administration ("FDA") to initiate clinical trials of HNK20 under an Investigational New Drug Application ("IND") filed in March 1994. Safety of HNK20 was initially demonstrated in Phase I/II clinical studies in adults. Virus challenge Page 10 11 studies in adults suggested decreased virus shedding in HNK20 treated versus placebo treated subjects. A Phase I safety trial in children was completed in July 1995. A Phase II safety and pharmacology trial in premature infants and infants with bronchopulmonary dysplasia at high risk of contracting RSV viral pneumonia was completed in April 1996. The double-blind, placebo-controlled study included 57 infants, under the age of nine months at study entry, who received either 2.5 milligrams per day of HNK20 or placebo, each through once daily nosedrop administration. Results of the study indicated that HNK20 was well tolerated in the target population and was administered with a high level of compliance. A review of adverse events revealed no safety concerns related to treatment with HNK20. Given the small sample size, no significant differences were observed between the HNK20 group and the placebo group related to the incidence of RSV infections, pneumonia or hospitalization. In May 1996, the Company initiated a Phase III study designed to determine the prophylactic effectiveness of intranasal administration of HNK20 in premature infants and infants with bronchopulmonary dysplasia at high risk of contracting RSV viral pneumonia. The double-blind, placebo-controlled study included a total of 614 infants, and was conducted at 26 centers in Australia, New Zealand, Argentina and South Africa, during the Southern Hemisphere's winter months of May to October. The results indicated that, in the entire subject population which included infants up to 19 months of age, those treated with HNK20 experienced a 24% reduction in lower respiratory tract infection and an 11.4% reduction in the frequency of hospitalization relative to infants receiving placebo. However in the younger infants, 185 infants who were under four months of age at the beginning of the study, a greater difference was observed. In these infants there was a 50% reduction in the frequency of lower respiratory tract infections and a 42% reduction in the frequency of hospitalization. The daily dose of HNK20 (2.5 mg) delivered in a concentration of 10 mg/ml is believed to be suboptimal. Based on the weight of the infants on entry into the study, the mean dose of HNK20 (0.5 mg/kg) was the minimum dose showing prophylaxis in the nonhuman primate model of RSV. As children progressed through the study and gained weight, the dose in mg/kg decreased. Levels of HNK20 in nasal secretions were highest in the subgroup of infants under four months old at study initiation, in whom efficacy was highest, suggesting a relationship between passive antibody level and efficacy that could be optimized by increasing dose. An analysis of HNK20 levels indicated that higher levels were associated with a decreased frequency of hospitalization. Taken together, these observations indicate that efficacy of HNK20 would be enhanced by increasing dose. The Company believes that additional Phase III study could be conducted in the Northern Hemisphere to demonstrate efficacy of HNK20 at an elevated dose level, in infants under four months of age at study entry. The trial is designed as a randomized, double-blind, placebo controlled study, to include a minimum of 520 infants, under four months of age at study entry. HNK20 recipients would receive a dose of 7.5 mg per day, approximately three times higher than that used in the Southern Hemisphere study. The Company will need to secure additional partnerships or other sources of funding in order to support the planned high-dose Northern Hemisphere study. CDVAX AND CDIG AGAINST ANTIBIOTIC-ASSOCIATED COLITIS Market Opportunity. The Company is developing CdVax, a vaccine designed to prevent antibiotic-associated colitis caused by Clostridium difficile (C. difficile). Antibiotic treatment results in a decrease in the number of non-disease causing bacteria in the intestine, a condition allowing the rapid growth of the antibiotic-resistant C. difficile. The C. difficile bacteria produce two toxins (A and B toxins) that cause intestinal inflammation and fluid secretion. C. difficile is a leading cause of antibiotic-associated colitis among elderly hospitalized patients and nursing home residents who are undergoing antibiotic treatment regimes. An estimated 21% of hospitalized patients, or 6.6 million persons, develop C. difficile infections, and 7% (2.2 million persons) develop C. difficile disease (colitis and antibiotic-associated diarrhea) annually in the United States. Up to 33% of nursing home residents (approximately 500,000 Page 11 12 persons) develop diarrheal illness in the United States each year, and C. difficile is an important cause of such illness. C. difficile infection is also associated with the use of certain anticancer drugs. Diarrhea is an important contributor to and cause of death in the elderly, and C. difficile is a significant factor in such cases. Complications of diarrhea, especially dehydration, electrolyte imbalance, and urinary tract and skin infections, are frequent. Current treatment of C. difficile disease involves fluid and electrolyte replacement and the use of additional antibiotics. Treatment is sometimes problematic because of the need to interrupt the antibiotic regime targeting the patient's primary infection in order to effect resolution of the C. difficile infection. This interruption may result in recurrence of the primary infection. The Company is not aware of any available method for prevention of the disease other than avoidance of broad-spectrum antibiotics in high-risk elderly patients and isolation, quarantine and other infection control procedures used to limit exposure to C. difficile. These measures are often difficult or impossible to apply. OraVax Approach. The Company has developed CdVax, containing chemically inactivated A and B toxins which could be administered prior to exposure to the C. difficile bacteria. Preclinical trials in animal models with CdVax have demonstrated effectiveness in prevention of C. difficile induced disease. Although certain high-risk groups, such as nursing home patients and patients undergoing elective surgery may benefit from prophylactic immunization, the Company's principal goal is to use the vaccine is to stimulate high-level antitoxin antibodies in plasma donors. These plasma donations will be used to prepare an immune globulin product (CdIG) for use in the short-term prophylaxis and therapy of C. difficile infections. The Company believes that a significant market exists for a novel therapy of C. difficile colitis based on the passive administration of hyperimmune globulin. The principal advantages of this approach to treatment over existing therapies include rapid time to recovery from illness, shortened hospital stay and resulting cost savings, and the absence of relapse, which complicates the use of antibiotic treatments in 20% of C. difficile cases. Preclinical studies have demonstrated the effectiveness of passive antibody treatment, and clinical case reports using large doses of standard commercial globulin preparations (which contain low titers of antibodies against C. difficile toxins) have shown clinical benefit, providing proof of principle. The Company's hyperimmune product will be significantly more potent than standard globulin formulations and can be conveniently administered in small volumes. In October 1997, the Company was awarded a Phase II Small Business Innovation Research (SBIR) grant totaling $690,000 from the National Institutes of Health (NIH) in support of CdVax and CdIG development. The Company has filed an Orphan Drug application for the colitis indication and anticipates commencing Phase I studies of CdVax in mid - 1998. CHIMERIVAX(TM) PLATFORM TECHNOLOGY The Company has developed a novel, proprietary platform technology for the construction of vaccines against a number of viral infections caused by members of the family Flaviviridae ("Flaviviruses"). The underlying technology was developed at St. Louis University and an exclusive worldwide license was granted to OraVax on September 8, 1997. Flavivirus infections of medical significance include hepatitis C, dengue, Japanese encephalitis, tick-borne encephalitis, St. Louis encephalitis, and yellow fever. The technology is based on the use of the yellow fever 17D vaccine, the safest and most effective live virus vaccine ever developed, to construct genetically-engineered, live, attenuated vaccines against other Flaviviruses. To produce the new vaccines, the gene encoding the envelope (E) glycoprotein of the other virus (for example Japanese encephalitis, dengue or hepatitis C) is inserted into the yellow fever 17D genome "backbone". The resulting chimeric virus has the protein coat of the other Flavivirus virus, which contains the protective antigens, and the replicative machinery of YF 17D vaccine. The new vaccine stimulates neutralizing antibodies and cellular immunity against the target Page 12 13 Flavivirus virus and can be manufactured at extremely low cost. Based on experience with the parent YF 17D vaccine and preclinical results with the Company's chimeric vaccines to date, a single dose of the vaccine is expected to provide lifelong immunity with negligible side-effects. The Company has developed vaccine candidates against two disease targets, Japanese encephalitis and dengue, and has initiated research and development on hepatitis C. JE VACCINE AGAINST INFECTION BY THE JAPANESE ENCEPHALITIS VIRUS The Company is in the advanced stages of development of an improved vaccine for prevention of Japanese encephalitis ("JE") viral infections. JE is a potentially fatal neurotropic viral infection, endemic and epidemic throughout Asia, including important markets in Japan, Korea, Taiwan, China, India and Thailand. JE is the leading cause of viral central nervous system infection of children worldwide, and has surpassed poliomyelitis in importance as vaccine coverage rates for polio have increased. Current JE vaccines used to immunize all children in Japan, Korea and Taiwan are expensive, produced in mouse brain and require multiple booster doses. In Korea, children routinely receive eight doses by fifteen years of age. In Japan, JE is the second leading vaccine sold, after DPT. The mouse brain vaccine is also licensed in the United States, Australia and many European countries for the immunization of travelers and military, but significant safety concerns have emerged since its introduction in the 1990's. The World Health Organization has identified a high priority for the development of safer and less expensive vaccines against JE, which would ensure its use in endemic regions, where the birth cohort at risk is approximately 70 million/year and where only a small fraction of children are immunized currently. In addition, a safer vaccine that requires only a single dose for immunization would better meet the needs of travelers and military, which represent a major market opportunity in the US and Europe. OraVax has demonstrated safety and preclinical efficacy of its JE vaccine based on the ChimeriVax (TM) technology in animal models, including nonhuman primates. The vaccine is produced in cell culture substrate acceptable for human use. Production efficiency is very high, and extremely favorable margins on sales are expected. The Company is currently in pilot production under GMP, and expects to file an IND and initiate clinical trials in the first quarter of 1999. DENGUE FEVER Dengue is the most important mosquito-borne viral infection worldwide. The disease is characterized by two distinct clinical syndromes, dengue fever, a debilitating acute disease with fever, rash, muscle and joint pains and dengue hemorrhagic fever (DHF) with prostration, bleeding and shock. DHF is a leading cause of hospitalization of children in Asia and is fatal in up to 5% of cases. There are over 2.5 billion persons at risk of dengue, 100 million of whom are infected with dengue viruses annually. A high proportion of infected people develop dengue fever, with approximately 450,000 cases progressing to DHF. Dengue occurs throughout all tropical regions of the world, and is intermittently introduced into the United States, Australia and Europe, with ensuing outbreaks. Hundreds of cases occur among U.S. and European travelers annually. There is no specific treatment and no vaccine is available for prevention of the infection. An effective vaccine against dengue would be widely used not only in endemic areas but for protection of all travelers to the tropics. There are four distinct viruses that cause dengue fever (dengue types 1-4). OraVax has developed a candidate ChimeriVax(TM) vaccine against dengue type 2 which is in preclinical development, with very promising results. The Company's objective is to develop a tetravalent vaccine, containing all four dengue serotypes. HEPATITIS C Page 13 14 Hepatitis C virus causes an estimated 20% of all cases of viral hepatitis, and is the agent responsible for 80-90% of all cases of "nonA-nonB viral hepatitis". The virus is transmitted by blood, blood products, reused needles, and by congenital transmission. There is considerable evidence for heterosexual transmission as well. Four million persons in the United States are chronically infected with hepatitis C, with 30,000 new cases occurring annually. Approximately 80% of those infected develop chronic, persistent infections of the liver, and 20% of these develop cirrhosis, with a high risk of liver cancer. Worldwide, 3% of the entire human population is infected, with 170 million chronic carriers at risk of cirrhosis and cancer. There is a very high mandate for an effective vaccine. OraVax believes that its ChimeriVax technology is applicable to the construction of an effective vaccine that would stimulate both humoral and cellular immunity against hepatitis C. As for dengue, a multivalent vaccine is required, with simultaneous immunization against two or three different hepatitis C types representing the majority of types causing human illness. TICK-BORNE ENCEPHALITIS Tick-borne encephalitis (TBE) is a major medical problem, causing severe illness and deaths in eastern Europe and the former USSR. The epidemiology and motivation for vaccination is similar to that for Lyme disease. Existing vaccines are conventional killed virus vaccines produced in cell culture, and are the leading vaccines sold in Austria, Germany, with significant unexploited potential markets elsewhere in Europe and Russia. These vaccines are expensive, require multiple doses for primary immmunization and booster doses. There are reported neurological accidents associated with these vaccines. OraVax's ChimeriVax(TM) technology is applicable to the development of a TBE vaccine that would have significant advantages (single dose, life long immunity, safety and low cost) over existing vaccines. Like the vaccine against JE, a TBE vaccine requires a single product against one serotype, and thus is technically feasible within a short development cycle. The Company plans to seek a corporate partner before initiating research and development on a TBE vaccine. OTHER ORAVAX TECHNOLOGIES In addition to the Company's three principal product development programs, the Company has rights to certain other technologies which may have the potential to be developed into products. These technologies also build on the Company's platform of knowledge of the mucosal immune system and immunology. OraVax will continue to evaluate potential development opportunities for these technologies and may consider seeking a corporate partner to commercialize them on a case-by-case basis. IgA Antibody Technology. The Company's monoclonal lgA antibody technology includes methods for stimulating IgA antibody production, producing recombinant secretory component and linking IgA antibody to secretory component. The Company's current efforts in these areas are focused on the development of the HNK20 monoclonal IgA antibodies against RSV, but are expected to have general application to the development of monoclonal IgA antibodies against other infections. The Company's patent application, filed worldwide, describing the HNK20 monoclonal IgA antibody issued in the United States in 1995. In addition, the Company has filed a United States patent application claiming the DNA encoding the RSV-recognition site. OraVax also has an exclusive worldwide license from Harvard University to a patent application covering complexes of antibody and secretory component and methods for producing such complexes, including methods for the production of recombinant secretory component and for linking IgA antibodies to secretory component. The Company is not aware of competing patent rights involving complexes of antibody and secretory component. Page 14 15 Viricle Technology. The bluetongue virus ("BTV") afflicts sheep and cattle in livestock raising regions, including the western United States, Australia and South Africa, causing still births. Genetically engineered virus-like particles known as Viricles(R) were developed as a vaccine against BTV in sheep and against African Horse Sickness, an economically important disease in Spain and other countries which raise thoroughbred horses. In veterinary field trials conducted prior to 1994 by Oxford Virology and the National Environmental Research Council in England, orally administered Viricles have shown promise as a veterinary vaccine against BTV without the need for a mucosal adjuvant. OraVax believes this delivery system may prove useful in the development of human oral vaccines. Consequently, the Company has incorporated a portion of the C. difficile gene into these virus-like particles and has shown that the resulting Viricle vaccine stimulates antibody against both BTV and C. difficile. OraVax acquired the rights of Oxford Virology and jointly owns and has an exclusive license from the National Environment Research Council in Oxford, England to two inventions involving BTV, one relating to Viricles and one relating to a method for producing an immunogenic effect against BTV through the use of such particles. Patents have issued with broad claims to the technology. Additionally, in 1997 an OraVax patent was issued by the US patent office for additional viricle technology titled "Oral Immunization with Multiple Particulate Antigen Delivey System", US patent #5,690,938. Two additional patents covering the technology, included in the license to OraVax, have been awarded by the US patent office covering the technology, patents: #5,667,782 "Multiple Particulate Antigen Delivery System" and #5,686,270 "Production of Antigens by Self-Assembly of Polypeptide Components". The Company has additionally received notice of allowance of a fourth patent, "Use of Bluetounge Virus as Vaccine Components". Shigella Live Vector Oral Vaccine Technology. Infection by Shigella bacteria ("Shigella") is the leading cause of bacillary dysentery. Bacillary dysentery is a worldwide problem, with the highest incidence among children in developing countries. The principal markets for a Shigella vaccine are expected to be travelers, deployed military populations and selected high-risk institutionalized groups in the United States. Current treatment of bacillary dysentery involves fluid replacement and the use of antibiotics and anti-motility drugs after the occurrence of the infection. While certain antimicrobial drugs may provide protection against Shigella, the widespread use of such drugs has not been recommended because of their side effects and the possibility of inducing the development of drug resistant strains of bacteria. The Company has a worldwide exclusive license to the virG gene modification from the Institut Pasteur. The virG mutation limits virulence of the bacteria. The Company is aware of certain additional gene modifications, which may be necessary or useful in formal design of a human vaccine. These additional modifications are covered by patents or patent applications to which the Company does not currently have rights. The Company is evaluating the possibility of using Shigella live vector technology as an antigen delivery method for its H. pylori vaccine. Copolymer Microsphere Technology. The Company has a non-exclusive license to a patent application covering the use of copolymer microsphere technology in the development of oral vaccines directed against five specific disease targets, including H. pylori and C. difficile. However, this technology is not currently used in formulating any OraVax product candidates. The Company has a non-exclusive license to an issued United States patent relating to the use of copolymer microspheres in injected vaccines. The Company is aware of an additional issued United States patent relating to selective release of active ingredients through the use of copolymer microspheres. Hydroxyapatite. The Company has an exclusive license from Harvard University to a patent covering the use of hydroxyapatite crystals as a particulate carrier for antigens used as oral vaccines. The patent is titled "Hydroxyapatite-Antigen Conjugates and Methods for Generating a Poly-Ig Immune Response", was issued in August of 1995, US patent #5,443,832. Page 15 16 License of CagA. In September 1996, the Company entered into a licensing agreement with bioMerieux Vitek, Inc. granting bioMerieux exclusive rights to develop automated human diagnostic products incorporating a proprietary OraVax antigen. The antigen, called CagA, is a component of H. pylori. Strains of H. pylori producing CagA are thought to be among the most virulent. Under terms of the agreement, bioMerieux receives an exclusive, royalty-bearing sublicense to manufacture, use, sell, lease, and otherwise distribute any licensed products for use in the field of in vitro diagnostic tests using instruments that perform automatic, multiparametric immunoanalysis. This sublicense is worldwide, except in Japan, where coexclusive rights were granted. Additionally, in March of 1998, OraVax entered into a separate licensing agreement with Biomerica, Inc. for the diagnostic use of CagA in in-office diagnostic tests. Under the terms of the agreement, Biomerica receives an exclusive, royalty-bearing, worldwide, sublicense to manufacture, use, sell, lease, and otherwise distribute any licensed products for use as a single diagnostic test, or a component of a diagnostic test that incorporates the CagA antigen and is intended for single use. OraVax retains all rights to the use of CagA for vaccines to treat or prevent diseases caused by H. pylori infection. CagA was originally identified by Martin J. Blaser, M.D., Timothy Cover, M.D. and Murali Tummuru, Ph.D. of Vanderbilt University School of Medicine. In 1993, OraVax acquired worldwide exclusive rights to CagA patented by Vanderbilt University. MANUFACTURING At present, the Company's ability to manufacture its products is limited to clinical trial quantities. The Company does not have the capability to manufacture commercial quantities of products. The Company's long-term strategy is to develop its Canton manufacturing facilities for producing both pilot-scale and commercial quantities of products. To ensure compliance with GMP regulations, OraVax will need to add sufficient technical staff to oversee all product operations, including quality control, quality assurance, technical support and manufacturing management. UreAB Oral Vaccine. The UreAB vaccine product used in the Phase I clinical trials is manufactured in the biological production facility of the Walter Reed Army Institute of Research, Forest Glen Section, Silver Spring, Maryland under a Cooperative Research and Development Agreement ("CRADA") with the United States Army. OraVax anticipates the continued use of this facility to support Phase II and at least the initial portion of Phase III trials. The Company's partner, Merieux, has initiated GMP manufacturing at its facilities in Marcy l'Etoile (Lyon) France, and will be able to provide vaccine for Phase III trials. OraVax expects to manufacture product for commercial distribution in the United States. Alternatively, the Company may elect to contract out this commercial product manufacture. HNK20 lntranasal Antibody. Manufacturing of HNK20 for Phase I and Phase II clinical trials has been performed by OraVax at its primary facility in Cambridge, Massachusetts and by third parties under contract to OraVax. The product used in the Phase III clinical trials conducted in the Southern Hemisphere which commenced at the end of the second quarter of 1996 was manufactured by a contract manufacturer. The Company had previously anticipated using product from inventory produced by this contract manufacturer to conduct a second Phase III trial in North America during the winter of 1997-1998. However, during an audit conducted by the Company in October 1997 of an additional contract manufacturer, the Company discovered that improper handling of the product by the latter manufacturer during a step which is not part of the current process, precluded the clinical use of this supply of HNK20. The manufacture of the additional supply of the product necessary for the trial is underway, however the conduct of the trial will require additional funding and the Company is continuing negotiations with potential corporate partners for such funding. CdAB Vaccine. Product for early clinical trials has been manufactured by third parties under contract to OraVax and under a CRADA with the Walter Reed Army Institute of Research.The Company, Page 16 17 however, may elect to manufacture product for further clinical trials in its own facilities in Cambridge or Canton, Massachusetts. MARKETING STRATEGY The Company's products fall into one or more of three market segments: travelers and military from the developed country markets, the developed country general pharmaceutical markets and what is broadly characterized as the rest of the world (ROW). OraVax has developed a preferred approach to each of these market segments.
- ---------------------------------------------------------------------------------------- MARKET SEGMENT PRODUCT - ---------------------------------------------------------------------------------------- Developed country general pharmaceutical Helicobacter pylori vaccines Clostridium difficile hyperimmune globulin HNK20 nosedrop hepatitis C vaccine (tick borne encephalitis - regional Central European) - ---------------------------------------------------------------------------------------- Travelers and military Yellow Fever vaccine Dengue vaccine Japanese encephalitis virus vaccine tick borne encephalitis vaccine hepatitis C vaccine - ---------------------------------------------------------------------------------------- ROW Helicobacter pylori Yellow Fever vaccine Dengue vaccine Japanese encephalitis virus vaccine hepatitis C vaccine - ----------------------------------------------------------------------------------------
For sales in the distributed general pharmaceutical markets of the developed countries, OraVax plans to establish marketing arrangements with pharmaceutical companies with large distribution systems for non-bulk distribution of its products and does not expect to establish a direct sales capability for non-bulk distribution in this segment for several years. To market in the future any of its products directly for non-bulk distribution, the Company will need to develop a marketing and sales force with technical expertise and distribution capability. There can be no assurance that the Company will be able to establish relationships with third parties for any of its products or successful in-house sales and distribution capabilities. To the extent that the Company enters into marketing or distribution arrangements, any revenues received by the Company will depend upon the efforts of third parties and there can be no assurance that such efforts will be successful. The Company currently intends to retain the right to market some of its products directly to bulk purchasers of vaccines and antibodies, including the United States military and the U.S. Center for Disease Control. See "Factors That May Affect Future Results -- Limited Sales and Marketing Experience." The Company plans to market products directly to the travelers and military markets, particularly in the U.S. and through partners in other countries. The Company has acquired the U.S. sales and marketing rights to an existing product, already being sold to the travelers and military markets in Europe and selected Asian countries as an early entry into this market segment. In November 1997, the Company acquired exclusive U.S. sales, marketing and distribution rights to the Arilvax(R) Yellow Fever vaccine from Evans Medical Limited, a subsidiary of Medeva, PLC. The Company believes it can market the product effectively, with a small sales force, since the market is currently restricted to the U.S. military and to physicians and travel medicine clinics approved by the State Health Departments. Several of the Company's other products are targeted for the same market. Page 17 18 The Company's current strategy for commercialization of vaccines with a large market in countries where the diseases are endemic (eg. China, South America, Africa and others) is to form partnerships with local companies or government institutes. In these cases the Company may choose to license the production technology to local companies for regional manufacture, to supply bulk product for local fill and finish or to supply finished product. The vaccines acquired under the Department of Defense contract will be sold principally to the U.S. military through sales contracts to the JVAP program, to other countries' military organizations or international bodies such as NATO as approved and to the limited civilian markets directly by OraVax or through its partner companies in the JVAP program. PATENTS AND PROPRIETARY RIGHTS; TECHNOLOGY AGREEMENTS The following sets forth the Company's proprietary position with respect to its principal product development programs. RSV PRODUCT DEVELOPMENT PROGRAM The Company's patent application, filed worldwide, describing the HNK20 monoclonal IgA antibody issued in the United States in 1996. The Company has filed a United States patent application claiming the DNA encoding the RSV-recognition site. OraVax is not aware of any other patents or patent applications describing this antibody. H. PYLORI PRODUCT DEVELOPMENT PROGRAM In addition to its own inventions, the Company has worldwide rights to inventions made by six groups of researchers in the field of H. pylori: During 1997 the Company and its joint venture partner, Pasteur Merieux, also acquired worldwide exclusive license to the Vibrovec live-vector vaccine delivery system from Virus Research Institute in Cambridge, Massachusetts for antigens being evaluated by the partners. The joint venture partners also completed option agreements with Aquila covering the QS21 adjuvant. Separately, OraVax secured an exclusive option agreement with IOMAI for their transdermal vaccine delivery system. Human Genome Sciences/MedImmune. In November 1996, the Company and Pasteur Merieux entered into a research and licensing agreement with Human Genome Sciences, Inc., ("HGS") and MedImmune, licensing the complete genome sequence of H. pylori for the development of vaccines. Under this agreement, OraVax and Pasteur Merieux have control and responsibility for filing patents on new molecular discoveries for use in the development of vaccines against H. pylori infection. Financial terms of the agreement call for OraVax and Pasteur Merieux to make license payments to HGS/MedImmune beginning with execution of the agreement and upon issuance of the first U.S. patent. In addition to royalties on any future sales, future milestone payments will be paid to HGS/MedImmune to reflect attainment of certain product development and revenue goals. During 1997 OraVax and its partner Pasteur Merieux filed several additional patent applications covering new molecules identified using the genome sequence information. Case Western Reserve University. In October 1993, the Company entered into an assignment agreement with its collaborators at Case Western Reserve University ("CWRU") and a research agreement with these collaborators and CWRU. Pursuant to the agreement, OraVax has been assigned preexisting patent rights claiming oral immunization using H. pylori antigens; One patent was issued in the United States in 1996. The research agreement provides for sponsorship of the continuing development work of the collaborators in the field of H. pylori, including the development of monoclonal antibodies against Page 18 19 urease and other antigens, the development of adjuvants to be used in conjunction with an oral vaccine directed against H. pylori and the development of animal models for the testing of oral vaccines directed against H. pylori. Under the terms of the research agreement, the Company will be granted a worldwide exclusive license to inventions made in the course of sponsored research. Centre Hospitalier Universitaire Vaudois ("CHUV"); Max-Planck Institute. In April 1992, the Company entered into a research and development agreement with the Foundation Pour La Recherche Des Maladies GastroIntestinales ("Gastrofonds") in Lausanne, Switzerland pursuant to which OraVax is sponsoring research in the field of H. pylori at the CHUV in Lausanne, Switzerland, and at the Max-Planck Institute in Tubingen, Germany. Pursuant to this agreement, Gastrofonds, representing collaborating inventors at the CHUV and the Max-Planck Institute, have assigned to OraVax title to two patent applications covering urease as a vaccine for prevention and treatment of H. pylori infection. Also pursuant to this agreement, Gastrofonds has granted the Company a worldwide exclusive license to all patent rights and know-how developed during the course of the sponsored research in the field of vaccine and secretory IgA products for prevention or treatment of infections caused by H. pylori. Institut Pasteur. The Company also has a co-exclusive license, with Merieux, to an issued patent and two patent applications owned by the Institut Pasteur covering the H. pylori urease antigen, heat shock protein A (hspa) and other antigens. Saint Bartholomew's Hospital Medical College. In October 1992, OraVax entered into an agreement with The Medical College of Saint Bartholomew's Hospital in London, England ("St. Bart's") pursuant to which the Company sponsored, from October 1992 through August 1995, research relating to the development of vaccine candidates for use in an oral vaccine directed against H. pylori. Under the agreement, OraVax was granted worldwide nonexclusive license to preexisting patent rights and know-how in the field of H. pylori developed by St. Bart's, and worldwide exclusive license to all patent rights and know-how developed during the course of the sponsored research. Vanderbilt University. In September 1993, the Company entered into a license agreement with Vanderbilt University ("Vanderbilt") pursuant to which Vanderbilt has granted to OraVax an exclusive worldwide license to patent rights to a specific region of the gene for an H. pylori antigen, the Cag A antigen, as a vaccine and diagnostic means and methods for detecting predisposition to peptic ulceration, and to related know-how. OraVax anticipates that its H. pylori vaccine products will be used in conjunction with mucosal adjuvants or mucosal antigen delivery systems. The UreAB vaccine formulation tested in a Phase II clinical trial uses the native heat-labile enterotoxin ("LT") produced by E. coli as a mucosal adjuvant. The Company is aware of a patent application owned by a competitor claiming use of LT combined with H. pylori antigens, including urease, against H. pylori infection; whether this application will issue in the United States or in other countries is uncertain. The Company currently has a license to the United States Navy's patent application covering the use of native LT as a mucosal adjuvant. The Company is aware of a patent owned by the Kitasato Institute that also claims the use of native LT. The Company is also conducting research on the polyphosphazene mucosal adjuvant and the Vibrio cholerae live-vector delivery system under an option from Virus Research Institute in Cambridge, Massachusetts. Other formulation technologies being evaluated include mutants of LT that may have advantages in greater safety or potency, the Shigella live-vector system developed by the Company and technologies developed or controlled by Merieux. It is possible that the Joint Venture may need to obtain a license to the patent rights owned by a third party covering a mucosal adjuvant or mucosal antigen delivery system, and there can be no assurance that the Company will be able to obtain any such license on favorable terms. See "Risk Factors -- Patents and Proprietary Rights." See "Factors That May Affect Future Results -- Patents and Proprietary Rights." Page 19 20 C. DIFFICILE PRODUCT DEVELOPMENT PROGRAM In March 1993, OraVax entered into a collaborative development and license agreement with Techlab, Inc. ("Techlab") pursuant to which OraVax is sponsoring research and the development of vaccines for the prevention of diseases caused by C. difficile. With respect to technology developed during the course of the collaboration, the Company will have title to all patent rights and know-how invented by OraVax employees or developed jointly by Company and Techlab employees, and Techlab will have title to all patent rights and know-how developed solely by its employees. Techlab has granted to OraVax a worldwide exclusive license to technology owned solely by Techlab. The Company has filed a patent application covering its C. difficile vaccine product candidate and related technology. The Company owns this patent application and any patents issued thereon. GENERAL The Company's success will depend, in part, upon its ability to develop patentable products and technologies and obtain patent protection for its products and technologies both in the United States and other countries. The Company is not aware of any issued third party patents which would interfere with development of its RSV, H. pylori or C. difficile product candidates. There can be no assurance that additional patent applications owned or licensed by the Company will issue as patents, that patent protection will be secured for any particular technology, or that, if issued, such patents will be valid or that they will provide the Company with meaningful protection against competitors or with a competitive advantage. There can be no assurance that patents will not be challenged or designed around by others. The Company could incur substantial costs in proceedings before the United States Patent Office, including interference proceedings. These proceedings could also result in adverse decisions as to the patentability of the Company's licensed or assigned inventions. Further, there can be no assurance that the Company will not infringe upon prior or future patents owned by others, that the Company will not need to acquire licenses under patents belonging to others for technology potentially useful, or necessary to the Company, or that such licenses will be available to the Company, if at all, on terms acceptable to the Company. Moreover, there can be no assurance that any patent issued to or licensed by the Company will not be infringed by others. Lastly, there can be no assurance that third parties will not bring suit against the Company for patent infringement or for declaratory judgment to have the patents owned or licensed by the Company declared invalid. OraVax also relies on trade secrets and other unpatented proprietary technology. No assurance can be given that the Company can meaningfully protect its rights in such unpatented technology or that others will not independently develop substantially equivalent products and processes or otherwise gain access to the Company's technology. See "Factors That May Affect Future Results -- Patents and Proprietary Rights." OraVax is engaged in research and development collaborations and licensing arrangements with a number of academic, government and commercial research groups. The Company has entered into these agreements to secure rights to certain technologies, processes and compounds that it believes may be important to the development of its products. See "Products Under Development" and "Factors That May Affect Future Results -- Risks Associated with Collaborative Arrangements." In general, the research and development agreements provide for OraVax sponsorship of research and development in exchange for exclusive, royalty-bearing licenses or options to the technology developed during the course of the sponsored research. Certain of these agreements also include nonexclusive licenses to preexisting technology rights. In general, the license agreements grant to the Company exclusive licenses in exchange for varying combinations of license fees, milestone payments, royalties and minimum royalties. In addition, the license agreements typically place commercialization obligations on the Company which, if not satisfied, may result in the licensor having the right to render the license nonexclusive or to terminate the agreement. In certain instances, the Company has obtained assignments of technology, although the Company's ownership, IN some cases, is subject to forfeiture for Page 20 21 failure to commercialize. Typically, the agreements are terminable by either party for breach. Further, the research agreements are generally terminable in the discretion of either party and the license agreements are generally terminable by the Company in its discretion. COMPETITION The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. Competitors of the Company in the United States and abroad are numerous and include, among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any which are being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company. In addition, some of the Company's competitors have substantially greater experience than the Company in preclinical testing and human clinical trials of pharmaceutical products and in obtaining FDA and other regulatory approvals of products for use in healthcare. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. There can be no assurance that the Company's products under development will be able to compete successfully with existing products or products under development by other companies, universities and other institutions or that they will attain regulatory approval in the United States or elsewhere. If the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it has limited experience. A significant amount of research in the field is also being carried out at academic and government institutions. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more aggressive in pursuing patent protection and negotiating licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or in collaboration with competitors and will compete with OraVax in recruiting highly qualified scientific personnel. See "Factors That May Affect Future Results -- Competition and Technological Change." The Company is aware of certain programs under development by competitors that are targeted for the prevention or treatment of certain diseases that the Company has identified as product development areas, including RSV and H. pylori. Certain of the Company's competitors are developing antibody products for the prevention of disease caused by RSV, and one such competitor has recently received U.S. regulatory approval for marketing its intravenous IgG (systemic) antibody product. The same company has developed a monoclonal IgG antibody for administration by injection and submitted an application for marketing approval to the U.S. FDA in late 1997. In addition, certain competitors of the Company are engaged in H. pylori research. However, the Company is not aware of any company that has initiated clinical trials of an H. pylori vaccine product candidate. The existence of products developed by these competitors, or other products or treatments of which the Company is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by the Company. GOVERNMENT REGULATION Regulation by governmental authorities in the United States and other countries will be a significant factor in the manufacturing and marketing of any products that may be developed by the Company. The nature and extent to which such regulation may apply to the Company will vary depending on the nature of any such products. All of the Company's products will require regulatory approval by governmental agencies prior to commercialization. Human therapeutics, in particular, are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and similar health authorities in foreign countries. Various federal statutes and regulations also govern or influence Page 21 22 the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The Immunization Practices Advisory Committee ("ACIP") of the CDC has a role in setting the market for most, if not all, of the products OraVax intends to make. The ACIP meets quarterly to review developing data on licensed vaccines, and those approaching license, as well as epidemiologic data on the need for these products. The recommendations of ACIP on the appropriate use of vaccines and related products are published in the Morbidity and Mortality Weekly Report and reprinted in several journals. The CDC develops epidemiologic data in support of the need for new vaccines and monitors vaccine usage and changes in disease incidence. In addition CDC staff frequently act as key advisors to the FDA in their review process. The Company believes that both its vaccines and antibody products will be classified by the FDA as "biologic products" as opposed to "drug products." New biologic products must satisfy several requirements in order to receive regulatory approval, including: preclinical laboratory and animal tests; submission by the Company or an individual physician to the FDA of an application for an IND, or submission to an Institutional Review Board of a research institution for approval of intrastate trials, one of which must become effective before human clinical trials may start, the performance of well-controlled clinical trials; and the submission of a Product License Application ("PLA") containing the results of clinical trials and manufacturing information prior to commercial sale or shipment of the product. During the approval process, the FDA must confirm that appropriate standards were maintained during product testing and that the product meets regulatory standards for safety and efficacy. In addition to obtaining FDA approval for each PLA, an Establishment License Application ("ELA") must be filed and approved by the FDA for the manufacturing facilities for a biologic product before commercial marketing of the biologic product is permitted. As a consequence of regulatory reforms initiated in 1995, a formal ELA may not be needed for some of the Company's product candidates. However, manufacturing practices will continue to be subject to FDA regulations and review. The regulatory process may take many years and requires the expenditure of substantial resources. Before testing of any agents with potential therapeutic value in healthy human test subjects or patients may begin, government requirements for preclinical data must be satisfied. These data, obtained from studies in animals, as well as from laboratory studies, are generally submitted in an IND application or its equivalent in countries outside the United States where clinical studies are to be conducted. These preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initial Phase 1 studies in human volunteers. Phase I clinical studies are generally performed in healthy human subjects or, occasionally, selected patients with the targeted disease or disorder. The goal of the Phase I study is to establish initial data about safety and tolerance of the drug in humans. Also, the first data regarding the absorption, distribution, metabolism and excretion of the drug in humans, or the immune response to a vaccine, may be obtained. In Phase II human clinical studies, evidence is sought about the desired therapeutic efficacy of a drug or antibody, or the immune response to a vaccine, in limited studies with small numbers of carefully selected subjects. Efforts are made to evaluate the effects of various dosages and to establish an optimal dosage level and dosage schedule. Additional safety data are also gathered from these studies. The Phase III clinical development program consists of expanded, large scale, multicenter studies of patients with the target disease or disorder, or in the case of a preventive antibody or vaccine, who are susceptible to the disease. The goal of these studies is to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosage regimen. At the same time that the human clinical program is being performed, additional non-clinical (animal) studies may also be conducted. In addition, expensive, long duration toxicity, teratogenicity (birth defects) and carcinogenicity studies may be required to demonstrate the safety of drug administration for the extended period of time required for effective therapy. Also, a variety of laboratory, animal and initial human studies are performed to establish manufacturing methods for the Page 22 23 drug, as well as stable, effective dosage forms. All data obtained from this comprehensive development program are submitted as a PLA to the FDA and the corresponding agencies in other countries for review and approval. FDA approval of the PLA and the associated manufacturing documentation is required before marketing may begin in the United States. Although the FDA's policy is to review priority applications within 180 days of their filing, in practice longer times may be required. The FDA frequently requests that additional information be submitted requiring significant additional review time. Essentially, all proposed products of the Company will be subject to demanding and time-consuming PLA or similar approval procedures in the countries where the Company intends to market its products. These regulations define not only the form and content of the development of safety and efficacy data regarding the proposed product, but also impose specific requirements regarding manufacture of the product, quality assurance, packaging, storage, documentation and record keeping, labeling and advertising, and marketing procedures. Effective commercialization also requires inclusion of the Company's products in national, state, provincial, or institutional formularies or cost reimbursement systems. In addition, the activities of the Company, and its potential partners and licensees are subject to laws and regulations regarding, among other things, occupational safety, the use and handling of radioisotopes, environmental protection, laboratory and manufacturing working conditions, handling and disposition of potentially hazardous materials, and use of laboratory animals. Whether or not FDA approval has been obtained, approval of a product by comparable regulatory authorities may be necessary in foreign countries prior to the commencement of marketing of the product in such countries. The approval procedure varies among countries, can involve additional testing, and the time required may differ from that required for FDA approval. Although there is now a centralized European Community approval mechanism in place, each European country may nonetheless impose its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from both the FDA and foreign regulatory authorities after the relevant applications are filed. The Company expects to rely on corporate partners and licensees, along with Company expertise, to obtain governmental approval in foreign countries of drug formulations utilizing its compounds. See "Factors That May Affect Future Results -- Government Regulation; No Assurance of Regulatory Approval." HEALTHCARE REIMBURSEMENT In both domestic and foreign markets, sales of the Company's products, if any, will depend, in part, on the availability of reimbursement from third-party payers, such as government health administration authorities, private health insurers and other organizations. Third-party payers are increasingly challenging the price and cost-effectiveness of medical products. There can be no assurance that the Company's products will be considered cost-effective or that adequate third-party reimbursement will be available to enable the Company to maintain price levels sufficient to realize an appropriate return on its investment in product development. See "Factors That May Affect Future Results - -- Uncertainty of Third-Party Reimbursement." PRODUCT LIABILITY The Company's business exposes it to potential liability risks that are inherent in the testing, manufacturing and marketing of medical products. The use of the Company's products or clinical trials may expose the Company to product liability claims and possible adverse publicity. These risks also exist with respect to the Company's products, if any, that receive regulatory approval for commercial sale. The Company currently has limited product liability coverage for the clinical research use of its products which management believes is customary for a Company with products at this stage of clinical development. The Company does not have product liability insurance for the commercial sale of its Page 23 24 products but intends to obtain such coverage if and when its products are commercialized. However, such coverage is becoming increasingly expensive and there can be no assurance that the Company will be able to maintain its existing insurance coverage or obtain additional insurance coverage at acceptable costs, if at all, or that a product liability claim would not materially adversely affect the business or financial condition of the Company. If and when the Company manufactures vaccines which are recommended for routine administration to children, it is possible that the Company will be required to participate in the National Vaccine Injury Compensation Program. This program compensates children having adverse reactions to certain routine childhood immunizations with funds collected through an excise tax from the manufacturers of these vaccines. EMPLOYEES As of March 13, 1998, OraVax employed a work force of 75 persons including 61 persons employed full-time, of which 6 are leased employees, and 8 persons employed part-time. Of this total work force, 57 persons are engaged in research and development activities and 18 are devoted to research and facilities support and administrative activities. 18 persons hold Ph.D. or M.D. degrees. A significant number of the Company's management and professional employees have had prior experience with pharmaceutical, biotechnology or medical products companies. OraVax believes that it has been successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. See "Factors That May Affect Future Results -- Dependence on Attraction and Retention of Key Employees." OraVax believes that its relationships with its employees are good. ACADEMIC CONSULTANTS OraVax has relationships with a number of academic consultants. These persons are not employees of the Company. Accordingly, the Company has limited control over their activities and can expect only limited amounts of their time to be dedicated to the Company's activities. These persons may or may not enjoy relationships with other commercial entities, some of which could compete with the Company. Although the precise nature of each relationship varies, the consultants generally sign agreements which provide for confidentiality of the Company's proprietary information and results of studies but not for the assignment of inventions. There can be no assurance that OraVax will in connection with every relationship be able to maintain the confidentiality of the Company's technology, dissemination of which could have a materially adverse effect on the Company's business. Further, there can be no assurance that the Company will be able to license inventions and technology discovered by such consultants. See "Factors That May Affect Future Results -- Patents and Proprietary Rights." Page 24 25 ITEM 2. PROPERTIES The Company's administrative offices and research facilities consist of an aggregate of approximately 53,000 square feet of leased space at 38 Sidney Street, Cambridge, Massachusetts. The Company moved its principal offices to the 38 Sidney Street location from a nearby building in Cambridge in December 1995, significantly expanding its available laboratory and office space and improving its facilities. In January 1996, the Company leased a fully-equipped manufacturing facility of approximately 47,000 square feet in Canton, Massachusetts and purchased substantial related equipment from the former tenant. This facility was specifically designed and equipped by the former tenant for the manufacture of biological products. The Company anticipates that its initial use of the facility will be for the production of vaccines for the Joint Vaccine Acquisition Program, of the U.S. Department of Defense. The facility will also accomodate production development activities for OraVax's proprietary products depending on the outcome of product development. Existing building and capital equipment leases, which include renewal and purchase options, were transferred to the Company. In addition, the Company purchased leasehold improvements and other related assets from the former tenant, payable in installments through 1999. The Company believes these facilities are adequate for its needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation or legal proceedings that it believes could have a material adverse effect on the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 1997. Page 25 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's authorized capital stock consists of 25,000,000 shares of Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred Stock, $.001 par value per share. As of March 13, 1998, there were issued and outstanding 10,405,641 shares of Common Stock held by approximately 196 stockholders of record and 6,250 shares of 6% Convertible Preferred Stock ("Convertible Preferred Stock") held by approximately 32 stockholders of record. COMMON STOCK The Common Stock of the Company has been traded on the Nasdaq National Market under the symbol ORVX since June 7, 1995. Prior to June 7, 1995, the Company's Common Stock was not publicly traded. The following table sets forth for the periods indicated the high and low sales prices per share of the Common Stock as reported by the Nasdaq National Market. 1997 HIGH LOW ---- ---- --- First Quarter $ 7.00 $ 2.375 Second Quarter 3.625 2.25 Third Quarter 2.75 2.125 Fourth Quarter 4.25 1.75 1996 ---- First Quarter $15.00 $11.00 Second Quarter 14.50 7.25 Third Quarter 9.25 6.50 Fourth Quarter 10.75 5.25 1995 ---- First Quarter N/A N/A Second Quarter (June 9, 1995 - June 30, 1995) 10.125 7.25 Third Quarter 16.75 8.25 Fourth Quarter 14.875 9.50 On March 13, 1998, the closing price of the Company's Common Stock on the Nasdaq National Market was $1.875. The Company has never paid dividends on its Common Stock. The Company currently intends to reinvest its earnings, if any, for use in the business and does not expect to pay cash dividends in the foreseeable future. 6% CONVERTIBLE PREFERRED STOCK In December 1997, the Company issued and sold in a private placement to certain accredited investors for $1,000 per share an aggregate of 6,300 shares of Convertible Preferred Stock, resulting in gross proceeds to the Company of $6.3 million in the aggregate. Each share of Convertible Preferred Stock is entitled to receive cumulative dividends at the rate of $60.00 per share per annum, payable in shares of Convertible Preferred Stock valued at $1,000 Page 26 27 per share, when and as declared by the Company's Board of Directors. Such dividends accrue from day to day whether or not earned or declared. Each share of Convertible Preferred Stock is also entitled to a liquidation preference of $1,000 per share, plus any accrued but unpaid dividends, in preference to any other class or series of capital stock of the Company. Except to determine whether such stock is entitled to its liquidation preference under certain circumstances, and as provided by applicable law, holders of shares of Convertible Preferred Stock have no voting rights. All of the Convertible Preferred shares are fully convertible, at the option of the holder. On December 23, 2002, all outstanding shares of Convertible Preferred Stock will automatically be converted into Common Stock. The number of shares of Common Stock issuable upon conversion of shares of Convertible Preferred Stock will equal the liquidation preference of the shares being converted divided by the then-effective conversion price applicable to the Convertible Preferred Stock (the "Conversion Price"). The Conversion Price is the lowest trading price of the Common Stock during the 22 consecutive trading days immediately preceding the date of conversion reduced by the Applicable Percentage described below. The "Applicable Percentage", which is dependent upon the time elapsed after the date of issuance to the date of measurement, will be 5.000% starting on the first day of the fourth month after the date of issuance and will increase in the subsequent 14 months to 6.125%, 7.250%, 8.375%, 9.500%, 10.625%, 11.750%, 12.875%, 14.000%, 15.125%, 16.250%, 17.375%, 18.500%, 19.750% and 21.000%, respectively. At any date after the first day of the eighteenth month after the date of issuance, the Conversion Price will be the lesser of (i) 79% of the average of the daily low trading prices of the Common Stock for the eighteenth month, (ii) 79% of the average of the daily low trading prices of the Common Stock for the twenty-fourth month, and (iii) 79% of the average of the daily low trade prices of the Common Stock for the thirtieth month. The Conversion Price is at all times also subject to customary anti-dilution adjustment for events such as stock splits, stock dividends, reorganizations and certain mergers affecting the Common Stock. No holder of Convertible Preferred Stock will be entitled to convert any share of Convertible Preferred Stock into shares of Common Stock if, following such conversion, the holder and its affiliates (within the meaning of the Exchange Act) will be the beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of 10% or more of the outstanding shares of Common Stock. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is attached as APPENDIX A. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is attached as APPENDIX B. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is attached as APPENDIX C. Page 27 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements on accounting and financial disclosure matters. Page 28 29 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are as follows:
Name Age Title - ---- --- ----- Lance K. Gordon, Ph.D......................... 50 President, Chief Executive Officer and Director Thomas P. Monath, M.D......................... 57 Vice President, Research and Medical Affairs Robert J. Gerety, M.D., Ph.D.................. 58 Vice President of Development and Regulatory Affairs Douglas MacMaster (1)(2)...................... 67 Chairman of the Board of Directors C. Boyd Clarke (1)............................ 49 Director Andre L. Lamotte, Sc.D.(2).................... 48 Director Allen Misher, Ph.D. (2)....................... 66 Director
- ---------- (1)Member of the Audit Committee of the Board of Directors. (2)Member of the Compensation Committee of the Board of Directors. LANCE K. GORDON, PH.D. has served as the President and Chief Executive Officer and a member of the Board of Directors of the Company since June 1990. From January 1989 to June 1990, Dr. Gordon served as Senior Vice President of North American Vaccine, Inc., a biopharmaceutical company. From April 1988 to January 1989, he served as Chief Executive Officer of American Vaccine Corporation and Selcore Laboratories, Inc., both of which are biopharmaceutical companies. From 1987 to 1988, Dr. Gordon was Associate Director, Infectious & Inflammatory Diseases, Clinical Pharmacology -- Drug Medical Affairs, of E.R. Squibb & Sons, Inc., a pharmaceutical company. From 1981 to 1987, he was Director, Immunobiology Research at Connaught Laboratories, Ltd., a pharmaceutical company. During his seven years with Connaught Laboratories, Ltd., Dr. Gordon was responsible for both bacterial and viral research and development programs. He was the inventor and Project Director of the Connaught Haemophilus influenzae type b conjugate vaccine, ProHibit. Dr. Gordon also serves on the advisory boards of the not-for-profit Albert Sabin Foundation and BioSciences Contract Production, a private biopharmaceutical services company. Dr. Gordon received a B.A. from the University of California at Humboldt and a Ph.D. in Biomedical Science from the University of Connecticut. Dr. Gordon completed his postdoctoral fellowship at the Howard Hughes Medical Institute. THOMAS P. MONATH, M.D. has served as Vice President, Research and Medical Affairs of the Company since December 1993. From April 1992 to December 1993, he served as Vice President, Research and Development of the Company and from October 1991 to March 1992, he served as a consultant to the Company. From November 1988 to October 1991, Dr. Monath was Chief, Virology Division of the United States Army Medical Research Institute of Infectious Diseases, Fort Detrick, Maryland. As Chief of the Virology Division, Dr. Monath directed the development of conventional and genetically engineered viral vaccines and the discovery, evaluation, preclinical testing and clinical development of antiviral drugs. Dr. Monath currently serves as a member of the Steering Committee Page 29 30 on Dengue and Japanese Encephalitis of the Global Program for Vaccines and Immunization of the World Health Organization. In 1997 Dr. Monath was named to the National Vaccines Advisory Committee. Dr. Monath received a B.A. from Harvard College and an M.D. from Harvard Medical School. ROBERT J. GERETY, M.D., PH.D. has served as Vice President of Development and Regulatory Affairs of the Company since April 1997. From July 1994 until he resigned in December 1996, Dr. Gerety was President and Chief Executive Officer of ImmuLogic Pharmaceutical Corporation ("ImmuLogic"), a biopharmaceutical company that develops products with an emphasis on the treatment of allergies, autoimmune diseases and drugs of abuse. From October 1993 to July 1994, he served as ImmuLogic's Executive Vice President of Pharmaceutical Development. Prior to October, 1993, Dr. Gerety was Vice President of Development Operations at Biogen Inc., a biopharmaceutical company engaged in developing, manufacturing and marketing drugs for human healthcare. From June 1985 through September 1989, Dr. Gerety was an Executive Director of Merck & Co. and head of virus and cell biology at Merck & Co. Dr. Gerety received a B.A. from Rutgers University, an M.D. from the George Washington School of Medicine and M.A. and Ph.D. degrees from Stanford University Medical School. DOUGLAS MACMASTER has served as a director of the Company since March 1993 and was elected Chairman of the Board of Directors in April 1994. From July 1988 until his retirement in January 1992, Mr. MacMaster served as a Senior Vice President of Merck & Co., Inc. ("Merck"), a pharmaceutical company, with responsibility for worldwide chemical and pharmaceutical manufacturing, worldwide construction, the Agvet division and the Speciality Chemicals Group. From October 1985 to July 1988, Mr. MacMaster was President of the Merck Sharp & Dohme Division, with responsibility for the United States human healthcare business. Mr. MacMaster was an employee of Merck for 30 years. He is currently on the Board of Directors of American Precision Industries, Inc., Martek Biosciences Corp., Neose Pharmaceuticals, Inc., Phyto Pharmaceuticals Inc. and U.S. Bioscience, Inc. Mr. MacMaster received his A.B. degree from St. Francis Xavier University (Canada) and his J.D. degree from Boston College Law School. C. BOYD CLARKE, was elected a director of the Company in March 1997. Since September 1996, Mr. Clarke has served as President of U.S. Bioscience, Inc., a pharmaceutical company specializing in the development and commercialization of products for patients with cancer and AIDS. From January 1995 to May 1996, Mr. Clarke served as Vice President, Strategy, Alliance Management and Development for Merck Vaccines, where he managed a global alliance with Pasteur Merieux for the development of vaccines. Mr. Clarke served in other capacities at various units of Merck & Co., Inc. since 1977. Mr. Clarke received a B.S. in biochemistry and a M.A. in European History from the University of Calgary and was a doctoral candidate in European History at University of Wisconsin. ANDRE L. LAMOTTE, SC.D. has served as a director of the Company since April 1990. Since April 1989, he has served as the Managing General Partner of Medical Science Ventures, the General Partner of Medical Science Partners L.P., and as Managing General Partner of Medical Science Ventures II, the General Partner of Medical Science Partners II, L.P. and Medical Science II Co- Investment L.P. Dr. Lamotte received a B.S. in General Engineering from Ecole Centrale Paris, an M.S. in Chemical Engineering and an Sc.D. in Chemical Engineering from the Massachusetts Institute of Technology, and a M.B.A. from the Harvard Graduate School of Business Administration. ALLEN MISHER, PH.D. has served as a director of the Company since January, 1996. He was elected by the Board of Directors to fill a vacancy created by the resignation of Robert E. Curry as a Director. Dr. Misher is a consultant. From 1984 to 1994, he served as President of Philadelphia College of Pharmacy and Science. From 1982 to 1984, he was a Senior Vice President of National Medical Care, Inc. From 1964 to 1982 he was employed by SmithKline & French and SmithKline Corp. in a variety of positions in pharmacology and research, including President of SmithKline Medical Diagnostics Group from 1978 to 1982 and Group Vice President of SmithKline Corp. from Page 30 31 1978 to 1982. He is currently on the Board of Directors of U.S. Bioscience and Cortech, Inc. Dr. Misher received his B.Sc. from Philadelphia College of Pharmacy and Science and his Ph.D. in Physiology from the University of Pennsylvania. The Board of Directors is divided into three classes, each of whose members serve for a staggered three-year term. The Board is comprised of two Class I Directors (Mr. MacMaster and Dr. Lamotte), two Class II Directors (Mr. Clarke and Dr. Misher) and one Class III Director (Dr. Gordon). At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the Class I Directors, Class II Directors and Class III Directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders held during the calendar years 1999, 2000 and 1998, respectively. The Board of Directors has a Compensation Committee comprised of Drs. Lamotte and Misher and Mr. MacMaster, which makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company, and an Audit Committee comprised of Messrs. Clarke and MacMaster, which reviews the results and scope of the audit and other services provided by the Company's independent public accountants. Page 31 32 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION. The following table sets forth certain information with respect to the compensation paid by the Company during the fiscal years ended December 31, 1995, 1996 and 1997 to the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers whose cash compensation exceeded $100,000 in 1997 (the Chief Executive Officer and such other executive officers are hereinafter referred to as the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION(1) AWARDS SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS(#) COMPENSATION($)(4) ----- --------- ---------- --------------- ----------- ------------------ Lance K. Gordon 1997 $250,000 $62,500 $ 8,522 100,000 --- President and Chief 1996 $250,000 $56,250 $ 6,067 40,000 --- Executive Officer 1995 $220,500 $40,794 $ 7,009 --- $45,653 Thomas P. Monath 1997 $190,000 $52,500 $ 3,417 50,000 --- Vice President, Research 1996 $190,000 $42,750 $ 2,250 --- --- and Medical Affairs 1995 $157,500 $29,138 $ 5,034 --- --- Robert J. Gerety 1997 $188,815 $37,500 $43,855 125,000 --- Vice President of 1996 --- --- --- --- --- Development and Regulatory 1995 --- --- --- --- --- Affairs Keith S. Ehrlich(5) 1997 $145,000 $36,250 $10,017 75,000 --- Vice President, Finance and 1996 $145,000 $26,100 $ 799 10,000 --- Administration 1995 $131,250 $24,938 $ 1,039 --- ---
- ---------- (1) Includes amounts payable in a subsequent fiscal year for services rendered by the Named Executive Officer in the fiscal year. (2) Other compensation in the form of perquisites and other personal benefits has been omitted because it constitutes less than the lesser of $50,000 or ten percent of the total annual salary and bonus for the Named Executive Officer. (3) Includes term-life insurance premiums and financial planning expenses paid by the Company to the Named Executive Officer. (4) Represents relocation allowances paid by the Company. (5) Mr. Ehrlich resigned as an officer of the Company effective as of January 29, 1998. Page 32 33 OPTION GRANT TABLE. The following table sets forth certain information regarding options granted by the Company to the Named Executive Officers during the fiscal year ended December 31, 1997: OPTION GRANTS IN LAST FISCAL YEAR Individual Grants
Potential Realizable Value at Assumed Number of Percent of Stock Price Shares of Total Options Annual Rates of Common Stock Granted to Appreciation Underlying Employees For Option Term(1) Options in Fiscal Exercise Expiration Name Granted(#) Year Price($/sh) Date 5%($) 10%($) - ---- ------------ ------------- ----------- ---------- -------------------- Lance K. Gordon............ 100,000 20.1% $2.50 3/24/07 $157,224 $398,436 Thomas P. Monath........... 50,000(2) 10.0% $2.50 3/24/07 $78,610 $199,220 Robert J. Gerety........... 125,000(3) 25.1% $3.00 4/03/07 $235,838 $597,653 Keith S. Ehrlich(4)........ 75,000 15.0% $2.50 3/24/07 $117,915 $298,830
- ---------- (1) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. This table does not take into account any appreciation in the price of the Common Stock to date. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Stock and the date at which the options are exercised. (2) Option vests in 16 equal quarterly installments commencing on March 31, 1997. (3) Option vests in four equal annual installments commencing on April 3, 1998. (4) Mr. Ehrlich resigned as an officer of the Company effective January 29, 1998. YEAR-END OPTION TABLE. The following table sets forth certain information regarding stock options exercised during the year ended December 31, 1997 and stock options held as of December 31, 1997, by the Named Executive Officers: Page 33 34 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Number of Shares Shares of Underlying Unexercised Value of Unexercised In- Common Stock Value Options at the-Money Options at Acquired on Realized Fiscal Year-End (#) Fiscal Year-End($)(2) Name Exercise (#) ($)(1) Exercisable/unexercisable Exercisable/unexercisable - ---- -------------- -------- ------------------------- ------------------------- Lance K. Gordon.................. --- --- 176,223/93,003 $132,546/$0 Thomas P. Monath................. --- --- 148,557/48,502 $92,497/$0 Robert J. Gerety................. --- --- ---/125,000 ---/$0 Keith S. Ehrlich(3).............. --- --- 64,554/60,500 $0/$0
- ---------- (1) Represents the difference between the exercise price and the fair market value on the date of exercise. (2) Based on the fair value of the Common Stock on December 31, 1997 ($1.75), less the option exercise price. (3) Mr. Ehrlich resigned as an officer of the Company effective as of January 29, 1998. DIRECTOR COMPENSATION. Except as described below, the Company's directors do not receive any cash compensation for service on the Board of Directors or any committee thereof, but are reimbursed for actual expenses incurred in connection with attending meetings of the Board and any committee thereof. The Company pays reasonable travel and out-of-pocket expenses incurred by non-employee Directors in connection with attendance at meetings to transact the business of the Company or attendance at meetings of the Board of Directors or any committee thereof. In April 1994, the Company entered into an agreement with Mr. MacMaster, Chairman of the Board of Directors, pursuant to which Mr. MacMaster receives an annual retainer of $25,000 paid quarterly in advance, a fee of $2,000 per day for attending meetings of the Board of Directors or other meetings attended at the request of the Company's President or the Board of Directors, including monthly advisory meetings, plus travel expenses. Mr. MacMaster received an option effective February 6, 1995, to purchase 12,750 shares of Common Stock at an exercise price of $3.529 per share. The option vests in five equal annual installments commencing one year after the date of grant. In February 1996, the Company entered into an agreement with Dr. Misher pursuant to which Dr. Misher receives an annual retainer of $5,000 and a fee of $1,500 per meeting of the Board of Directors attended. In addition, on February 5, 1996, Dr. Misher received an option to purchase 10,000 shares of Common Stock at an exercise price of $13.25 per share. The option vests in three equal annual installments commencing one year after the date of grant. In March 1997, the Company entered into an agreement with Mr. Clarke pursuant to which Mr. Clarke receives an annual retainer of $5,000 and a fee of $1,500 per meeting of the Board of Directors attended. In addition, on March 7, 1997, Mr. Clarke received an option to purchase 10,000 shares of Common Stock at an exercise price of $5.50 per share. The option vests in three equal annual installments commencing one year after the date of grant. EMPLOYMENT AGREEMENTS Under the terms of an employment agreement dated July 19, 1990, Dr. Gordon serves as President, Chief Executive Officer and a director of the Company and is entitled to receive an annual base salary, as determined by the Board of Directors, plus a bonus based upon the achievement of certain defined management objectives. The employment agreement automatically renews for Page 34 35 successive 12-month periods. Dr. Gordon's employment is terminable (i) by the Company or Dr. Gordon at any time upon not less than six months' prior written notice or (ii) by the Company, for "cause" (as defined in the employment agreement), immediately upon written notice. In the event the Company elects not to extend the employment agreement or terminates Dr. Gordon without "cause," the Company must pay Dr. Gordon a one time severance payment equal to fifty percent (50%) of his annual base salary in effect at the time. Dr. Gordon has agreed, for a period of one year following termination of his employment, not to engage in any business activity that directly or indirectly competes with the Company or to provide any services to the Company's competition or its clients. Dr. Gordon also has agreed not to disclose any of the Company's proprietary information to third parties without the written approval of the Company either during or after his employment. In connection with the execution of his employment agreement, the Company agreed to sell, and Dr. Gordon agreed to buy, 70,834 shares of the Company's Common Stock at a purchase price of $0.235 per share. See "Certain Transactions." Under the terms of an employment agreement dated October 18, 1991, Dr. Monath serves as Vice President, Research and Development and is entitled to receive an annual base salary as determined by the Board of Directors and to participate in the bonus program for the Company's executive officers. Pursuant to the employment agreement, the Company granted Dr. Monath an option to purchase 39,006 shares of the Company's Common Stock at $0.706 per share, vesting over a four-year period, and reimbursed Dr. Monath for expenses associated with his relocation to the Boston, Massachusetts area. Under the terms of an employment agreement dated April 3, 1997, Dr. Gerety serves as Vice President of Development and Regulatory Affairs and is entitled to receive an annual base salary as determined by the Board of Directors and to participate in the bonus program for the Company's executive officers. Pursuant to the employment agreement, the Company granted Dr. Gerety an option to purchase 125,000 shares of the Company's Common Stock at $3.00 per share, vesting over a four-year period. Each of the employment agreements with Drs. Monath and Gerety is for an initial period of three years and is thereafter automatically renewable for successive twelve-month periods unless terminated by either party by giving six-months' prior written notice to the other. The employment of Drs. Monath and Gerety is terminable by the Company, by giving prior written notice, at any time, with or without "cause" (as defined in their employment agreements). In the event the Company terminates Dr. Monath's or Dr. Gerety's employment without "cause," the terminated party is entitled to receive his then current salary for a period of six months following such termination. In addition, Drs. Monath and Gerety have agreed, for a period of three years, not to engage in any business activity that directly or indirectly competes with the Company or to provide any services to the Company's competition. Drs. Monath and Gerety have also entered into Confidential Information and Invention Assignment Agreements with the Company pursuant to which each of them has agreed (i) not to disclose any of the Company's proprietary information to third parties without the prior written approval of the Company either during or after his employment and (ii) to assign to the Company his full right and title in and to any inventions made during the course of his employment with the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee are Drs. Lamotte and Misher and Mr. MacMaster. No member of the Compensation Committee was at any time during 1997, or formerly, an officer or employee of the Company or any subsidiary of the Company, nor has any member of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934. Page 35 36 During 1997, no executive officer of the Company has served as a director or member of the Compensation Committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director of or member of the Compensation Committee of the Company. REPORT OF THE COMPENSATION COMMITTEE The executive compensation program of the Company is administered by the Compensation Committee, composed of Drs. Lamotte and Misher and Mr. MacMaster, all of whom are non-employee directors. The Company's executive compensation program is designed to retain and reward executives who are capable of leading the Company in the achievement of its business objectives. All decisions by the Compensation Committee relating to the compensation of the Company's officers are reviewed by the full Board. COMPENSATION PHILOSOPHY The objectives of the executive compensation program are (i) to align compensation with business objectives and individual performance and (ii) to attract, retain and reward executive officers who contribute to the long-term success of the Company. The Company's executive compensation philosophy is based on the principles of competitive and fair compensation and sustained performance. Competitive and Fair Compensation. The Company is committed to providing an executive compensation program that helps attract and retain highly qualified executives. To ensure that compensation is competitive, the Company compares its compensation practices with those of other companies in the industry and sets its compensation guidelines based on this review. The Company believes compensation for its executive officers is within the range of compensation paid to executives with comparable qualifications, experience and responsibilities in companies with similar businesses and of comparable size and success. The Company also strives to achieve equitable relationships both among the compensation of individual officers and between the compensation of officers and other employees throughout the organization. Sustained Performance. Executive officers are rewarded based upon corporate performance and individual performance. Corporate performance is evaluated by reviewing the extent to which strategic and business plan goals are met, including such factors as achievement of operating budgets, establishment of strategic licensing and development alliances with third parties, timely development of new processes and products, and performance relative to competitors. Individual performance is evaluated by reviewing attainment of a specified individual objectives and the degree to which teamwork and company values are fostered. In evaluating each executive officer's performance, the Company generally conforms to the following process: - Company and individual goals and objectives generally will be set at the beginning of the performance cycle. - At the end of the performance cycle, the accomplishment of the executive's goals and objectives and his contributions to the Company will be evaluated. Page 36 37 - The executive's performance will then be compared with peers within the Company and the results will be communicated to the executive. - The comparative results, combined with comparative compensation practices of other companies in the industry, will be then used to determine salary and stock compensation levels. Annual compensation for the Company's executives generally consists of three elements -- salary, cash bonuses and stock options. The salary for executives is generally set by reviewing compensation for competitive positions in the market and the historical compensation levels of the executives. Increases in annual salaries and payment of bonus awards will be based on actual corporate and individual performance against targeted performance and various objective performance criteria. Targeted performance criteria vary for each executive are based on his area of responsibility, and may include continued innovation and development of the Company's technology and products, timely development of new products or processes, implementation of financing strategies and establishment of strategic licensing and developmental alliances with third parties. Subjective performance criteria include an executive's ability to motivate others, develop the skills necessary to grow as the Company matures, recognize and pursue new business opportunities and initiate programs to enhance the Company's growth and success. The Committee does not use a specific formula based on these targeted performance and subjective criteria, but makes an evaluation of each executive officer's contributions in light of all such criteria. Compensation at the executive officer level also includes the long-term incentives offered by stock options. The stock option program is designed to promote the identity of long-term interests between the Company's employees and its shareholders and assist in the retention of executives. The size of option grants is generally intended to reflect the executive's position with the Company and his contributions to the Company, including his success in achieving the individual performance criteria described above. The option program generally uses a five-year vesting period to encourage key employees to continue in the employ of the Company. Executive officers of the Company are also eligible to participate in the Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is available to virtually all employees of the Company and generally permits participants to purchase shares at a discount of approximately 15% of the fair market value at the beginning or end of the applicable purchase period. Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), enacted in 1993, generally disallows a tax deduction to public companies for compensation over $1 million paid to the corporation's chief executive officer and four other most highly compensated executive officers. Qualifying performance compensation will not be subject to the deduction limit if certain requirements are met. The Company intends to structure the performance-based portion of the compensation of its executive officers in a manner that complies with the new statute to mitigate any disallowance of deductions. Dr. Gordon's 1997 Compensation. Dr. Gordon, President and Chief Executive Officer of the Company, is eligible to participate in the same executive compensation plans available to other executives. Dr. Gordon's salary for 1997 remained at $250,000. Dr. Gordon also received bonus compensation of $62,500 in 1997. The Compensation Committee believes that Dr. Gordon's annual compensation has been set at a level competitive with other companies in the industry. COMPENSATION COMMITTEE Page 37 38 Andre L. Lamotte Allen Misher Douglas MacMaster COMPARATIVE STOCK PERFORMANCE The comparative stock performance graph below compares the cumulative stockholder return on the Common Stock of the Company for the period from June 8, 1995 (the effective date of the initial public offering of the Company's Common Stock) through December 31, 1997 with the cumulative total return on (i) the Total Return Index for the Nasdaq Stock Market (U.S. Companies) (the "Nasdaq Composite Index"), and (ii) the Nasdaq Pharmaceutical Index (assuming the investment of $100 in the Company's Common Stock, the Nasdaq Composite Index and the Nasdaq Pharmaceutical Index on June 8, 1995 and reinvestment of all dividends). Measurement points are on June 8, 1995 and the last trading day of the years ended December 31, 1996 and 1997. Prior to June 8, 1995, the Company's Common Stock was not registered under the Securities Exchange Act of 1934. __________________________________________________________________________ $250 [ ]CRSP Nasdaq Stock Market [ ]CRSP Pharmaceutical Stocks________________________________________ [ ]OraVax, Inc. __________________________________________________________________________ $200 __________________________________________________________________________ $150 __________________________________________________________________________ $100 __________________________________________________________________________ $50 __________________________________________________________________________ $0 __________________________________________________________________________ 6/8/95 12/31/95 12/31/96 12/31/97 __________________________________________________________________________ 6/8/95 12/29/95 12/31/96 12/31/97 __________________________________________________________________________ CRSP Nasdaq Stock Market $100.00 $120.32 $148.00 $181.59 CRSP Pharmaceutical Stocks $100.00 $159.71 $159.88 $165.22 OraVax, Inc. $100.00 $117.50 $52.50 $17.50 __________________________________________________________________________ ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of March 13, 1998, with respect to the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each director of the Company; (iii) each executive officer named in the Summary Compensation Table under the heading "Executive Compensation" above and (iv) all directors and executive officers of the Company as a group. The number of shares of Common Stock beneficially owned by each director or executive officer is determined under the rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power Page 38 39 or investment power and also any shares which the individual has the right to acquire within 60 days after March 13, 1998 through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. the inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. As of March 13, 1998, no director or executive officer of the Company beneficially owned any shares of Convertible Preferred Stock.
Number of Shares of Common Percentage of Percentage of Stock Common Total Voting Beneficially Stock Capital Stock Beneficial Owner Owned Outstanding Outstanding - ---------------------------------------------------------------- ------------ ------------- ------------- 5% STOCKHOLDERS Wellington Management Company, LLP (1).......................... 1,010,700 9.8% 9.8% Vanguard Specialized Portfolios -- Health Care Portfolio (2)............................................ 602,600 5.8% 5.8% Medical Science Partners, L.P.(3)............................... 600,857 5.8% 5.8% DIRECTORS C. Boyd Clarke (4).............................................. 6,666 * * Lance K. Gordon (5)............................................. 229,445 2.2% 2.2% Andre L. Lamotte (6)............................................ 603,695 5.8% 5.8% Douglas MacMaster (7)........................................... 18,700 * * Allen Misher (8)................................................ 6,666 * * OTHER EXECUTIVE OFFICERS Keith S. Ehrlich (9)............................................ 128,925 1.2% 1.2% Robert J. Gerety (10)........................................... 48,750 * * Thomas P. Monath (11)........................................... 154,507 1.5% 1.5% All directors and executive officers as a group (12)............ 1,189,855 11.0% 11.0%
- ---------- * Less than 1%. (1) The information reported is based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 10, 1998. The address of this entity is 75 State Street, Boston, MA 02109. (2) The information reported is based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 9, 1998. The address of this entity is 100 Vanguard Boulevard, VM #V34, Malvern, PA 19355. (3) Includes 26,320 shares held by Medical Science II Co-Investment L.P. ("MSP II-Co") and 149,544 shares held by Medical Science Partners II, L.P. ("MSP II"). Medical Science Partners, L.P. ("MSP") is an affiliate of MSP II-Co and MSP II and may be deemed to be the beneficial owner of shares held by such entities. The address of MSP is 20 Williams Street, Suite 250, Wellesley, MA 02181. (4) Represents shares which Dr. Clarke may acquire upon the exercise of options within 60 days after March 13, 1998. Page 39 40 (5) Includes 166,216 shares of Common Stock which Dr. Gordon has the right to acquire within 60 days after March 13, 1998 upon exercise of outstanding stock options. (6) Includes 424,993 shares held by MSP, 26,320 shares held by MSP II-Co and 149,544 shares held by MSP II. Dr. Lamotte is the Managing General Partner of Medical Science Ventures, the General Partner of MSP and is the Managing General Partner of Medical Science Ventures II, the General Partner of MSP II and MSP II-Co, and may be deemed to be the beneficial owner of the shares held by Partner of MSP II and MSP II-Co, and may be deemed to be the beneficial owner of the shares held by MSP, MSP II and MSP II-Co although Dr. Lamotte disclaims beneficial ownership of such shares. The address of Dr. Lamotte is c/o MSP, 20 Williams Street, Suite 250, Wellesley, MA 02181. (7) Represents shares which Mr. MacMaster may acquire upon the exercise of options within 60 days after March 13, 1998. (8) Represents shares which Dr. Misher may acquire upon the exercise of options within 60 days after March 13, 1998. (9) Includes 124,899 shares which Mr. Ehrlich may acquire upon the exercise of options within 60 days after March 13, 1998. Mr. Ehrlich resigned as an officer of the Company effective January 22, 1998. (10) Includes 31,250 shares which Dr. Gerety may acquire upon the exercise of options within 60 days after March 13, 1998. (11) Includes 148,557 shares which Dr. Monath may acquire upon the exercise of options within 60 days after March 13, 1998. (12) Includes 502,954 shares which all directors and executive officers as a group may acquire upon the exercise of options within 60 days after March 13, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For a description of certain transactions between the Company and Mr. MacMaster, a director of the Company, see "Management -- Director Compensation." For a description of certain employment and other arrangements between the Company and its executive officers, see "Management -- Executive Compensation" and "Management -- Employment Agreements." For a description of certain registration rights held by Dr. Gordon and certain stockholders of the Company, see "Description of Capital Stock." The Company believes that the securities issued in the transactions described above were sold at their then fair market value and that the terms of the transactions described above were no less favorable than the Company could have obtained from unaffiliated third parties. The Company has a policy that all material transactions between the Company and its officers, directors and other affiliates must (i) be approved by a majority of the members of the Company's Board of Directors and by a majority of the disinterested members of the Company's Board of Directors and (ii) be on terms no less favorable to the Company than could be obtained form unaffiliated third parties. In addition, this policy requires that any loans by the Company to its officers, directors or other affiliates be for bona fide business purposes only. Page 40 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are included as part of this Annual Report on Form 10-K. 1. The following financial statements (and related notes) of the Company are included as APPENDIX C of this Report: Report of Independent Accountants Consolidated Balance Sheets - December 31, 1996 and 1997. Consolidated Statements of Operations - Fiscal years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Stockholders' Equity (Deficit) - Fiscal years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Cash Flows - Fiscal years ended December 31, 1995, 1996 and 1997. Notes to Consolidated Financial Statements. 2. Combined Financial Statements of OraVax Merieux Co. and Merieux OraVax Co. Report of Independent Accountants S-1 Combined Financial Statements S-2 Notes to Combined Financial Statements S-6 All other schedules are omitted as the information required is inapplicable or the information is presented in the financial statements or the related notes. 3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Annual Report on Form 10-K. (b) On January 21, 1998, the Company filed a Current Report on Form 8-K dated as of December 23, 1997 relating to the issuance and sale by the Company of 6,300 shares of Convertible Preferred Stock. The following trademarks of the Company are mentioned in this Annual Report on Form 10-K: OraVax, Viricle. Page 41 42 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 19th day of March, 1998. ORAVAX, INC. By: /s/ Lance K. Gordon --------------------------- Lance K. Gordon, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Lance K. Gordon President, Chief Executive Officer) - ----------------------- and Director (principal executive ) Lance K. Gordon officer and principal financial ) officer) ) /s/ Lisa M. Bruneau Controller (controller and ) - ----------------------- principal accounting officer) ) Lisa M. Bruneau /s/ Douglas MacMaster Director ) March 19, 1998 - ----------------------- Douglas MacMaster /s/ C. Boyd Clarke Director ) - ----------------------- C. Boyd Clarke /s/ Andre L. Lamotte Director ) - ----------------------- Andre L. Lamotte /s/ Allen Misher Director ) - ----------------------- Allen Misher
Page 42 43 EXHIBIT INDEX The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit No. Description - ----------- ----------- 3.1(2) Form of Second Amended and Restated Certificate of Incorporation of the Company. 3.2(2) Amended and Restated By-Laws of the Company. 4.1(2) Specimen Certificate for shares of Common Stock, $.001 par value, of the Company. 4.2(6) Rights Agreement dated as of April 2, 1997 between the Company and The First National Bank of Boston. 4.3(7) Certificate of Designations of the Convertible Preferred Stock. 10.1(1)(2) 1990 Stock Option Plan, as amended. 10.2(1)(2) 1995 Stock Option Plan. 10.3(1)(2) Employment Agreement between the Company and Lance K. Gordon dated as of July 19, 1990. 10.4(1)(2) Employment Agreement between the Company and Thomas P. Monath dated October 18, 1991. 10.5(1)(2) Stock Purchase Agreement between the Company and Lance K. Gordon dated as of September 28, 1990. 10.6(2) Consulting Agreement between the Company and Dr. Jean-Pierre Kraehenbuhl dated as of January 1, 1990. 10.7(2) Consulting Agreement between the Company and Dr. Marian Neutra dated as of January 1, 1990. 10.8(1)(4) Letter Agreement dated February 5, 1996 between the Company and Allen Misher. 10.9(1)(5) Letter Agreement dated February 10, 1997 between the Company and C. Boyd Clarke. 10.10(2) Master Lease Agreement between Comdisco and the Company dated March 31, 1993. 10.11(2) Equipment Schedule to Master Lease Agreement between Comdisco and the Company dated June 21, 1994. 10.12(2)+ Invention and License Administration Agreement between the President and Fellows of Harvard College and the Swiss Institute for Experimental Cancer Research dated October 22, 1990.
Page 43 44 10.13(2)+ Research and Development Agreement among the Company, Foundation Pour La Recherche Des Maladies Gastro-Intestinales, Dr. Andre Blum and Kieta Holding, S.A. dated April 2, 1992, as amended in February 1993 and January 1994. 10.14(2)+ Invention and License Administration Agreement among Foundation Pour La Recherche Des Maladies Gastro-Intestinales, the Swiss Institute for Experimental Cancer Research and Dr. Jean-Pierre Kraehenbuhl dated April 2, 1992. 10.15(2)+ Invention and License Administration Agreement among Foundation Pour La Recherche Des Maladies Gastro-Intestinales, Max-Planck Institute for Biology and Dr. Rainer Haas dated April 1992 and related Participation Agreement. 10.16(2) Participation Agreements by and between the Company and each of Dr. Rainer Haas, Sven Gustafson, Dr. Jean-Pierre Kraehenbuhl, Dr. Madeleine Heitz, Dr. Pierre Michetti and Dr. Andre Blum. 10.17(2)+ Agreement between the Company, the Natural Environmental Research Council and Dr. D.H.L. Bishop dated May 15, 1992. 10.18(2)+ Collaborative Development and License Agreement between the Company and Techlab, Inc. dated March 31, 1993. 10.19(2)+ Industrial Research Agreement between the Company, Case Western Reserve University, Dr. Steven J. Czinn and Dr. John G. Nedrud dated October 14, 1993. 10.20(2)+ Assignment Agreement among the Company, Dr. Steven J. Czinn and Dr. John G. Nedrud dated October 14, 1993. 10.21(2)+ Cooperative Research and Development Agreement between the Company and Walter Reed Army Institute of Research dated December 19, 1994. 10.22(2)+ Master Agreement between the Company and Pasteur Merieux Serums & Vaccins S.A. dated March 31, 1995. 10.23(2)+ Research and Development Agreement between the Company and Merieux OraVax S.N.C. and OraVax, Merieux Co. dated March 31, 1995. 10.24(3) Lease dated October 27, 1995 between the Company and Forest City 38 Sidney Street, Inc. 10.25(4) Assignment of Lease dated as of January 1, 1996 between Immunogen, Inc. and the Company. 10.26(4) Landlord's Waiver, Consent and Agreement dated as of January 1, 1996 by and among AEW No. 1 Corporation, Aberlyn Capital Management Limited Partnership and the Company. 10.27(4) Consent to Assignment and Leasehold Mortgage dated as of January 1, 1996 by and among AEW No. 1 Corporation, Immunogen, Inc. and the Company.
Page 44 45 10.28(4)+ License Agreement dated as of February 6, 1996 between Institut Pasteur and the Company. 10.29(7) Form of Preferred Stock Investment Agreement dated as of December 23, 1997. 10.30++ Agreement dated as of September 29, 1997 between the Company and Evans Medical Limited. 10.31(1) Employment Agreement dated April 3, 1997 between the Company and Robert J. Gerety. 21(4) Subsidiaries of the Company. 23.1 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule.
- ---------- (1) Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K. (2) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as amended (File No. 33-90936). (3) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995. (4) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (5) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (6) Incorporated herein by reference to the Company's Registration Statement on Form 8-A dated April 11, 1997 (File No. 0-26034). (7) Incorporated herein by reference to the Company's Current Report on Form 8-K dated December 23, 1997. + Confidential treatment granted as to certain portions. ++ Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission. Page 45 46 APPENDIX A SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for each of the five years in the period ended December 31, 1997 are derived from financial statements that have been audited by Coopers & Lybrand L.L.P., independent accountants. The statement of operations data for the years ended December 31, 1993 and 1994, and the Balance Sheet data for the years ended December 31, 1993, 1994 and 1995 is derived from audited financial statements not included in this Annual Report on Form 10-K. The data set forth below should be read in conjunction with " Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and related notes included elsewhere in this Annual Report on Form 10-K. SUMMARY FINANCIAL DATA
1993 1994 1995 1996 1997 Statement of Operations Data: Revenues: Collaborative research and development .................... $ -- $ -- $ 8,684 $ 6,595 $ 7,587 Government grants and other ...... 349 257 311 870 583 Interest ......................... 78 51 1,080 1,280 683 ------------ ------------ ------------ ------------ ------------ 427 308 10,075 8,745 8,853 Expenses: Research and development ......... 5,981 8,406 12,450 21,009 14,589 General and administrative ....... 1,848 2,580 3,299 3,750 3,422 Interest ......................... 92 190 87 523 418 ------------ ------------ ------------ ------------ ------------ 7,921 11,176 15,836 25,282 18,429 Equity in joint venture.............. (2,436) (5,085) (6,236) ------------ ------------ ------------ Net loss (1) ........................ (7,494) (10,868) (8,197) (21,622) (15,812) Net loss to common stockholders (1).. (7,494) (10,968) (8,305) (21,622) (15,812) Basic and diluted loss per share .... $ (1.90) $ (2.46) $ (1.58) Weighted average number of basic and diluted shares outstanding .... 4,377,131 8,794,775 10,031,222
December 31, ----------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 Balance Sheet Data: Cash and investments ................... $ 1,042 $ 3,706 $ 27,631 $ 22,125 $ 11,722 Total assets ........................... 3,050 5,195 29,833 28,744 17,344 Working capital ........................ (218) 1,400 23,109 14,694 7,837 Long term obligations .................. 679 462 492 2,659 1,298 Convertible preferred stock ............ 14,988 27,331 - - 5,601 Total stockholders' equity (deficit) ... (14,152) (25,038) 24,513 18,424 9,785
(1) The net loss for the years ended December 31, 1994 and 1995 exclude accretion to redemption value of preferred stock of $100,000 and $108,000, respectively, which is included in the net loss to common shareholders. 47 APPENDIX B MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in 1990, the Company has been engaged in the discovery and development of vaccines and injected antibody products to prevent or treat human infectious diseases. To date, the Company has not received any revenues from the sale of products and does not expect to receive any such revenues until late 1999. The first product revenues are anticipated from sales of the yellow fever vaccine, under the Company's partnership with Evans Medical Limited. The Company's losses incurred since inception resulted principally from expenditures under its research and development programs and the Company expects to incur significant operating losses over the next several years due primarily to expanded research and development efforts, preclinical testing and clinical trials of its product candidates, the acquisition of additional technologies, the establishment of manufacturing capability and the performance of commercialization activities. Results of operations may vary significantly from quarter to quarter depending on, among other factors, the progress of the Company's research and development efforts, the receipt, if any, of milestone payments, the timing of certain expenses and the establishment of collaborative research agreements. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 The Company's total revenues increased to $8,853,000 in 1997 from $8,745,000 in 1996. In 1997, the Company's revenues consisted of $7,587,000 earned under its collaboration (the "Joint Venture") with Pasteur Merieux Connaught ("PMC") which was entered into during 1995, $583,000 from government grants and other research revenues, and $683,000 in interest earned on invested funds. In 1996, the Company's revenues consisted of $6,595,000 earned under the Joint Venture with PMC, $870,000 from government grants and other research revenues, and $1,280,000 in interest earned on invested funds. The increased revenue was attributable to increased budgeted activities, for research and development, of the Joint Venture with PMC offset by a decrease in interest income as a result of declining cash investments and a decrease in grant revenue as a result of expired grants from the National Institute of Health. The Company's total costs and expenses decreased to $18,429,000 in 1997 from $25,282,000 in 1996. Research and development expenses decreased 31% to $14,589,000 in 1997 from $21,009,000 in 1996, principally reflecting the 1996 conduct of both a Phase II clinical trial under its H.pylori program and a Phase III clinical trial under its RSV program, and the 1996 production of necessary supplies of clinical materials for its Phase III clinical trial. In addition, the Company reduced its workforce by approximately 25% in early April 1997. General and administrative expenses decreased 9% to $3,422,000 in 1997 from $3,750,000 in 1996 as decreased expenses associated with the workforce reduction in the second quarter of 1997 offset increases which the Company had incurred in the first quarter of 1997 as compared to the same period in 1996. Interest expense decreased to $418,000 in 1997 from $523,000 in 1996, principally due to the expiration of some equipment leases. The Company accounts for its investment in the Joint Venture Partnerships, through which the Joint Venture began conducting its research beginning in the second quarter of 1995, under the equity method of accounting. Accordingly, the Company recorded its $5,085,000 and $6,236,000 share of the Joint Venture Partnerships' losses during the years ended December 31, 1996 and 1997, respectively. The increased loss was principally attributable to increased budgeted activities, for research and development, of the Joint Venture in 1997 as compared with 1996. The Company incurred a net loss of $15,812,000 in 1997 compared to a net loss of $21,622,000 in 1996. 48 YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 The Company's total revenues decreased to $8,745,000 in 1996 from $10,075,000 during 1995. In 1996, the Company's revenues consisted of $6,595,000 earned under its collaboration (the "Joint Venture") with Pasteur Merieux Connaught. ("PMC") which was entered into during 1995, $870,000 from government grants and other research revenues and $1,280,000 in interest earned on invested funds. In 1995, the Company's revenues consisted of $8,684,000 earned under the Joint Venture, of which $3,816,000 represented up front payments earned in connection with the initiation of the Joint Venture, $311,000 from government grants and $1,080,000 in interest earned on invested funds. The Company's total costs and expenses increased to $25,282,000 in 1996 from $15,836,000 in 1995. Research and development expenses increased 69% to $21,009,000 in 1996 from $12,450,000 in 1995, principally reflecting the conduct of an approximately 600 patient Phase III clinical trial of the Company's HNK20 product candidate together with production costs associated with clinical grade materials used in the trial, and other growth in the Company's other primary product development programs, including conduct of a Phase 2 clinical trial under its H. pylori program. The 14% increase in general and administrative expenses during the same period to $3,750,000 in 1996 from $3,299,000 in 1995, reflects some increases in other administrative costs necessary to support the growth in research and development. General and administrative expenses did not grow in proportion to the increase in research and development costs principally because the Company's clinical trials and manufacture of clinical grade materials were substantially conducted by outside contractors requiring minimal incremental administrative overhead. Interest expense increased to $523,000 in 1996 from $87,000 in 1995 principally as a result of the assumption of existing and new debt in connection with the Company's acquisition of its manufacturing facility in Canton, Massachusetts in early 1996. The Company accounts for its investment in the Joint Venture Partnerships, through which the Joint Venture began conducting its research beginning in the second quarter of 1995, under the equity method of accounting. Accordingly, the Company recorded its $5,085,000 and $2,436,000 share of the Joint Venture Partnerships' losses during the years ended December 31, 1996 and 1995, respectively. The increase was principally attributable to increased budgeted research activities of the Joint Venture in 1996 as compared with 1995. The Company incurred a net loss of $21,622,000 in 1996 compared to a net loss of $8,197,000 in 1995. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standard Board issued Statement of Accounting Standards No.130, "Reporting Comprehensive Income". This statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Statement will become effective for fiscal years beginning after December 15, 1997. The Company will adopt the new standard beginning in the first quarter of the fiscal year ending December 31, 1998. The Company does not expect the adoption of FAS 130 to materially effect the financial statement presentation. In June 1997, the Financial Accounting Standard Board also issued Statement of Financial Accounting Standards No.131, "Disclosures about Segments of an Enterprise and Related Information". This Statement specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company is in the process of evaluating the impact of the new standard on the presentation of the financial statements and the disclosures therein. The Statement will become effective for fiscal years -2- 49 beginning after December 15, 1997. The Company will adopt the new standard for the fiscal year ending December 31, 1998. LIQUIDITY AND CAPITAL RESOURCES In January and March 1995, the Company sold an aggregate of 216,237 shares of Series Preferred Stock for net cash proceeds of $9.2 million. These shares were converted to common stock upon the closing of the Company's initial public offering in June 1995. In March 1995, the Company entered into a Joint Venture with Pasteur Merieux Connaught ("PMC") for the development, manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines against H. pylori infections in humans. Under the Joint Venture, OraVax and PMC agreed to develop vaccines which use the urease protein or any of its sub-units as an antigen (the "Target Products"). OraVax and PMC will share equally in profits from the sales of the Target Products and in all future research, development, clinical and commercialization costs. OraVax and PMC estimate that research, development and clinical costs will exceed $50.0 million. PMC is providing technical expertise and will also provide marketing expertise to the Joint Venture. PMC made an initial payment of $3.2 million directly to OraVax which included $0.6 million to recognize the value of research and development conducted by OraVax in the first quarter of 1995 prior to the formation of the Joint Venture, and a milestone payment of $2.6 million to recognize the value of technology previously developed by OraVax and made available to the Joint Venture. In addition, PMC purchased $2.5 million of the Company's Series Preferred Stock. Subsequently, PMC purchased an additional $1.0 million of common stock in the Company's initial public offering. In addition, PMC agreed to pay the Company directly up to $12.0 million during the development period, subject to the achievement of certain clinical and regulatory milestones, of which $0.6 million was paid to OraVax in December 1995. However, there can be no assurance that the milestones which trigger such future payments will be achieved. Beginning in the second quarter of 1995, research, development and commercialization activities of the Joint Venture were conducted through two equally controlled partnerships which have contracted with OraVax to perform research and development and clinical trial activities. OraVax earned $6.6 million and $7.6 million under these contracts in 1996 and 1997, respectively. In addition, during 1996 and 1997, the Joint Venture entered into research and development contracts with PMC and third parties. The research and development budgets of the two partnerships comprising the Joint Venture are established by joint committees in which each of the venturers has an equal participation and role. The venturers will pay approximately equal shares of the agreed budgets. OraVax will receive revenue from the partnerships for the research and development work which is requested to be performed by OraVax and funded by the Partnerships. There can be no assurance, however, that OraVax will be selected to perform such work. The Joint Venture provides for certain rights of termination, but, absent any breach, either party may unilaterally terminate the Joint Venture. The venture's have agreed to fund through the Joint Venture, on an annual basis, the research and development, clinical and pharmaceutical development costs, and the Executive Committee of the Joint Venture has currently approved funding of such costs through December 1998. In June 1995, the Company sold 2,300,000 shares of its common stock for $10.00 per share in an initial public offering, providing net proceeds of approximately $20.7 million. In 1995, the Company entered into a five year operating lease, with renewal options, to consolidate its current research and administrative operations and provide for its longer-term expansion plans in an approximately 53,000 square foot facility in Cambridge, Massachusetts. Occupancy of the new facility began in December 1995. There were no material impairments of long-lived assets as a result of the move. In January 1996, the Company leased an approximately 47,000 square foot GMP-compliant manufacturing facility in Canton, Massachusetts and acquired related equipment and leasehold improvements from the former tenant. This facility was specifically designed and equipped by the former tenant for the manufacture of biological products. The Company anticipates that its initial use of the facility will be for the production of vaccines for the Joint Vaccine Acquisition Program, of the U.S. Department of Defense. This facility will also accommodate production development activities for OraVax's proprietary products depending on the outcome of product development. Existing building and capital equipment leases, which include renewal and purchase options, were transferred to the Company. In addition, the Company purchased leasehold improvements and other related assets from the former tenant, payable in installments through 1999. -3- 50 The costs to lease and equip these facilities will be funded in whole, or in part, either through the Department of Defense Program, existing cash and investments, proceeds from offerings of securities, or other methods of financing including mortgage or lease financing, if available to the Company on acceptable terms. In addition, the Company expects to continue its current practice of leasing most of its capital equipment, provided such lease financing continues to be available to the Company on acceptable terms. The timing and amount of costs of developing the manufacturing facility, and the capital requirements thereon, will be dependent upon the timing of when it is put into use for the scale-up of manufacturing, and further negotiations with the Joint Vaccine Acquisition Program Principals. In June 1996, the Company sold 2,300,000 shares of its common stock for $7.25 per share in a follow-on public offering, providing net proceeds of approximately $15.2 million. In December 1997, the Company sold 6,300 shares of its 6% Convertible Preferred Stock, for $1,000 per share, in a private placement financing, providing gross proceeds of $6.3 million, of which $4.9 million was received in 1997 and $1.4 million in January 1998. Net proceeds were approximately $5.6 million. In December 1997, the Company sold 240,000 shares of its common stock, for $1.91 per share, in a private placement financing, providing net proceeds of $396,000. The Company's aggregate cash and investments were $11,722,000 at December 31, 1997, a decrease of $10,403,000 since December 31, 1996. Cash used by operations during the period, principally to support research and development, was $7,940,000. The Company expended $253,000 for property and equipment, repaid $1,530,000 of its capital lease obligations, and repaid $330,000 of its installment debt, net of accrued interest, during the period. In addition, the Company invested $5,082,000 in the Joint Venture during the year ended December 31, 1997. In September, 1997 the Company was selected by Evans Medical Limited (Evans), a Medeva PLC group company, as the exclusive marketer and distributor of Evans' live-attenuated yellow fever vaccine, Arilvax(R), in the United States. The Company also agreed to work with Evans to introduce the vaccine into other international markets. Under the terms of the agreement, the Company will conduct clinical studies necessary for U.S. registration of the vaccine and will market and distribute the product to both civilian and military groups in the U.S. Arilvax(R) is currently marketed by Evans in Europe and selected Asian markets. Evans will fund all costs associated with the agreed-upon clinical trials and with securing regulatory approval in the U.S. Based on the established performance of Arilvax(R) in other markets and discussions with the FDA, Evans anticipates submitting a U.S. product license application (PLA) in 1998. The Company does not anticipate incurring any material net expenditures under this agreement until 1999 at which time, assuming a U.S. PLA is filed, it would expect to incur premarketing and predistribution costs. Since inception, the Company's cash expenditures have exceeded its revenues. Operations have been funded principally through public and private placements of equity securities, equipment lease financing, revenues from the Company's Joint Venture with Merieux, government grants and interest income. The Company's future capital requirements will depend on many factors, including, but not limited to, the progress of its research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the funding of the Company's share of the expenses of the Joint Venture or similar arrangements, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in the Company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of commercialization activities and arrangements, and the acquisition of additional facilities and capital equipment. The Company plans to finance these cash needs in the near term principally through its existing cash reserves, together with interest earned thereon, revenues, payments and reimbursements under the Company's Joint Venture with PMC and facilities and equipment financing. The Company believes, based upon its current operating plan, that, in addition to its available cash balances and known revenues, it will need additional financing in order to fund the Company's operations in the second half of 1998. The Company will require additional funds to conduct, if planned, a Phase III trial of its HNK20 product candidate and for HNK20 manufacturing start up. Moreover, changes in the Company's research and development plans or -4- 51 other events affecting the Company's operations may result in accelerated or unexpected expenditures. In addition, the Company will need substantial additional capital to fund its operations for the manufacturing and marketing of any of its successful product candidates. Possible sources of capital include strategic corporate partnerships and private equity financing, both of which the Company is actively pursuing. If additional funds are raised by issuing equity securities, further dilution to existing stockholders may result and future investors may be granted rights superior to those of existing stockholders. There can be no assurance, however, that additional financing will be available from any of these sources, or if available, will be available on terms satisfactory to the Company. The Company's inability to obtain needed funding on satisfactory terms may require the Company to delay, curtail or eliminate one or more of its planned product development programs, scale back its planned manufacturing operations or enter into collaborative arrangements that may require the Company to issue additional equity or relinquish rights to certain technologies or product candidates that the Company would not otherwise issue or relinquish. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's future operating results are difficult to predict and may be affected by a number of factors, including the following, that could cause actual results to differ materially from those indicated by the forward-looking statements made herein and presented elsewhere by management from time to time. EARLY STAGE OF PRODUCT DEVELOPMENT. The products under development by the Company will require significant additional research and development efforts, including extensive clinical testing and regulatory approval, prior to commercial use. The Company's potential products are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies. These risks include the possibilities that the Company's therapeutic approach will not be successful, that any or all of the Company's potential products will be found to be unsafe, ineffective, toxic or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances, that the potential products, if safe and effective, will be difficult to develop into commercially viable products, to manufacture on a large scale or be uneconomical to market, that proprietary rights of competitors or other parties will preclude the Company from marketing such products; or that competitors or other parties will market superior or equivalent products. FUTURE CAPITAL NEEDS. In addition, the Company will require substantial additional funds in order to continue its research and development programs, preclinical and clinical testing of its product candidates and to conduct full scale manufacturing and marketing of any pharmaceutical products that may be developed. The Company's capital requirements depend on numerous factors, including but not limited to the progress of its research and development programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in the Company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of commercialization activities and arrangements, and the purchase of additional facilities and capital equipment. The Company believes, based upon its current operating plan, that, in addition to its available cash balances and known revenues, it will need additional financing, in the second half of 1998, in order to fund the Company's planned operations. Possible sources of capital include strategic corporate partnerships and private equity financing, both of which the Company is actively pursuing. There can be no assurance, however, that changes in the Company's research and development plans, acquisitions or other events affecting the Company's operations will not result in accelerated or unexpected expenditures. Thereafter, the Company will need to raise substantial additional capital to fund its operations. There can be no assurance, however, that additional financing will be available, or if available, will be available on acceptable or affordable terms. MANUFACTURING LIMITATIONS. At present, the Company's ability to manufacture its products is limited to clinical trial quantities. At present, the Company does not have the capability to manufacture commercial quantities of products. The Company's strategy is to develop manufacturing facilities, initially through the manufacturing agreements for products funded by the U.S. Department of Defense's Joint Vaccine Acquisition Program and to expand their use in the future, for producing both pilot-scale and commercial quantities of its proprietary products. To ensure compliance with current Good Manufacturing Practices ("cGMP") imposed by the FDA, OraVax will need to establish sufficient technical staff to oversee all product operations, including quality control, quality assurance, technical support and manufacturing management. The Company may enter into arrangements with contract manufacturing companies to expand its own production capacity in order to meet requirements for its product candidates. If the Company chooses to contract for manufacturing services and encounters delays or difficulties in establishing -5- 52 relationships with manufacturers to produce, package and distribute its finished pharmaceutical or other medical products (if any), clinical trials, market introduction and subsequent sales of such products would be adversely affected. Moreover, contract manufacturers must operate in compliance with cGMP. The Company's potential dependence upon third parties for the manufacture of its products may adversely affect the Company's profit margins and its ability to develop and deliver such products on a timely and competitive basis. RISKS ASSOCIATED WITH COLLABORATIVE ARRANGEMENTS. The Company's product development strategy may require the Company to enter into various additional arrangements with corporate, government and academic collaborators, licensors, licensees and others. Therefore, the Company may be dependent upon the subsequent success of these outside parties in performing their responsibilities. There can be no assurance that the Company will be able to establish additional collaborative arrangements or license agreements that the Company deems necessary or acceptable to develop and commercialize its potential pharmaceutical products or that such collaborative arrangements or license agreements will be successful. PATENT AND PROPRIETARY RIGHTS. The Company seeks to protect its trade secrets and proprietary know-how, in part, through confidentiality agreements with its employees, consultants, advisors and collaborators. There can be no assurance that these agreements will not be violated by the other parties, that OraVax will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Certain of the technology that may be used in the products of OraVax is not covered by any patent or patent application. There can be no assurance that any pending patent applications relating to the Company's product candidates will result in patents being issued. Moreover, there can be no assurance that any such patents will afford protection against competitors with similar technology. There may be pending or issued third-party patents relating to the product candidates of OraVax. OraVax may need to acquire licenses to, or to contest validity of, any such third party patents. It is likely that significant funds would be required to defend any claim that OraVax infringes a third-party patent, and any such claim could adversely affect sales of the challenged product of OraVax until the claim is resolved. There can be no assurance that any license required under any such patent would be made available. GOVERNMENT REGULATION. The rigorous preclinical and clinical testing requirements and regulatory approval process of the FDA and of foreign regulatory authorities can take a number of years and require the expenditure of substantial resources. The Company has limited experience in conducting and managing preclinical and clinical testing necessary to obtain government approvals. There can be no assurance that the Company will be able to obtain the necessary approvals for clinical testing or for the manufacturing and marketing of any products that it develops. Additional government regulation may be established that could prevent or delay regulatory approval of the Company's product candidates. Delays in obtaining regulatory approvals would adversely affect the marketing of any products developed by the Company and the Company's ability to receive product revenues or royalties. If regulatory approval of a potential product is granted, such approval may include significant limitations on the indications for which such product may be marketed. Even if initial regulatory approvals for the Company's product candidates are obtained, the Company, its products and its manufacturing facilities are subject to continual review and periodic inspection. The regulatory standards for manufacturing are applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer or facility, including warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions, delays in obtaining new product approvals, withdrawal of the product from the market, and criminal prosecution. Other violations of FDA requirements can result in similar penalties. UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. Government and other third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third party payers for uses of the Company's products, the market acceptance of these products would be adversely affected. YEAR 2000 ISSUES. The approaching millennium ("Year 2000") could result in challenges related to the Company's computer software, accounting records and relationships with suppliers, collaborative partners and licensees. Management of the Company is studying Year 2000 issues and is seeking to avoid such problems. Based on the Company's review of its business and operating systems, the Company does not expect to incur material costs with respect to assessing and remediating Year 2000 problems; however, there can be no assurance that such problems will not be encountered or that the costs incurred to resolve such problems will not be material. -6- 53 Because of these and other factors, past financial performance should not be an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, changes in the biotechnology and pharmaceutical industries and recommendations by analysts or other events. -7- 54 APPENDIX C ORAVAX, INC. INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE Report of Independent Accountants........................................ 2 Consolidated Balance Sheets as of December 31, 1996 and 1997............. 3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997...................................... 4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997.................. 5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997...................................... 6 Notes to Consolidated Financial Statements............................... 7
55 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of OraVax, Inc.: We have audited the accompanying consolidated balance sheets of OraVax, Inc. as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OraVax, Inc. as of December 31, 1996 and 1997, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has suffered recurring losses from operations and will require additional funds to continue operations into the second half of 1998, both of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts March 27, 1998 56 ORAVAX, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, ------------------------ 1996 1997 ASSETS Cash and cash equivalents ....................................... $ 14,916 $ 10,274 Short-term investments .......................................... 7,209 1,448 Deferred financing costs ........................................ -- 847 Prepaid and other current assets ................................ 230 1,529 -------- -------- Total current assets ............................................ 22,355 14,098 Property and equipment, net ..................................... 5,454 3,524 Investment in and advances to (from) joint venture .............. 619 (535) Other assets .................................................... 316 257 -------- -------- Total assets .................................................... $ 28,744 $ 17,344 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................................ $ 1,135 $ 935 Accrued expenses ................................................ 3,653 3,659 Obligation under capital leases ................................. 1,597 1,316 Installment debt ................................................ 330 260 Deferred joint venture revenue .................................. 946 91 -------- -------- Total current liabilities ....................................... 7,661 6,261 Obligation under capital leases, excluding current portion ...... 1,665 416 Installment debt, excluding current portion ..................... 994 882 -------- -------- Total liabilities ............................................... 10,320 7,559 Commitments and contingencies (Note H) Stockholders' equity : Preferred stock, $.001 par value; 2,000,000 shares authorized in 1996 and 1997; none issued or outstanding .... -- -- Convertible preferred stock, $.001 par value; 9,000 shares authorized in 1997; issued and outstanding 6,300 in 1997 (liquidation preference $6,300) ............ -- 5,601 Common stock, $.001 par value; 25,000,000 shares authorized in 1996 and 1997; issued and outstanding 9,975,821 and 10,371,543 in 1996 and 1997 .................. 10 10 Additional paid-in capital .................................... 73,519 74,962 Deferred compensation ......................................... (223) (94) Accumulated deficit ........................................... (54,882) (70,694) -------- -------- Total stockholders' equity ...................................... 18,424 9,785 -------- -------- Total liabilities and stockholders' equity ...................... $ 28,744 $ 17,344 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 57 ORAVAX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------ 1995 1996 1997 Revenue: Collaborative research and development -- related party ...................................... $ 4,868 $ 6,595 $ 7,587 -- other .............................................. 3,816 -- -- Government grants and other ........................... 311 870 583 Interest .............................................. 1,080 1,280 683 ------------ ------------ ------------ 10,075 8,745 8,853 ------------ ------------ ------------ Expenses: Research and development .............................. 12,450 21,009 14,589 General and administrative ............................ 3,299 3,750 3,422 Interest .............................................. 87 523 418 ------------ ------------ ------------ 15,836 25,282 18,429 ------------ ------------ ------------ Loss from operations .................................... (5,761) (16,537) (9,576) Equity in operating loss of joint venture ............... (2,436) (5,085) (6,236) ------------ ------------ ------------ Net loss ................................................ (8,197) (21,622) (15,812) Accretion to redemption value of preferred stock ........ 108 -- -- ------------ ------------ ------------ Net loss to common stockholders ......................... $ (8,305) $ (21,622) $ (15,812) ============ ============ ============ Basic and diluted loss per share ........................ $ (1.90) $ (2.46) $ (1.58) Weighted average number of basic and diluted shares outstanding ............................................ 4,377,131 8,794,775 10,031,222
The accompanying notes are an integral part of the consolidated financial statements. 58 ORAVAX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
TOTAL PREFERRED COMMON COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS' STOCK SHARES STOCK CAPITAL COMPENSATION DEFICIT EQUITY Balance, December 31, 1994 ............ 230,661 -- 245 (220) (25,063) (25,038) Conversion of redeemable convertible preferred stock to common stock ..... 5,019,383 $ 5 36,666 -- -- 36,671 Issuance of common stock .............. 2,310,197 3 20,745 -- -- 20,748 Issuance of common stock-401k ......... 5,758 -- 68 -- -- 68 Issuance of common stock options ...... -- -- 141 (141) -- -- Exercise of common stock options ...... 44,982 -- 54 -- -- 54 Exercise of common stock warrants ..... 4,884 -- -- -- -- -- Vesting of compensatory common stock options ..................... -- -- 250 -- -- 250 Accretion of redeemable convertible preferred stock to redemption value -- -- (108) -- -- (108) Amortization of deferred compensation ................... -- -- -- 65 -- 65 Net loss .......................... -- -- -- -- (8,197) (8,197) ------- --------- ------ --------- ----- ------- ------- Balance, December 31, 1995 ......... 7,615,865 8 58,061 (296) (33,260) 24,513 Issuance of common stock ........... 2,313,822 2 15,340 -- -- 15,342 Issuance of common stock-401k ...... 18,509 -- 97 -- -- 97 Exercise of common stock options ... 27,625 -- 21 -- -- 21 Amortization of deferred compensation .................... -- -- -- 73 -- 73 Net loss .......................... -- -- -- -- (21,622) (21,622) ------- ----------- ------ --------- ----- -------- -------- Balance, December 31, 1996 ......... 9,975,821 10 73,519 (223) (54,882) 18,424 Issuance of common stock ........... 276,146 -- 480 480 Issuance of common stock-401k ...... 50,723 -- 89 89 Exercise of common stock options ... 68,853 -- 51 51 Issuance of convertible preferred stock (6,300 shares) ............. 5,601 -- -- -- Deferred financing costs ........... 847 847 Amortization of deferred compensation .................... -- -- -- 66 66 Reversal of deferred compensation .. (63) 63 0 Non-cash stock compensation ........ 39 39 Net loss ........................... -- -- -- -- (15,812) (15,812) ------- --------- ------ ------- ------ -------- ------- Balance, December 31, 1997 ........ $ 5,601 10,371,543 $ 10 $ 74,962 $ (94) $ (70,694) $ 9,785 ======= ========== ====== ========= ===== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 59 ORAVAX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 Cash flows from operating activities: Net loss from operations .......................... $ (8,197) $(21,622) $(15,812) Adjustments to reconcile net loss from operations to net cash used in operating activities: Depreciation .................................... 708 2,028 2,183 Equity in operations of joint venture ........... 2,436 5,085 6,236 Amortization of debt discount ................... -- -- 148 Non-cash compensation ........................... 383 170 194 Changes in operating assets and liabilities: Prepaid expenses and other current assets ..... (172) 76 101 Other assets .................................. (37) (200) 59 Accounts payable .............................. 210 74 (200) Accrued expenses .............................. 1,225 1,301 6 Deferred revenue .............................. 899 47 (855) -------- -------- -------- Net cash used in operating activities ............... (2,545) (13,041) (7,940) -------- -------- -------- Cash flows from investing activities: Purchases of short-term investments ............... (26,189) (17,378) (5,422) Sales and maturities of short-term investments .... 10,440 25,918 11,183 Expenditures for property and equipment ........... (762) (1,361) (253) Proceeds from sale-leaseback of property and equipment ..................................... 614 775 -- Investment in and advances to joint venture ....... (2,886) (5,254) (5,082) -------- -------- -------- Net cash provided by (used in) investing activities . (18,783) 2,700 426 -------- -------- -------- Cash flows from financing activities: Proceeds from common stock issuances, net ......... 20,802 15,363 531 Proceeds from preferred stock issuances, net ...... 9,232 -- 4,201 Principal payments under capital lease obligations ...................................... (530) (1,488) (1,530) Principal payments of installment debt, net ....... -- (500) (330) -------- -------- -------- Net cash provided by financing activities ........... 29,504 13,375 2,872 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................................... 8,176 3,034 (4,642) Cash and cash equivalents at beginning of period .... 3,706 11,882 14,916 -------- -------- -------- Cash and cash equivalents at end of period .......... $ 11,882 $ 14,916 $ 10,274 ======== ======== ======== Interest paid during the year ....................... $ 87 $ 384 $ 418 ======== ======== ======== Noncash financing activities - See Note I.
The accompanying notes are an integral part of the consolidated financial statements. 60 ORAVAX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. NATURE OF BUSINESS: OraVax's mission is the discovery, development and commercialization of biologic products for the prevention and treatment of human infectious diseases. Prior to the first quarter of 1995, the Company operated as a development stage enterprise, devoting substantially all of its efforts to establishing the new business and carrying on research and development activities. Beginning in 1995, the Company was no longer classified as a development stage enterprise. Since inception, the Company's cash expenditures have exceeded its revenues. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Operations have been funded principally through public and private placements of equity securities, equipment lease financing, revenues from the Company's Joint Venture with Merieux, government grants and interest income. The Company's future capital requirements will depend on many factors, including, but not limited to, the progress of its research and development programs, the progress of preclinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the funding of the Company's share of the expenses of the Joint Venture or similar arrangements, the cost of filing, prosecuting and defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes in the company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of commercialization activities and arrangements, and the acquisition of additional facilities and capital equipment. The Company plans to finance these cash needs in the near term principally through its existing cash reserves, together with interest earned thereon, revenues, payments and reimbursements under the Company's Joint Venture with PMC and facilities and equipment financing. The Company believes, based on its current operating plan, that, in addition to its available cash balances and known revenues, it will need additional financing in order to fund the Company's operations in the second half of 1998. The Company will require additional funds to conduct, if planned a Phase III trial of its HNK20 product candidate and for HNK20 manufacturing start up. Moreover, changes in the Company's research and developments plans or other events affecting the Company's operations may result in accelerated or unexpected expenditures. In addition, the Company will need substantial additional capital to fund its operations for the manufacturing and marketing of any of its successful product candidates. Possible sources of capital include strategic corporate partnerships and private equity financing, both of which the Company is actively pursuing. If additional funds are raised by issuing equity securities, further dilution to existing stockholders may result and future investors may be granted rights superior to those of existing stockholders. There can be no assurance, however, that additional financing will be available from any of these sources, or if available, will be available on terms satisfactory to the Company. The Company's inability to obtain needed funding on satisfactory terms may require the Company to delay, curtail or eliminate one or more of its planned product development programs, scale back its planned manufacturing operations or enter into collaborative arrangements that may require the Company to issue additional equity or relinquish rights to certain technologies or product candidates that the Company would not otherwise issue or relinquish. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, manufacturing limitations, third party reimbursements, collaborative arrangements, and compliance with government regulations. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, OraVax JVM, Inc. and OraVax Securities Corp., which were incorporated in 1995. Intercompany transactions and balances have been eliminated in consolidation. Joint Venture The Company accounts for its investment in its Joint Venture Partnerships under the equity method of accounting. (see Note K) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist principally of temporary cash investments. The Company restricts temporary cash investments to institutions with high credit standing. 7 61 Short-term Investments Short-term interest-bearing investments are those which, when purchased, have maturities of less than one year but greater than three months. At December 31, 1997 Company had the following short-term investments available for sale which it expects to utilize for working capital purposes, carried at amortized cost plus accrued interest, which approximates fair market value (in thousands): US Government and Agency obligations, due February 1998 through April 1998, 4.8% - $ 394* 5.2% Certificate of deposit, due January 1998, 5.8% 1,054 ------ $1,448 ====== * These treasury securities are restricted as to their use.
Property and Equipment Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets, generally three to seven years. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gains and losses are included in operations in the period of disposal. Revenue Recognition Revenue under the Company's collaborative research and development agreement is recognized as related expenses are incurred. The Company recognizes milestone payments as revenue when the milestones are achieved. (See Note K) The Company recognizes government grant revenue as the related expenses are incurred. Research and Development Costs Research and development costs are expensed as incurred. Computation of Net Loss per Common Share For the year ended December 31, 1997, the Company adopted Statement of Accounting Standards No.128 ("FAS 128"), which requires the presentation of Basic and Dilutive earnings per share, which replaces primary and fully diluted earnings per share. Earnings per share have been restated for all periods presented to reflect the adoption of FAS 128. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents. Common stock equivalent shares consist of convertible preferred stock (Note I) and stock options (Note J). The dilutive computations do not include common stock equivalents for the years ended December 31, 1997, 1996 and 1995, as their inclusion would be antidilutive. Income Taxes 8 62 The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial reporting and tax bases of liabilities and assets using enacted tax rates in effect in the years in which the differences are expected to reverse. Potential future income tax benefits resulting from net operating losses, unused research and experimentation credits, and other timing differences will be recognized as taxable income becomes available to absorb them. Effect of Recent Accounting Pronouncements In June 1997, the Financial Accounting Standard Board issued Statement of Accounting Standards No.130, "Reporting Comprehensive Income". This statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Statement will become effective for fiscal years beginning after December 15, 1997. The Company will adopt the new standard beginning in the first quarter of the fiscal year ending December 31, 1998. The Company does not expect the adoption of FAS 130 to materially effect the financial statement presentation. In June 1997, the Financial Accounting Standard Board also issued Statement of Financial Accounting Standards No.131, "Disclosures about Segments of an Enterprise and Related Information". This Statement specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company is in the process of evaluating the impact of the new standard on the presentation of the financial statements and the disclosures therein. The Statement will become effective for fiscal years beginning after December 15, 1997. The Company will adopt the new standard for the fiscal year ending December 31, 1998. C. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following (in thousands):
YEARS ENDED DECEMBER 31, ----------------- 1996 1997 Furniture and equipment ........... $ 442 $ 493 Computer hardware and software .... 172 197 Leasehold improvements ............ 2,578 2,626 Equipment under capital lease ..... 4,803 4,353 ------ ------ 7,995 7,669 Less accumulated depreciation ..... 2,541 4,145 ------ ------ Property and equipment, net ....... $5,454 $3,524 ====== ======
The net book value of equipment under capital lease was $3,121,000 and $1,579,000 at December 31, 1996 and 1997, respectively. D. ACCRUED EXPENSES: Accrued expenses consisted of the following (in thousands):
YEARS ENDED DECEMBER 31, ----------------- 1996 1997 Research and development contracts ... $2,374 $1,985 License fees ......................... 58 63 Financing related deal costs ......... -- 751 Other ................................ 1,221 860 ------ ------ Total accrued expenses ............... $3,653 $3,659 ====== ======
9 63 E. INCOME TAXES: Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The components of deferred taxes were as follows:
Years Ended December 31, 1996 1997 Capitalization of costs .......... $ 8,238 $ 11,943 Property, plant and equipment .... 563 898 Capital leases ................... (20) -- Accrued expenses ................. 326 358 Net operating loss ............... 11,272 13,459 Tax credits ...................... 1,797 2,586 -------- -------- Gross deferred tax asset ......... 22,176 29,244 Valuation allowance .............. (22,176) (29,244) -------- -------- Net deferred tax asset ........... $ -- $ -- ======== ========
As of December 31, 1997, the Company had available federal net operating loss carryforwards of approximately $33,760,000 and $1,770,000 of federal tax credits, which may be used to offset future taxable income. These carryforwards expire beginning in 2005. Due to the uncertainty surrounding the realization of the net operating loss carryforwards in future tax returns, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased approximately $7,069,000 from December 31, 1996 to December 31, 1997. The Company has experienced ownership changes as defined under Section 382 of the Internal Revenue Code. Ownership changes limit the future use of the net operating loss and credit carryforwards created prior to the ownership change. If the full amount of the limitation is not used in any year, the amount not used increases the allowable limit in the subsequent year. F. CAPITAL LEASES: During the year ended December 31, 1997, the Company did not enter into any sale-leaseback or direct lease arrangements due to the low volume of capital equipment expenditures. During 1996, an equipment lease assumed by the Company in connection with its lease of a manufacturing facility in Canton, Massachusetts, was capitalized in the amount of $2,773,000. Interest paid on capital leases during the years ended December 31, 1995, 1996 and 1997was $87,000, $372,000 and $270,000, respectively. Minimum future payments under the Company's capital leases as of December 31, 1997 were as follows (in thousands):
YEAR ENDING DECEMBER 31, AMOUNT 1998 ................................ $1,418 1999 ................................ 320 2000 ................................ 124 ------ 1,862 Less amount representing interest ... 130 ------ 1,732 Less current obligation ............. 1,316 ------ Long-term obligation ................ $ 416 ======
10 64 G. INSTALLMENT DEBT: In January 1996, the Company leased an approximately 47,000 square foot, good manufacturing practices ("GMP"), manufacturing facility in Canton, Massachusetts and acquired related equipment and leasehold improvements from the former tenant. This facility was specifically designed and equipped by the former tenant for the manufacture of biological products. The Company anticipates that its initial use of the facility will be for the production of vaccines for the Joint Vaccine Acquisition Program, of the U.S. Department of Defense. The facility will also accommodate production development activities for OraVax's proprietary products depending on the outcome of product development. Existing building and capital equipment leases, which contain renewal and purchase options were transferred to the Company. In addition, the Company purchased leasehold improvements and other related assets from the former tenant, capitalized in the amount of $1,824,000, with the related debt payable in installments through 1999 collateralized by a leasehold mortgage and collateral assignment of OraVax's interest in the building lease. Future minimum payments under the installment purchase are as follows (in thousands):
YEAR ENDING DECEMBER 31, AMOUNT 1998 ................................ $ 260 1999 ................................ 1,050 ------ 1,310 Less amount representing interest ... 168 ------ 1,142 Less current obligation ............. 260 ------ Long-term obligation ................ $ 882 ======
H. COMMITMENTS AND CONTINGENCIES: Operating Leases The Company leases office and laboratory facilities in Cambridge, Massachusetts under an operating lease which contains renewal options and expires in March 2001. In addition, the Company has an operating lease for a manufacturing facility in Canton, Massachusetts, containing renewal and purchase options and expiring in June 2002. The noncancelable future payments as of December 31, 1997 were as follows (in thousands): YEAR ENDING DECEMBER 31, AMOUNT 1998.............. $1,427 1999.............. 1,430 2000 ............. 1,434 2001 ............. 511 2002 ............. 101 Rent expense for leased facilities during the years ended December 31, 1995, 1996 and 1997 was $689,000, $1,862,000 and $2,051,000, respectively. Agreements The Company is party to various agreements, principally contracted research and clinical trials, for which noncancelable minimum future payments as of December 31, 1997 were $895,000 payable in the year ended December 31, 1998. 11 65 In addition, under certain of these and other agreements, the Company may pay royalties on future sales of specified products. I. PREFERRED STOCK: The Company issued an aggregate of 964,803 shares of Series Redeemable Convertible Preferred Stock for net cash proceeds of $27,231,000 (the "Series Preferred Stock") at various dates since its inception through December 31, 1994. In January and March 1995, the Company issued an aggregate of 216,237 shares of Series Preferred Stock for net cash proceeds of $9,232,000. During 1994 and 1995, $100,000 and $108,000, respectively, to accrete the redeemable convertible preferred stock to its redemption value on a straight-line basis, was recorded in noncash transactions. In June 1995, all outstanding shares of Series Preferred Stock were converted to 5,019,383 shares of common stock in connection with the closing of the Company's initial public offering. In December 1997, in a private placement financing, the Company issued 6,300 shares of 6% Convertible Preferred Stock ("Convertible Preferred Stock"), for $1,000 per share, providing cash proceeds of $5.6 million, of which $4.2 million was received in 1997 and $1.4 million in 1998, net of $700,000 in deal costs, to the Company. The holders of the Convertible Preferred Stock receive an annual cumulative 6% dividend, which accrues in stock. All of the Convertible Preferred shares are fully convertible into shares of the company's Common Stock, at the option of the holder. The conversion price is the lowest trading price of the Common Stock during the 22 consecutive trading days immediately preceding the date of conversion reduced by a conversion discount that starts at 5% in December 1997 and increases to a maximum of 21% by June 1999. At December 31, 1997, the value of the discount is $846,788, which has been recorded as deferred financing costs and will be amortized over the eighteen month discount period. The discount will be marked to market on a quarterly basis based on changes in the Company's stock price. The number of shares sold on any given date are limited to the greater of 4,000 shares, 10% of the average daily trading volume of the Common Stock for the 5 trading days immediately preceding such sale, as reported by Nasdaq or such principal exchange, or 10% of the trading volume of the Common Stock on the day of such sale, as reported by Nasdaq or such principal exchange. The conversion price is at all times also subject to customary anti-dilution adjustment for events such as stock splits, stock dividends, reorganizations and certain mergers affecting the Company's Common Stock. On December 23, 2002, all outstanding shares of the Convertible Preferred Stock, including any accrued dividends thereon, will automatically be converted into the Company's Common Stock at the conversion price on such date. Each share of Convertible Preferred Stock is also entitled to a liquidation preference of $1,000 per share, plus any accrued but unpaid dividends, in preference to any other class or series of capital stock of the Company. Except to determine whether such stock is entitled to its liquidation preference under certain circumstances, and as provided by applicable law, holders of the Convertible Preferred Stock have no voting rights. In February 1998, 7,294,737 shares were registered for conversion. J. STOCKHOLDERS' EQUITY: Common Stock In December 1997, in a private placement financing, the Company sold 240,000 shares of its common stock, par value $.00l per share, for $1.91 per share, providing net proceeds of $396,000 to the Company. In June 1996, the Company sold 2,300,000 shares of its common stock, par value $.001 per share, for $7.25 per share in a follow-on stock offering, providing net proceeds of $15,215,000 to the Company. In June 1995, the Company sold 2,300,000 shares of its common stock, par value $.001 per share, for $10.00 per share in an initial public offering, providing net proceeds of $20,676,000 to the Company. In connection with the initial public offering, all outstanding shares of Series Preferred Stock were converted to common stock. In March 1995, the Company's stockholders approved an increase in the authorized shares of common stock to 25,000,000 shares and authorized 2,000,000 shares of a new class of preferred stock, par value $.001 per share. 12 66 Stock Options Effective January 1, 1996, The Company adopted FAS No. 123, "Accounting for Stock-Based Compensation." FAS 123 established financial accounting and reporting standards for stock-based employee compensation plans. The statement defines a new method of accounting for employee stock compensation plans using a fair value based method, under which compensation costs is measured and recognized in results of operations. Alternatively, FAS 123 allows an entity to retain the accounting for employee stock compensation plans defined under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company retained the accounting defined in APB No. 25 under which no compensation expense is recognized for fixed stock option grants to employees provided that the grant price equals or is greater than fair market value. As required, the Company will disclose the pro forma effects of stock-based compensation using the fair value based method defined under FAS 123. Incentive stock options granted under the Company's 1990 and 1995 stock option plans (the "Plans") may not be granted at a price less than the fair market value of the common stock on the date of grant (or less than 110% of fair market value in the case of employees or officers holding 10% or more of the voting stock of the Company). Nonqualified stock options may be granted at an exercise price established by the Board of Directors, which may be less than, equal to or greater than the fair value of the common stock on the date of grant. Options granted under the Plans generally vest over three- to five-year periods, and expire not more than ten years from the date of grant, or not more than five years from the date of grant in the case of incentive stock options granted to an employee or officer holding 10% or more of the voting stock of the Company. The Company's 1996 Employee Stock Purchase Plan (the "ESPP") permits employees to purchase common stock of the Company at the lesser of 85% of its fair value at the beginning or end of related six month payroll withholding periods. During 1995, 1996 and 1997, 10,197, 13,822 and 36,146 shares, respectively, were sold to employees under the ESPP. At December 31, 1997, 39,835 shares of common stock remained reserved for future issuances under the ESPP. Had compensation cost for options issued under OraVax's stock option plan and Employee Stock Purchase Plan been determined based on the fair value at the grant dates consistent with the methods defined under FAS 123, OraVax's net loss and loss per share would have been increased to the pro forma amounts indicated below:
Year Ended December 31, 1995 1996 1997 Net loss as reported (in thousands)........................................ ($8,305) ($21,622) ($15,812) Pro forma ( in thousands).................................................. ($8,378) ($21,877) ($16,233) Basic and diluted loss per share .......................................... ($1.90) ($1.91) ($1.58) Pro forma.................................................................. ($1.91) ($2.49) ($1.62)
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes pricing model with the following weighted-average assumptions.
Year Ended December 31, 1995 1996 1997 ------- ------- ------- Expected Option Term....................................................... 5 years 5 years 5 years Expected Option Volatility................................................. 65% 65% 70% Risk Free Interest Rate.................................................... 6.82% 6.13% 6.54%
13 67 Expected Dividend Yield.................................................... 0% 0% 0%
The weighted average fair value of options granted under the plans during each of the years ended December 31, 1995, 1996 and 1997 was $4.55, $7.32 and $1.66, respectively. The fair value of each option granted under the Employee Stock Purchase Plan is estimated on the grant date using the Black-Scholes pricing model with the following weighted-average assumptions.
Year Ended December 31, 1995 1996 1997 -------- -------- -------- Expected Option Term....................................................... 1/2 year 1/2 year 1/2 year Expected Option Volatility................................................. 65% 65% 70% Risk Free Interest Rate.................................................... 5.64% 5.32% 5.62% Expected Dividend Yield.................................................... 0% 0% 0%
The weighted-average fair value of options granted under the Employee Stock Purchase Plan during each of the years ended December 31, 1995, 1996 and 1997 was $3.49, $3.11 and $.97, respectively. Because some options vest over several years and additional awards are generally made each year, the pro forma amounts may not be representative of the effects on net income in future years. A summary of the status of OraVax's stock option plan for the years ended December 31, 1995, 1996 and 1997 is as follows:
WEIGHTED-AVERAGE SHARES EXERCISE PRICE Outstanding at December 31, 1994 ... 761,419 1.74 Granted .......................... 92,104 6.14 Exercised ........................ (44,982) 1.20 Canceled ......................... (5,734) 2.23 --------- Outstanding at December 31, 1995 ... 802,807 2.27 Granted .......................... 127,610 12.18 Exercised ........................ (27,625) .78 Canceled ......................... (11,983) 5.21 --------- Outstanding at December 31, 1996 ... 890,809 3.70 Granted .......................... 498,683 2.63 Exercised ........................ (68,853) .74 Canceled ......................... (145,367) 5.61 --------- Outstanding at December 31, 1997 ... 1,175,272 3.18 =========
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable - ----------------------------------------------- ----------------------------------------- Range of Exercise #Outstanding Wtd. Average Wtd. Average #Options Wtd. Average Price at 12/31/97 Remaining Exercise Exercisable Exercise Contractual Price Price Life - ----------------- ------------ ------------ ------------ ----------- ------------ 0.471- 0.7065 41,802 4.36 0.69 46,333 0.68 0.765- 1.1475 179,385 5.22 0.79 165,265 0.79 2.25 - 3.375 792,968 8.25 2.60 270,516 2.56 3.529- 5.2935 52,500 7.28 3.63 19,594 3.53 6.625- 9.9375 22,745 7.78 7.81 9,000 7.85 11.75 - 17.625 86,000 8.19 13.24 18,716 13.28 --------- ------- $ 0.471-$17.625 1,175,400 7.59 3.18 529,424 2.35 --------- -------
At December 31, 1997, options to purchase 818,178 shares of common stock remained available for future grants under the plans. At December 31, 1997, 1,993,450 shares of common stock remained reserved to satisfy the issuance of shares under outstanding and future grants under the plans. In connection with certain stock option grants in 1995, the Company recorded $141,000 of deferred compensation expense which is being amortized and charged to operations over the five-year vesting period of the related options. In addition, $250,000 of compensation expense was recorded in 1995 in connection with the vesting of certain milestone-based stock options. In 1997, $39,000 of compensation expense was recored in connection with the vesting of certain performance leased options and the extension of the term has certain options. 14 68 K. JOINT VENTURE: In March 1995, the Company entered into a collaboration (the "Joint Venture") with Pasteur Merieux Connaught ("PMC") for the development, manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines against H. pylori infection in humans. Under the Joint Venture, OraVax and PMC agreed to develop vaccines which use the urease protein or any of its sub-units as an antigen (the "Target Products"). OraVax and PMC will share equally in profits from the sales of the Target Products and in all future research, development, clinical and commercialization costs. PMC is providing technical expertise and will also provide marketing to the Joint Venture. PMC made an initial payment of $3.2 million directly to OraVax which included $0.6 million to recognize the value of research and development conducted by OraVax in the first quarter of 1995 prior to forming the Joint Venture, and a milestone payment of $2.6 million to recognize the value of technology previously developed by OraVax and made available to the Joint Venture. In addition, PMC purchased $2.5 million of the Company's Series Preferred Stock. Subsequently, PMC purchased an additional $1.0 million of common stock in the Company's initial public offering. In addition, PMC agreed to pay the Company directly up to an additional $12.0 million during the development period, subject to the achievement of certain clinical and regulatory milestones, of which $0.6 million was paid to OraVax in December 1995. Beginning in the second quarter of 1995, research, development and commercialization activities of the Joint Venture were conducted through two equally controlled partnerships (the "Joint Venture Partnerships") which have contracted with OraVax to perform the research, development and clinical trial activities. OraVax earned $4,868,000, $6,595,000 and $7,587,000 under these contracts during 1995, 1996 and 1997, respectively. In addition, during 1996 and 1997, the Joint Venture entered into research and development contracts with PMC and third parties. The research and development budgets of the two partnerships comprising the Joint Venture are established by joint committees in which each of the venturers has an equal participation and role. The venturers will pay approximately equal shares of the agreed upon budgets. OraVax will receive revenue from the partnerships for research and development work which is requested to be performed by OraVax and funded by the Partnerships. OraVax and PMC each invested approximately $2.9 million, $4.5 million and $5.8 million in 1995, 1996 and 1997, respectively, to fund the Joint Venture's operations. OraVax accounts for its investments in the Joint Venture Partnerships under the equity method of accounting and, accordingly, recorded its $2,436,000, $5,085,000 and $6,236,000 share of the Joint Venture Partnerships' net losses during 1995, 1996 and 1997, respectively. Following are the Joint Venture Partnerships' summarized combined balance sheets as of December 31, 1996 and 1997, and the summarized combined statement of operations for the period March 31, 1995 (inception) through December 31, 1995, for the years ended December 31, 1996 and 1997 and cumulative from inception (March 31, 1995) through December 31, 1997. OraVax and Merieux each licensed to the Joint Venture upon its formation the right to use all of their respective existing proprietary technologies relating to vaccines for the treatment of H. pylori, except for so-called naked DNA technology (for an injectable vaccine) which is the subject of a separate collaboration by Merieux with the third party. Additional technology in the H. pylori field acquired by either party since the formation of the Joint Venture is required to be offered to the Joint Venture. The Joint Venture itself has also obtained licenses to relevant technology from third parties, including a license in November, 1996 of the complete genome sequence of H. pylori from MedImmune and Human Genome Sciences. JOINT VENTURE PARTNERSHIPS (development stage enterprises) COMBINED BALANCE SHEET (IN THOUSANDS) ASSETS
DECEMBER 31, 1996 1997 Cash................................ $ 128 $ 625 Prepaid expenses.................... 1,046 623 ------ ------ $1,174 $1,248 ====== ======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - OraVax $ 750 $ 382 Accounts payable - PMC 586 595 Accounts payable - Other 1,240 Partners' capital: OraVax.................. (81) (485) PMC..................... (81) (484) ------- ------ $ 1,174 $1,248 ======= ======
15 69 JOINT VENTURE PARTNERSHIPS (development stage enterprises) COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS)
MARCH 31, 1995 CUMULATIVE (INCEPTION) (INCEPTION THROUGH YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 1997) Interest income $ - $ 16 $ 22 $ 38 ------- -------- -------- -------- Contract research expense - OraVax...... 4,868 6,595 7,587 19,050 Contract research expense - PMC........... 2,258 2,375 4,633 Contract research expense - other......... 1,139 2,508 3,647 Legal and administrative expenses - 85 15 100 ------- -------- -------- -------- Total expenses 4,868 10,077 12,485 27,430 ------- -------- -------- -------- Net loss.................................. $(4,868) $(10,061) $(12,463) $(27,392) ======= ======== ======== ========
L. RELATED PARTIES: The Company has a consulting agreement with the chairman of its Board of Directors under which, and together with fees paid to him for his services as chairman, he was paid $57,000, $51,000 and $39,000 during 1995, 1996 and 1997, respectively. In 1996, the Company entered into a consulting agreement with a member of its Board of Directors under which, and together with fees paid to him for his services as a director, he was paid $8,000 and $16,000 during 1996 and 1997, respectively. In 1997, the Company entered into a consulting agreement with another member of its Board of Directors under which, and together with fees paid to him for his services as a director, he was paid $10,000 during 1997. M. EMPLOYEE BENEFITS: The Company has a 401(k) retirement plan in which substantially all of its permanent employees are eligible to participate. Participants may contribute up to 15% of their annual compensation to the plan, subject to statutory limitations. For 1995, 1996 and 1997, the Company declared discretionary matching aggregate contributions to the plan of $68,000, $97,000 and $89,000, respectively, paid in 5,758, 18,509 and 50,723 shares of the Company's common stock, respectively. At December 31, 1997, there were 75,010 shares of common stock reserved for future issuances under the plan. 16 70 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS INDEX TO COMBINED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE Report of Independent Accountants.............................................................. S-2 Combined Balance Sheets as of December 31, 1996 and 1997....................................... S-3 Combined Statements of Operations for the period from inception (March 31, 1995) through December 31, 1995 and the years ended December 31, 1996 and 1997.................... S-4 Combined Statements of Partners' Capital (Deficit) for the period from inception (March 31, 1995) through December 31, 1995 and the years ended December 31, 1996 and 1997... S-5 Combined Statements of Cash Flows for the period from inception (March 31, 1995) through December 31, 1995 and the years ended December 31, 1996 and 1997.................... S-6 Notes to Combined Financial Statements......................................................... S-7
71 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of OraVax Merieux Co. and Merieux OraVax Co.: We have audited the accompanying combined balance sheets of OraVax Merieux Co. and Merieux OraVax Co. (both development stage enterprises) as of December 31, 1996 and 1997 and the related statements of operations, partners' capital, and cash flows for the period from inception (March 31, 1995) through December 31, 1995 and the years ended December 31, 1996 and 1997 and cumulative from inception (March 31, 1995) through December 31, 1997. These financial statements are the responsibility of the partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of OraVax Merieux Co. and Merieux OraVax Co. (development stage enterprises) as of December 31, 1996 and 1997, and the combined results of their operations and their cash flows for the period from inception (March 31, 1995) through December 31, 1995 and the years ended December 31, 1996 and 1997 and cumulative from inception (March 31, 1995) through December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. -------------------------------- Boston, Massachusetts March 27, 1998 72 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) COMBINED BALANCE SHEETS
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 ASSETS Cash ................................................ $ 127,445 $ 625,055 Prepaid expenses .................................... 1,046,301 623,164 ----------- ---------- Total assets ........................................ $ 1,173,746 $1,248,219 =========== ========== LIABILITIES AND PARTNERS' CAPITAL Liabilities ......................................... Accounts payable and accrued expenses .......... $ 1,335,862 $2,217,576 Commitments and contingencies (note D) Partners' capital (deficit) ......................... (162,116) (969,357) ----------- ---------- Total liabilities and partners' capital (deficit) ... $ 1,173,746 $1,248,219 =========== ==========
The accompanying notes are an integral part of the combined financial statements. 73 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) COMBINED STATEMENTS OF OPERATIONS
CUMULATIVE MARCH 31, 1995 (INCEPTION THROUGH YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1997) ----------------- ----------------- ----------------- ------------------ Revenue Interest Income - $ 16,393 $ 21,509 $ 37,902 ------------ ------------ ------------ Expenses: Contract research expense - OraVax, Inc.... $ 4,867,799 $ 6,595,003 $ 7,587,421 $ 19,050,223 Contract research expense - PMsv.......... - 2,257,985 2,375,000 4,632,985 Contract research expense - other......... - 1,139,033 2,507,559 3,646,592 Legal and administrative expenses......... - 85,777 15,020 100,797 ----------- ------------ ------------ ------------ Total expenses................................ 4,867,799 10,077,798 12,485,000 27,430,597 ----------- ------------ ------------ ------------ Net loss...................................... $(4,867,799) $(10,061,405) $(12,463,491) $(27,392,694) =========== ============ ============ ============
The accompanying notes are an integral part of the combined financial statements. 74 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) COMBINED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) FOR THE PERIOD FROM INCEPTION (MARCH 31, 1995) THROUGH DECEMBER 31, 1997
PASTEUR MERIEUX ORAVAX MERIEUX AMERICA JVM, INC. CONNAUGHT HOLDING, INC. TOTAL ------------ Capital contributions........... $ 2,885,851 $ 2,014,444 $ 866,793 $ 5,767,088 Net loss........................ (2,435,847) (1,700,322) (731,630) (4,867,799) ----------- ----------- ----------- ------------ Balance, December 31, 1995...... 450,004 314,122 135,163 899,289 Capital contributions........... 4,503,600 3,143,700 1,352,700 9,000,000 Net loss........................ (5,034,754) (3,521,082) (1,505,569) (10,061,405) ----------- ----------- ----------- ------------ Balance, December 31, 1996...... $ (81,150) $ (63,260) $ (17,706) $ (162,116) =========== =========== =========== ============ Capital contributions .......... 5,832,751 4,062,359 1,761,140 11,656,250 Net loss ....................... (6,236,765) (4,361,714) (1,865,012) (12,463,491) ----------- ---------- ---------- ----------- Balance, December 31, 1997 ..... $ (485,164) $ (362,615) $ (121,578) $ (969,357) =========== ========== ========== ===========
The accompanying notes are an integral part of the combined financial statements. 75 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) COMBINED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (MARCH 31, 1995) THROUGH DECEMBER 31, 1997
CUMULATIVE MARCH 31, 1995 (INCEPTION THROUGH YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1997) ----------------- ----------------- ----------------- ------------------ Cash flows from operating activities: Net loss ................................. $ (4,867,799) $(10,061,405) $(12,463,491) $(27,392,695) Changes in operating assets and liabilities: Prepaid expenses ..................... (899,289) (147,012) 423,137 (623,164) Accounts payable ..................... -- 1,335,862 881,714 2,217,576 ------------ ------------ ------------ ------------ Net cash used by operating activities ....... (5,767,088) (8,872,555) (11,158,640) (25,798,283) Cash flows from financing activities: Capital contributions .................... 5,767,088 9,000,000 11,656,250 26,423,338 ------------ ------------ ----------- ------------ Net increase in cash and cash equivalents ... -- 127,445 497,610 625,055 Cash and cash equivalents at beginning of period ................................. -- -- 127,445 -- ------------ ------------ ----------- ------------ Cash and cash equivalents at end of period .. $ -- $ 127,445 $ 625,055 $ 625,055 ============ ============ =========== ============
The accompanying notes are an integral part of the combined financial statements. 76 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) NOTES TO COMBINED FINANCIAL STATEMENTS A. NATURE OF BUSINESS: A collaboration between Pasteur Merieux Connaught ("PMC"), a societe anonyme existing and organized under the laws of the Republic of France, and OraVax, Inc. (OraVax), a corporation existing and organized under the laws of the State of Delaware, was formed on March 31, 1995 (the "Collaboration"). In accordance with the Master Agreement of the Collaboration (the "Agreement"), two partnerships, Merieux OraVax Co. and OraVax Merieux Co., both development stage enterprises (the "Partnerships") were formed. The Partnerships conduct all activities relative to the research, development, registration, commercialization, manufacturing, marketing, sales and distribution of immunotherapeutic and preventative vaccines against Helicobacter pylori infections in humans which use the urease protein or any of its sub-units as an antigen. The partnerships began operations on April 1, 1995. The two collaborators, OraVax and PMC have established their intent to own the partnerships equally on an aggregated basis, to share expenses equally, and to share profits and losses equally. The capital contributions of each partner are determined by budgets established annually by committees on which each of the partners has equal representation and an equal vote. It is the intent of the partners to share such additional capital contributions equally. Merieux OraVax Co. is a French partnership whose partners are PMC and OraVax JVM, Inc. ("OraVax JVM"), a wholly-owned subsidiary of OraVax. The term of the partnership is ninety-nine years. The initial interest of each partner in Merieux OraVax Co. is as follows: PMsv......................49.9% OraVax JVM................50.1% The second partnership comprising the Collaboration is OraVax Merieux Co., a Massachusetts general partnership, whose partners are OraVax JVM and Merieux American Holding, Inc. ("MAHI"), an affiliate of PMC. The initial interest of each partner in OraVax Merieux Co. is as follows: MAHI......................50.1% OraVax JVM................49.9% While the partnership interests of the partners in each partnership are slightly different, the Collaboration has been structured with the intent of having all costs, capital, profits and losses shared equally by Merieux and OraVax (through their respective affiliates). As a matter of partnership accounting, the capital contributions shall be made equally, to be consistent with the respective partnership interests for each partner as set forth above. In the event of a default by a partner in the payment of capital contributions to fund at least 80% of its share of the operating budget, the Agreement calls for negotiation to resolve any disagreement. If the partners fail to negotiate a resolution of the issue, the partner which has paid its contribution shall take control of the partnership from the partner failing to have contributed its share. Except for such a default, it is the intent of the Collaboration that control remain equal between OraVax and PMC. The partners of OraVax Merieux Co. and Merieux OraVax Co., both development stage enterprises, have agreed to fund through the Partnerships the research and development, clinical and pharmaceutical development costs of the Collaboration as approved by its executive committee at least through December 1998. 77 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The ultimate success of the Partnerships is dependent upon their ability to raise capital through partners' contributions, equity and debt placement, sale of product and interest income on invested capital. The Partnerships' capital requirements may change depending upon numerous factors, including progress of their research and development programs, time required to obtain regulatory approvals, resources the Partnerships devote to self-funded projects, proprietary manufacturing methods and advanced technologies and demand for the Partnerships' products, if and when approved. While management believes that additional capital will be available to fund operations, there can be no assurance that additional funds will be available when required, on terms acceptable to the Partnerships. The Partnerships are subject to risks common to entities in the biotechnology industry including, but not limited to, development by the Partnerships or their competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and compliance with government regulations. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Combination The combined financial statements include the accounts of OraVax Merieux Co. and Merieux OraVax Co. Intercompany transactions and balances have been eliminated in combination. Research and Development Costs Research and development costs are expensed as incurred. Cash and Cash Equivalents The Partnerships consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Income Taxes In conformity with the Internal Revenue Code and applicable state and local tax statutes, taxable income or loss of the Partnerships is required to be reported in the tax returns of the partners in accordance with the terms of the partnership agreements and, accordingly, no provision has been made in the accompanying financial statements for income taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 78 ORAVAX MERIEUX CO. AND MERIEUX ORAVAX CO. PARTNERSHIPS (development stage enterprises) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) C. RELATED PARTY TRANSACTIONS The Partnerships entered into research and development contracts, with OraVax, Inc., the parent company of OraVax JVM and with PMC, to perform contract research and development for the Partnerships. Funds transferred to OraVax for the period from inception through December 31, 1995 and the years ended December 31, 1996 and 1997 were $5,767,088, $6,642,015 and $7,205,000, respectively. Contract research and development performed by OraVax during the same periods were $4,867,799, $6,595,003 and $7,587,421, respectively. Funds transferred to PMC for the years ended December 31, 1996 and 1997 were $2,357,985 and $2,425,000, respectively. Contract research and development performed by PMC during the same period was $2,257,985 and $2,375,000, respectively. At December 31, 1996 and 1997, prepaid expenses represented funds transferred to OraVax and PMC in advance of performance under its research and development contracts. At December 31, 1997, accounts payable included liabilities to OraVax and PMC in the amounts of $382,421 and $595,096, respectively. D. COMMITMENTS AND CONTINGENCIES The Partnerships are party to research and license agreements with third parties for which non-cancelable minimum future payments as of December 31, 1997 were $250,000. In addition, under these agreements, the Company may pay milestones and/or royalties of future sales of specified products. EX-10.30 2 AGREEMENT WITH EVANS MEDICAL LIMITED 1 EXHIBIT 10.30 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. AGREEMENT This Agreement is made as of September 29, 1997 between Evans Medical Limited whose head office is situated at Evans House, Regent Park, Kingston Road, Leatherhead, Surrey KT22 7PQ, United Kingdom (hereinafter referred to as "Evans") and OraVax, Inc., a Delaware corporation, 38 Sidney Street, Cambridge, Massachusetts, 02139, U.S.A. (hereinafter referred to as "OraVax"). WHEREAS: A. Evans is engaged in the development, manufacture, marketing and sale of a vaccine against yellow fever ("YF"); B. Evans seeks assistance in the conduct and monitoring of Phase III Clinical Trials (as such term is defined in Section 1.1) in the United States; C. Evans seeks a collaboration with a reputable and experienced vaccine company in the United States to market the Product (as such term is defined in Section 1.1) in the United States; D. OraVax is an experienced participant in the pharmaceutical and vaccine business in the United States, with special expertise concerning YF vaccines; F. Evans and OraVax have conducted market research in the United States which indicates that there is a substantial and potentially profitable market for an effective YF vaccine product; G. Evans and OraVax each wish to participate in certain clinical studies, the regulatory approval, marketing and distribution of the Product as described herein and in return to receive benefits arising from the commercial exploitation of such Product in the Product Territory (as such term is defined in Section 1.1). WITNESSETH NOW, THEREFORE, in consideration of the mutual covenants herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Evans and OraVax hereby agree as follows: 2 SECTION 1. DEFINITIONS AND INTERPRETATION 1.1 When used in this Agreement, the following terms shall have the following meanings: (a) "Additional Periods" shall be as defined in Section 3.3. (b) "Budgets" shall mean the agreed budgets for clinical trials and/or promotional activities as described in Sections 2.4 and 3.10, respectively. (c) "cGCP Regulations" shall mean regulations set forth in Parts 50 and 56 of Volume 21 of the U.S. Code of Federal Regulations pertaining to ethical and scientific quality standards for designing, conducting, recording and reporting clinical trials that involve the participation of human subjects. (d) "Confidential Information" shall be as defined in Section 9.2. (e) "Damages" shall mean all actions, claims, demands, losses, damages, costs and expenses whatsoever, wheresoever and howsoever arising. (f) "Evans" shall be as defined in the first paragraph of this Agreement. (g) "FDA" shall mean the United States Food and Drug Administration or any successor thereof. (h) "GM" shall mean the gross margin from sales of the Product in the Product Territory calculated as per the example in Section 5.2. (i) "GM Target" shall mean the minimum GM mutually agreed upon by the Parties from time to time. The GM Target shall initially be mutually agreed upon by the Parties at least six months prior to the anticipated date of Product Approval. (j) "ICH" shall mean the International Conference on Harmonisation. (k) "IND" shall mean Investigational New Drug application. (l) "Initial Period" shall be as defined in Section 3.2. (m) "OraVax" shall be as defined in the first paragraph of this Agreement. - 2 - 3 (n) "Parties" shall mean Evans and OraVax. (o) "Phase III Clinical Trials" shall mean all clinical trials conducted in support of Product Approval and prior to the date of approval of the PLA by FDA. Unless specifically otherwise stated, all references in this Agreement to trials, clinical trials and vaccine trials shall be deemed to be references to Phase III Clinical Trials. (p) "Phase IV Clinical Trials" shall mean clinical trials conducted with approved Product subsequent to first grant of Product Approval. (q) "PLA" shall mean U.S. Product License Application relating to the Product. (r) "Product" shall mean Evans's YF 17D vaccine product manufactured to comply with the specifications approved by the Medicines Control Agency in the United Kingdom and described in Evans's current data sheet supplied with its YF 17D vaccine in the United Kingdom and any improvements thereon. (s) "Product Approval" shall mean approval of the PLA and issuance of a product license for Product by the FDA. (t) "Product Territory" shall mean the United States. (u) "Trademarks" shall be as defined in Section 8.1. (v) "YF" shall be as defined in Recital A to this Agreement. 1.2 In the interpretation of this Agreement unless inconsistent with the context or the subject matter: (a) References to the singular shall include references to the plural and vice versa; (b) References to clauses and Schedules are references to clauses and Schedules of this Agreement; (c) References to persons shall include references to all legal entities including but not limited to bodies corporate and vice versa; (d) Words denoting any gender shall include all genders; (e) Clause headings shall in every case be disregarded. - 3 - 4 SECTION 2. CLINICAL TRIALS, PRODUCT DEVELOPMENT AND COMPLIANCE WITH LAWS AND REGULATIONS 2.1 Application for PLA by Evans. (a) The Parties shall cooperate and work in good faith to obtain Product Approval in the Product Territory. OraVax and Evans shall, in accordance with this Agreement, provide such assistance to one another as both Parties agree is reasonable and necessary to obtain Product Approval. It is the intention of the Parties that OraVax shall be permitted to accompany Evans to all meetings with the FDA concerning Product Approval in the Product Territory. Evans shall supply OraVax with copies of all information that may be relevant to obtaining Product Approval and all written documentation submitted by Evans to the FDA concerning the Product Approval, as well as permission to cross file against existing submissions of Evans to the FDA, as necessary to file a U.S. IND for the Product. (b) OraVax acknowledges that Evans will be the holder and sole legal and beneficial owner of the PLA and all documents used to support the PLA. Notwithstanding any other provision set forth in this Agreement, access of OraVax to a PLA shall at all times be subject to the discretion of Evans and in any event only for the strict purposes of this Agreement. (c) OraVax acknowledges that at all times Evans shall remain the owner and manufacturer of the Product and shall be so identified on labels, package literature and other marketing materials in the format requested by Evans, subject to FDA requirements. (d) OraVax acknowledges that, except for the specific distribution rights granted in this Agreement, OraVax will not acquire any rights, including but not limited to intellectual property rights, in or in relation to the Product or Evans's business. 2.2 Conduct of Clinical Trials by OraVax. OraVax agrees to assist in conduct of clinical trials relating to Product Approval in the Product Territory. OraVax and Evans shall mutually agree on the objective and design of clinical trials, and shall review and agree on proposals, case report forms, consent forms, and the statistical analysis plan. OraVax shall be responsible for the selection of clinical investigators (which investigators shall be suitably qualified and able to conduct the clinical trials in accordance with the protocol agreed upon by OraVax and Evans); negotiation of clinical trials agreements and payments to investigators; implementation and clinical monitoring of the trials; preparation and distribution of study documents, including complete clinical trials binders; adverse event reporting; collection, storage and shipment of serum specimens to Evans for serological testing; - 4 - 5 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. and analysis of data. Unless otherwise requested by Evans, OraVax and Evans shall jointly prepare all clinical trial reports, including reports to the FDA; provided, however, that final approval of such reports shall in all cases be made by Evans. OraVax shall prepare and maintain study specific SOPs as needed, and will ensure the complete documentation of the trials. OraVax shall ensure that trials are conducted in accordance with cGCP Regulations, the tripartite harmonised guidelines issued by the ICH and the Declaration of Helsinki, and meet all necessary standards required in support of the PLA. OraVax shall maintain in force clinical trials insurance adequate to cover estimated liability that may arise in relation to these trials, the amount of which shall be mutually agreed upon by OraVax and Evans; provided, however, that in no event shall OraVax maintain clinical trials insurance in an amount less than [**]. 2.3 Reports and Data from Clinical Trials. OraVax agrees to provide Evans with data and reports when generated from all clinical trials and in a timely manner. OraVax and Evans shall discuss and agree on procedures for data handling and analyses required in support of IND and PLA filings. 2.4 Payment for OraVax Costs. OraVax and Evans will discuss in good faith all actions related to clinical trials and shall agree in advance on the Budgets for the trials; provided, however, that Evans shall have the right to final approval of the Budgets. As will be provided specifically in the Budgets, Evans shall pay OraVax for salary and reasonable and customary indirect costs of such OraVax staff as the Parties shall have mutually agreed to be reasonably necessary to be deployed to support the agreed-upon clinical trials. To the extent that the following may be specified in the Budget, or as otherwise agreed by Evans in writing, Evans shall pay all necessary and reasonable external costs of the trials, including payments to clinical investigators, overhead charges to investigator institutions, specimen handling and shipping costs, statistical services, monitoring services and travel, safety laboratory tests, and other out-of-pocket costs incurred by OraVax or its contractors. In the event that OraVax and Evans fail to agree on the Budgets, this Agreement shall terminate in accordance with Section 14.1(c), and each Party shall not incur any costs for the account of the other during the given notice period. 2.5 Supply and Materials for Clinical Trials. Evans agrees to provide OraVax with the supplies of Product, including diluent, reasonably necessary to conduct clinical trials in accordance with the agreed upon protocol, at no cost to OraVax. As required by trial design, Evans will supply placebo vaccine and will randomize and appropriately label active and placebo vaccine to be used in double-bind trials, at no cost to OraVax. Evans will provide to OraVax a description of the - 5 - 6 vaccine and/or technical documentation necessary for OraVax to prepare an investigator's brochure for distribution in advance of vaccine trials. It is hereby agreed that the information to be provided by Evans may be in the form of package inserts supplied with approved Product in the U.K. 2.6 Neutralization Tests. Evans will perform neutralization tests and any other special serological studies on samples collected during the clinical trial. If Evans is unable to conduct these tests, OraVax or a third party may perform them, as mutually agreed by both Parties. Evans shall pay the previously agreed cost associated with the performance of these tests. 2.7 Phase IV Clinical Trials. OraVax and Evans acknowledge that it may be desirable to conduct certain Phase IV Clinical Trials in the Product Territory. The Parties agree to discuss opportunities for increasing market share by such additional clinical trials aimed at broadening clinical indications and demonstrating safety in subgroups requiring the vaccine (e.g. HIV-infected subjects). Any such Phase IV Clinical Trials in the Product Territory shall be conducted in a collaborative manner. 2.8 Non-Solicitation. Unless otherwise agreed, the Parties shall not solicit the employment of any person who at the time of such solicitation is an employee of the other. SECTION 3. MARKETING AND DISTRIBUTION 3.1 Appointment as Distributor. Evans hereby appoints OraVax, and OraVax hereby agrees to act as the exclusive marketer and distributor to civilian and military markets in the Product Territory of the Product and OraVax hereby agrees to act in that capacity subject to the terms and conditions of this Agreement. 3.2 Term. The initial term of OraVax's appointment under this Agreement shall commence on the date of this Agreement and end five years after the date of grant of the Product Approval for the Product (the "Initial Period"). 3.3 Renewals. This Agreement shall continue to be automatically renewed for successive periods of two (2) years after the Initial Period (the "Additional Periods") unless terminated in accordance with Section 14. 3.4 Identification of OraVax as Distributor. OraVax shall be acknowledged as the distributor of the Product on labels, package literature and other marketing materials prepared for the Product Territory in a format acceptable to and required by the FDA, and to be mutually agreed upon by OraVax and Evans. The Parties agree that an unintentional failure by either Party to comply with this Section 3.4 shall not constitute grounds for termination of this Agreement under Section 14. - 6 - 7 3.5 Exclusive Appointment. Evans agrees not to appoint any other person to act as its distributor for the Product in the Product Territory during the currency of this Agreement except that for transitional purposes Evans may, during the period of six months expiring with the termination hereof, appoint OraVax's successor (if any) and allow such successor to make himself known as Evans's distributor able to do business from a specified date being the day after the termination hereof. 3.6 No Sales in the Territory by Evans. For the duration of OraVax's exclusive rights in the Product Territory granted hereunder, Evans will not undertake to sell the Product to any person, company or firm for resale in the Product Territory and not to sell the Product to any person, company or firm residing or trading outside the Product Territory which Evans has reasonable grounds to believe is purchasing the Product for the purpose of re-selling the Product in the Product Territory. 3.7 No Sales outside the Territory by OraVax. OraVax shall not sell the Product outside the Product Territory or sell the Product to a third party within the Product Territory where there are reasonable grounds for OraVax to believe that the third party may, whether directly or indirectly, sell or cause to be sold the Product outside the Product Territory. 3.8 Expansion of Product Territory. (a) OraVax may identify opportunities for expansion of sales of the Product outside the Product Territory, other than in markets already served by Evans, its affiliates or preexisting licensees. OraVax shall inform Evans of any such opportunity and of its wish to pursue such opportunity. Evans shall notify OraVax whether or not the territory in question is available to OraVax with regard to distribution of the Product and in the event that Evans notifies OraVax that such territory is so available Evans shall afford to OraVax for a period of 60 days after such notification by Evans a right of first negotiation with respect to entering into arrangements for distribution of the Product in any such new territory. In the event that Evans agrees to OraVax pursuing any such opportunity, OraVax shall inform Evans on a timely basis of all subsequent discussions regarding such market expansion. Evans shall have the final right to approve the terms of such expansion of the Product Territory covered by this Agreement. It is the intention of the Parties to expand the market for the Product to as many countries outside the U.S. as possible. Upon expiration of such 60-day period, or upon earlier notice from OraVax that OraVax does not wish to negotiate for the right to distribute the Product in the specified expanded market, Evans shall be free to negotiate with third parties concerning distribution in such market. (b) Specifically with regard to the expansion of the Product Territory under this Section 3.8, OraVax is not an agent for Evans and is not authorized to and - 7 - 8 shall not enter into any negotiation on behalf of Evans and therefore shall not represent to any party that it is employed by or acting on behalf of Evans in any capacity and further agrees that Evans shall have no obligation to OraVax to enter into any transaction (no matter how far negotiations have proceeded with respect to the transaction) and in doing so incur no obligation to OraVax or any third party. (c) This Section 3.8 shall not apply if OraVax introduces to Evans a party with whom Evans or any of its affiliates has already been in contact regarding distribution of the Product or if Evans or any of its affiliates has not been in contact but knew of the existence either from that party directly or from another intermediary. 3.9 OraVax's Status as Independent Contractor. The relationship between the Parties is that of seller and buyer and shall not be deemed to be that of principal/agent, joint venture, partnership or otherwise. Otherwise than as expressly permitted by this Agreement, OraVax is not authorized to act on behalf of Evans and shall not act or purport to act to obligate or bind Evans or hold itself out as entitled to obligate or bind Evans in any way without the express written consent of Evans, but shall act as an independent contractor buying for itself and selling in its own name and at its own risk subject only to Section 13.1. 3.10 Promotional Efforts of OraVax. OraVax shall exercise its best efforts to promote, extend and increase market share of the Product in the Territory, including negotiations with the U.S. Armed Forces in order to obtain the military market, and promotion of the Product at major consumer group meetings, including the American Society of Tropical Medicine & Hygiene and the Travel Medicine Society. Subject to Budget approval by the Parties, OraVax and Evans shall share equally the costs for such exceptional promotional activities. 3.11 Promotional Material. Evans shall supply to OraVax at no cost one copy of any marketing materials used by Evans in relation to the Product and that may be used by OraVax in the production of marketing materials within the Product Territory. OraVax shall be permitted to make additional copies of such marketing materials at its expense. OraVax agrees not to use any sales aids or promotional materials that have not been supplied or approved by Evans. OraVax shall be responsible for filing copies of all promotional materials with the FDA in accordance with applicable FDA regulations, and for ensuring that such materials comply with applicable FDA regulations. 3.12 Sales Targets. OraVax shall use its best efforts to meet the minimum sales targets set forth on Schedule 3 to this Agreement, as such Schedule 3 may be amended from time to time with the written agreement of the Parties. The Parties agree to review sales targets within six months following Product Approval and on an annual basis thereafter. - 8 - 9 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3.13 OraVax's Conduct. OraVax shall not: (a) pledge the credit of Evans or affiliates of Evans in any way; (b) engage in any conduct which in the opinion of Evans is prejudicial to Evans's business or the marketing of the Product; or (c) be concerned or interested in the development, manufacture, sale, promotion, marketing or importation into the Product Territory of any goods which may compete directly or indirectly with sales of the Product. 3.14 Obligations of Evans. Evans shall not be under any obligation to manufacture or to continue the manufacture of the Product and may at any time make such alterations to the Product's specifications as it thinks fit or as are required by the FDA or other applicable regulatory authority including changes in the design, production or packaging or by the withdrawal of the Product. 3.15 Packaging of the Product. (a) Evans will supply the Product in packed form as agreed by the Parties at the time of placing an order and approved by the FDA. (b) The Product will be supplied in Evans packaging, subject to the provisions of Section 3.4. The packaging and all package inserts will be in the English language. OraVax shall be responsible for ensuring that the specifications for packaging and packaging inserts comply with the requirements of the FDA. Any subsequent modification required by the FDA shall be made known to Evans in writing by OraVax within ten (10) days of the time which OraVax first becomes aware of it. The packaging shall include, in a form acceptable to Evans, an acknowledgment that the Product is manufactured by Evans and that the Trademarks are registered trademarks of Evans. SECTION 4. SUPPLY OF PRODUCT 4.1 Forecasts of Product Requirements. At least [**] prior to the expected date of the first Product Approval, OraVax shall provide to Evans (separately for civilian and military markets) a written forecast by calendar quarter (or part thereof as the case may be) of its expected requirement of Product for the period of twelve months immediately following the grant of Product Approval. Such forecast shall be - 9 - 10 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. updated within ten days of commencement of each calendar quarter. Evans shall indicate in writing whether it accepts each such forecast and upon written acceptance by Evans of each forecast the amount of Product specified in relation to the fourth calendar quarter of each such forecast shall constitute and be deemed by the Parties a binding order for Product to be supplied by Evans to OraVax on the terms of this Agreement (a "Binding Order") provided that in respect of each Binding Order the amount of Product specified shall be within the range plus or minus [**] of the amount of Product first accepted by Evans in relation to the calendar quarter in question. 4.2 Orders. OraVax shall submit written orders for supply of Product at least twelve weeks prior to the date that it requires delivery of Product by Evans each such actual order shall be for a reasonable quantity of Product and in any event the amount of Product ordered by OraVax shall be in accordance with the Binding Orders accepted by the Parties pursuant to Section 4.1 above. 4.3 Binding Effect of Orders. Orders from OraVax shall be binding on the Parties upon written acceptance by Evans. 4.4 Supply. Evans shall use its reasonable commercial efforts to supply the Products in accordance with such Binding Orders. 4.5 Stocks of the Product. Evans shall maintain stocks of the Product consistent with OraVax's sales forecasts. OraVax shall maintain stocks to supply the Product sufficient to meet customer demand under normal market conditions, such quantities to be defined by the Parties and reviewed periodically. In the event of an emergency, such as a YF epidemic in the Product Territory or actual orders from OraVax in excess of the Binding Order quantities, Evans shall exercise reasonable efforts to supply the Product in quantity sufficient to meet increased demand but always subject to Evans's previous commitments and to the availability of sufficient stock of the Product on short notice. 4.6 Marketing Plans. A strategy for promoting the Product and for increasing market share will be developed between both Parties and carried out by OraVax. OraVax shall prepare a marketing plan for each calendar year and will submit such plans to Evans for review at least 90 days before the commencement of each calendar year. The marketing plan shall include priorities for promoting the Product, sales forecasts and product positioning and such other information as the Parties shall reasonably require. - 10 - 11 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SECTION 5. PRICE AND PAYMENT 5.1 Share of Gross Margin. Evans and OraVax agree to share the GM [**] except in the case that the GM achieved on sales of Product is less than the GM Target in force at the date payment is due from OraVax to Evans in which case OraVax shall retain [**] of the GM calculated in accordance with Section 5.2 and the balance shall be remitted to Evans provided that the amount remitted to Evans shall in no event be less than Evans Cost of Production at the time payment is due, plus [**] of Evans Cost of Production. Evans shall invoice OraVax for Product ordered by OraVax in accordance with Section 4.3 at the time of shipment by Evans at prices that provide for reimbursement of Evans Cost of Production, being the cost of manufacturing, packaging, release testing, delivery, insurance, freight, taxes, and duties plus a further [**] of such Cost of Production. OraVax Cost of Sales shall be cost of handling and shipping Product to its customers and any taxes, duties or tariffs paid by OraVax in respect of the Product. 5.2 Calculation of Gross Margin. The following is an example of a calculation of the sharing of GM under this Agreement (numbers are not actuals): Gross sales price received by OraVax $ 1.00 Deduct: - [**] Gross Margin [**] Amount payable to Evans by OraVax [**] [**]
5.3 Audit and Inspection. OraVax shall maintain complete sales documentation, and Evans shall maintain complete production documentation. Each Party shall have a right to audit and take copies of sales or production documentation (as the case may be) of the other Party to verify correctness of Cost of Production, Cost of Sales or GM, as the case may be, and to inspect storage facilities used by the other Party in connection with storage and handling of the Product; provided that audits contemplated by this Section 5.3 shall be conducted no more than once per year per Party by an independent third party and at the cost of the Party conducting the audit unless a material difference in the Cost of Production, Cost of Sales or GM is found, in which case the Party subject to the audit shall forthwith pay to the other Party the amounts found to be due and shall further bear the reasonable costs of the audit. - 11 - 12 5.4 Payment for Product Shipped. On the last day of each month, OraVax shall make a single payment by wire transfer to Evans. This payment shall include Evans's share of the GM on sales of Product for which OraVax was due to be paid by its customers during the immediately preceding month without regard to whether or when OraVax is paid by customers (for example, amounts due to Evans that relate to customer payments due to OraVax on June 3 and June 29 shall be paid by OraVax to Evans on July 31, even if OraVax did not in fact receive such customer payments on their respective due dates), and payment of invoices received from Evans pursuant to Section 5.1 in the preceding month. OraVax shall provide with each payment a statement including the Evans invoice numbers and amounts and details of the calculation of GM. 5.5 Payment in U.S. Dollars. All payments required to be made pursuant to this Agreement shall be made in United States Dollars unless otherwise agreed in writing between the Parties SECTION 6. PACKING, DELIVERY AND RISK IN TRANSIT 6.1 Evans will pack the Product suitable for delivery and deliver each shipment of Product to the Premises in the Product Territory as shall be designated by OraVax and agreed by Evans. Evans shall invoice Product F.O.B. OraVax's Cambridge, Massachusetts premises (the "Premises"). 6.2 Acceptance of, and risk in, the Product by OraVax shall be deemed to have taken place upon delivery of a packed consignment to the Premises. Notwithstanding the foregoing, Evans shall retain title to the Product until Evans has received payment in full in respect thereof. If an event described in Section 14.1(b)(i) or (ii) occurs with respect to OraVax, Evans shall have the right to (i) repossess Product for which Evans has not received payment in full, and (ii) enter into any premises owned or controlled by OraVax at which Product is stored for such purpose. SECTION 7. QUALITY CONTROL 7.1 Storage and Shipment Specifications. Evans shall provide to OraVax detailed specifications for storage and shipment of the Product. OraVax agrees to comply with such specifications. Evans will be paid by OraVax for any Product damaged subsequent to receipt by OraVax. 7.2 Rotation of Stocks. OraVax shall monitor expiration dates and ensure proper rotation of stocks. - 12 - 13 7.3 Replacement of Defective Product. OraVax shall inspect all batches of Product received. In the event that a batch is found to be damaged or not in good order, OraVax shall so notify Evans within 30 days' of delivery of such batch and Evans shall promptly replace the notified Product or allow a full credit, the specific remedy in such case to be determined solely by Evans. If Evans subsequently determines that such Product is not damaged or such damage is the fault of OraVax, OraVax shall be liable to make payment in full in respect of both the purportedly damaged Product and any replacement Product delivered by Evans. 7.4 Release Testing. Evans shall be responsible for release testing in the country of manufacture prior to packaging of the Product. OraVax shall be responsible for obtaining a certificate of approval from CBER and any other release testing or procedure in the Product Territory. 7.5 Product Defects. (a) OraVax shall give immediate written notice to Evans of any alleged manufacturing or other defect in the Product of which OraVax becomes aware and of any possible expense, liability, cost, claim or proceedings arising from the alleged defect. (b) With respect to any adverse drug experiences alleged to be caused by and any alleged manufacturing or other defect in the Product, OraVax shall not take any action or make any admission of liability or other disclosure that is not required by law to any third party with respect to claims, either in the name of OraVax or on behalf of Evans without Evans's prior written consent. 7.6 Return Policy. No returns shall be accepted unless mutually agreed upon by the Parties. In the event Product is returned in accordance with this Section 7.6, the cost of such returned Product shall not be passed to or accepted by Evans without the prior consent of Evans. 7.7 Compliance with Regulation. OraVax shall distribute the Product to consumers in full compliance with local and national regulations for the distribution of yellow fever vaccines. The Product shall be distributed only to vaccinating centers approved and designated by State and Health Departments in the U.S., or to the U.S. military and other U.S. government purchasers. 7.8 Consultation to Consumers. OraVax shall provide expert advice and consultation to consumers on the Product and its utilization. Such advice and consultation may refer to the Product itself or to the general use of YF vaccines for international travel. In no event shall OraVax give any warranties in relation to the Product other than those printed on packaging of the Product or agreed upon mutually. Any additional warranties must be agreed upon by the Parties in writing. - 13 - 14 SECTION 8. INTELLECTUAL PROPERTY RIGHTS 8.1. Rights of Evans to Intellectual Property. OraVax recognizes that all intellectual property rights covering or relating to the Product including but not limited to all patents and patent applications in respect of the Product, technical information and other know how, all trademarks of Evans used on or relative to the Product (hereinafter referred to as "Trademarks"), all registered and unregistered design rights in respect of the Product and copyrights in all labels and marks attached to the Products and packages, leaflets and brochures and all clinical trial data and promotional and advertising literature supplied by Evans or on behalf of Evans or generated by OraVax in respect of the Product, are the exclusive property of Evans. 8.2 Trademark Registrations. Evans shall make any applications for registration of the Trademarks in the Product Territory in its own name. Should it be desirable in the opinion of Evans for an application to be made for the registration in the Product Territory of any of the Trademarks, OraVax shall render all reasonable assistance to Evans in connection therewith. Should it be desirable in the opinion of Evans that any such application should be made in the name of OraVax such application shall be made by OraVax at the expense of Evans; and any registration so obtained shall be promptly assigned to Evans or its nominee on request or upon termination of this Agreement. 8.3 License of Trademark to OraVax. Should it be desirable in the opinion of Evans, Evans shall grant OraVax a license to use the Trademarks which are registered in the Product Territory. Any such grant shall be at the cost of Evans. Upon the termination (as the case may be) of this Agreement, Evans shall be entitled at its cost to take all steps necessary to terminate any license granted to OraVax under this Section 8.3 and OraVax shall: (a) Cooperate with Evans as and when requested by Evans in having any such license so terminated; and (b) Not oppose or hinder Evans in taking any such steps to have any such license so terminated. Other than as is necessary for the proper performance of this Agreement by OraVax, no license, express or implied, is granted by this Agreement by Evans under any of the Trademarks or those of affiliates of Evans. 8.4 Prior Evans Approval of Trademark Use. Any proposed use of the Trademarks by OraVax shall be submitted to Evans for its prior written approval and - 14 - 15 the Trademarks shall only be used by OraVax in the manner and form so approved by Evans. 8.5 Use of Trademarks. OraVax shall use its best endeavors to preserve the value and validity of the Trademarks and, in particular, OraVax will ensure that the Trademarks are always fully capitalized or given other distinctive typographic treatment, and a reference (whether by reference from the first use of the Trademarks to footnotes or otherwise) will indicate that the Trademarks are the trademarks or the registered trademarks, as the case may be, of Evans. 8.6 OraVax Logo. OraVax shall be entitled to use its corporate logo on any labeling of the Product provided that OraVax's corporate logo is in a form, position and size previously agreed to in writing by Evans. Evans undertakes not to appropriate in any way any of OraVax's intellectual property rights covering or relating to OraVax's logo. OraVax undertakes not to appropriate in any way any of Evan's intellectual property rights covering or relating to Evan's logo. OraVax shall not use in its business any trademarks which are similar or substantially similar to or so nearly resemble the Trademarks so as to be likely to cause deception or confusion. 8.7 Infringement. OraVax shall promptly notify Evans of any actual, threatened or suspected infringement in the Product Territory of any Trademarks which comes to OraVax's notice, and of any claim by any third party so coming to its notice that the importation of the Product into the Product Territory, or its sale therein infringes any rights of any other person, and OraVax shall at the request and expense of Evans do all such things as may be reasonably required to assist Evans in taking all proceedings in relation to any such infringement or claim. SECTION 9. CONFIDENTIALITY 9.1 Mutual Confidentiality Covenant. Each Party shall keep secret and confidential all Confidential Information of the other (as defined below) disclosed, made available or acquired for the purposes of this Agreement. Each Party shall also use its best endeavors to prevent the disclosure to any person, other than its employees and authorized agents (and then only when such disclosure is required for the proper performance of this Agreement), of all Confidential Information of the other. Each Party shall use its best endeavors to ensure that the Confidential Information of the other is not used except as expressly allowed by this Agreement. Each Party shall be responsible for ensuring that its employees and authorized agents do not disclose Confidential Information of the other to a third party or make any unauthorized use of the Confidential Information. Each Party shall be responsible for maintaining the Confidential Information with the same degree of care which it uses to maintain its own confidential information and which it warrants as providing - 15 - 16 adequate protection of such information from unauthorized disclosure, copying or use. 9.2 Definition of Confidential Information. In this Agreement, "Confidential Information" means any confidential or proprietary information, (whether disclosed or acquired directly or indirectly in writing, verbally or by any other means, and whether disclosed or acquired before or after the date of this Agreement or pursuant to this Agreement or in the course of performing this Agreement), concerning the business of a Party, information related to the Product, and information related to any Party's operations, processes, plans or intentions, production information, know-how, data, formulae, expertise, methodology, drawings, specifications, design rights, trade secrets, inventions, market opportunities and business affairs, production methods, results of testing of the Product, any market research and any new and novel combinations thereof, but does not include information which: (a) is in or comes into the public domain without any breach of this Agreement by the receiving Party; or (b) the receiving Party can show (i) was in its possession or known to it by being recorded in its files prior to disclosure by the disclosing Party; or (ii) to have been independently developed by it in the course of work by its employees who have not had access to the Confidential Information; or (c) the receiving Party obtains or has available from a source other than the disclosing Party without breach by the receiving Party or such source of any obligation of confidentiality or non-use; or (d) is disclosed by the receiving Party with the prior written approval of the disclosing Party. 9.3 Exceptions. OraVax may divulge Confidential Information required to be kept confidential pursuant to Section 12.1 in confidence to any governmental authority to the extent required to obtain authorization for marketing of the Product except that OraVax will provide adequate prior notice to Evans before providing such information. 9.4 Return of Documents. Upon termination or expiration as the case may be of this Agreement, the receiving Party shall return to the disclosing party promptly all documents and materials and copies thereof containing the Confidential Information of the disclosing Party except that it may retain one archival copy thereof for the sole purpose of being able to determine the scope of its continuing obligations hereunder. - 16 - 17 SECTION 10. EVANS'S WARRANTIES 10.1 Warranty of Evans. Evans does not warrant that Product Approval will be obtained or, if obtained, that Product Approval will be obtained on a timely basis. In the event Product Approval is obtained, Evans warrants that the Product will at the time of delivery comply with the specifications sanctioned by the FDA in connection with Product Approval and will be manufactured in accordance with the specifications outlined in Schedule 1 hereto and in a good and workmanlike manner at a premises which complies with standards stipulated by the relevant regulatory authorities in the Product Territory. OraVax agrees to provide Evans with written information relating to applicable laws, rules and regulations in the Product Territory and in the event that such information proves incorrect or incomplete, the warranty provided by Evans herein shall not apply and OraVax shall indemnify Evans against all Damages accruing to Evans and arising through reliance by Evans on such incorrect or incomplete information. 10.2 Authority for this Agreement. Each Party warrants and represents that it has full power and authority to enter into this Agreement and to meet the obligations hereunder. 10.3 No Infringement. Evans warrants that as of the date of this Agreement it is not aware of any infringement in the Product Territory of any third party patents issued prior to the date of this Agreement by the Product meeting the specifications in Schedule 1. 10.4 Indemnification. Evans shall indemnify and keep indemnified and hold OraVax, its employees, agents and contractors harmless against all Damages arising for which OraVax or its employees, agents or contractors may be or become liable which arise directly or indirectly from or in respect of any third party alleging infringement of any patent issued prior to the date of this Agreement, copyright, trademark or other intellectual property right of Evans relating to the Product. This Section 10.4 shall not apply with respect to cases in which OraVax, its employees, agents or contractors, as the case may be, have failed to handle and use the Product in accordance with the terms of this Agreement or have otherwise acted negligently or in breach of this Agreement in which case OraVax shall indemnify and keep indemnified and hold Evans, its affiliates, employees, agents and contractors harmless against Damages arising for which Evans or its affiliates, employees, agents or contractors may be or become liable and arise directly or indirectly from or in respect of any third party alleging infringement of any patent, copyright, trademark or other intellectual property right due to such failure by OraVax to handle and use the Product in accordance with the terms of this Agreement, or their negligence or breach of this Agreement. - 17 - 18 SECTION 11. PRODUCT RECALL 11.1 Notice of Recall. OraVax shall inform Evans forthwith by telephone or facsimile transmission (immediately confirmed in writing) in the event of any circumstances giving rise to a possible or actual recall of the Product. Evans shall inform OraVax forthwith by telephone or facsimile transmission (immediately confirmed in writing) in the event of any circumstances giving rise to a possible or actual recall of any batches of the Product delivered to OraVax. 11.2 Right to Discontinue Sale of the Product. Evans shall have the right (irrespective of any power granted by law to the FDA or other authority in the Product Territory) on the grounds of public health and safety to require OraVax to discontinue sale of and recover some or all of the batches of the Product specified by Evans. 11.3 Notification to Purchasers of the Product. Where a product recall has been initiated whether by the FDA or other authority or by Evans pursuant to Section 11.2, OraVax shall inform purchasers of the Product so affected and shall require them to deliver or to make available for collection all such stocks of the Product in their possession. OraVax shall ensure that such stocks of the Product are collected and stored separately and securely in premises controlled by OraVax pending further instructions from Evans. 11.4 Reimbursement of Costs. Evans shall reimburse OraVax for all costs of any action taken pursuant to this Section 11 provided that where such costs are caused by the negligence, breach of this Agreement or willful default of OraVax, its employees or agents, OraVax shall bear such costs alone. 11.5 Notice of Product Recalls Outside the Territory. Evans shall notify OraVax immediately in the event a product recall of the Product has been initiated by Evans or any sub-contractor of Evans in any country of the world other than in the Product Territory. SECTION 12. ADVERSE DRUG REPORTS 12.1 Adverse Drug Experience. (a) OraVax shall conduct post marketing surveillance of adverse events as required by the FDA. If OraVax receives any report of a serious adverse drug experience (as described in Schedule 3) allegedly caused by the Product, OraVax shall report the matter to the relevant regulatory authorities in compliance with the laws and regulations of the Product Territory covering licensed products and OraVax shall report to Evans in a manner consistent with the spontaneous - 18 - 19 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. adverse drug event (ADE) reporting procedure developed by Evans for use by its distributors forthwith by telephone or facsimile transmission (immediately confirmed in writing). Evans shall have responsibility for the notification of regulatory authorities in the United Kingdom and in other countries in which the Product is distributed, according to the statutory requirements in such countries. (b) If Evans receives any report of a serious adverse drug experience allegedly caused by the Product in any country of the world other than the Product Territory, Evans shall immediately advise OraVax accordingly. (c) Evans shall provide OraVax on a biannual basis with written summaries of reports of adverse drug experiences that are not serious but are allegedly caused by the Product in any country of the world other than the Product Territory. (d) OraVax shall provide Evans on a biannual basis with written summaries of reports of adverse drug experiences that are not serious but allegedly caused by the Product in the Product Territory. SECTION 13. PRODUCT LIABILITY 13.1 Indemnification of OraVax. Evans shall indemnify and keep indemnified and hold harmless OraVax, its employees, agents and contractors against Damages for which OraVax shall or may be or become liable which arise directly or indirectly from or in respect of any Product supplied by Evans or on behalf of Evans to OraVax, or from such Product's, uses or effects, except those Damages caused by the breach of this Agreement, negligence or wilful default of OraVax its employees, agents or contractors. 13.2 Indemnification of Evans. OraVax shall indemnify and keep indemnified and hold harmless Evans, its employees, agents and contractors against all Damages arising for which Evans shall or may be or become liable which arise directly or indirectly from or in respect of the breach of this Agreement, wilful default or negligence of OraVax, its employees, agents, or contractors. 13.3 Product Liability Insurance. Each Party warrants that it has, and will maintain for a period of four years following termination of this Agreement, a product liability policy of insurance covering all risks liable to be incurred under this Section for an amount not less than US[**] naming Evans as an insured party. In - 19 - 20 addition, OraVax shall effect at its own cost such insurance as may be required by governmental or statutory authorities in the Product Territory. Each Party will use its best endeavors not to do anything at any time which may disentitle it to claim under such policy or which prejudices or in any manner adversely affects its right to make a claim pursuant to such policy. Each Party must, upon any reasonable request from the other Party, produce a certificate of currency in respect of such policy. If at any time either Party fails to maintain such policy the other Party shall be entitled to effect same on that party's behalf and recover as a debt from that Party the costs incurred in so doing and at its option terminate this Agreement pursuant to Section 14.1(b)(iii). Each Party must advise the other in writing within 48 hours of it becoming aware of the occurrence of any event relating to the Product which could or might lead to a claim under, or the cancellation of, such policy for any reason whatsoever. 13.4 Notice of Claims. The indemnities provided in this Section 13 and Section 10.4 hereof shall apply only if the indemnified Party shall promptly notify the indemnifying Party in writing of any claims, proceedings, or other actions or the threat thereof in respect of which indemnification may be sought. The indemnified Party shall reasonably cooperate with the indemnifying Party in connection with defending or settling any claim, proceeding or other action in respect of which indemnification may be sought. No settlement of any claim, proceeding or other action or threat thereof for which indemnification is sought shall be made without the prior written approval of the indemnifying Party. The indemnifying Party will have the sole control over the defense and/or settlement of any claim, proceeding, or other action for which indemnification is sought, subject to the indemnified Party's right to select and use its own counsel and the indemnified Party's sole cost and expense. SECTION 14. TERMINATION 14.1 This Agreement may be terminated: (a) By either Party without cause by giving to the other Party; (i) At least six (6) months written notice expiring with the expiration of the Initial Period; and thereafter (ii) At least six (6) months written notice, expiring with the expiration of the current Additional Period. (b) By the Party not affected by giving to the other Party written notice to terminate on the date specified in the notice should any of the following events occur, namely: - 20 - 21 (i) The other Party becoming insolvent or having a receiver appointed of its assets, or execution or distress levied upon its assets; (ii) An order being made or a resolution being passed for winding-up or liquidation of the other Party; (iii) Failure of the other Party to observe any of the terms hereof to a material and significant extent and to remedy the same within the period specified in a notice given by the aggrieved Party to the Party in default calling for remedy, being a period not less than thirty (30) days; (iv) The other Party's failure to perform its duties hereunder for a continuous period of three (3) months or for a total period of six (6) months in any period of twelve calendar months due to a cause beyond the reasonable control of the Party failing to perform, including fire, flood, riot, breakdown of machinery, industrial action, shortage of materials, epidemic, government action or war; (c) By either Party upon three (3) months, written notice to the other Party; (i) prior to the first launch of the Product in the Territory, provided that such termination is due to the legitimate failure of the Product for clinical or regulatory reasons, or (ii) In the event that the GM falls below the current GM Target as contemplated in accordance with the prior mutual agreement of the Parties. (d) In accordance with Section 2.4. 14.2 In the event of this Agreement being terminated, OraVax undertakes to reasonably co-operate with Evans and any successor of OraVax appointed by Evans and (if applicable) any other distributor of the Products in the Product Territory with a view to ensuring an orderly transfer of any licenses and distribution responsibilities. 14.3 On termination or expiration of this Agreement, as the case may be: (a) OraVax shall provide Evans with full particulars of all unsold Product (including quantities of each Product, the dates on which the Product was delivered) in its possession. Evans shall be entitled at its discretion to purchase from OraVax at the price actually paid by OraVax all or any of the unsold Product. (b) If so requested by Evans, OraVax shall arrange for delivery of the Product purchased by Evans pursuant to paragraph (a) of this Section 14.3 to such - 21 - 22 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. destination or destinations as may be designated by Evans. All delivery arrangements shall be subject to the prior approval of Evans. Reasonable costs of freight and insurance for such delivery shall be paid by Evans. (c) Any Product in respect of which Evans has notified OraVax in writing that it does not wish to repurchase pursuant to paragraph (a) of this Section 14.3, may be sold by OraVax within six (6) months after termination, in which case the terms of this Agreement or such of them as are relevant shall continue to operate until the remaining Product has been sold or the period of six (6) months expires, whichever first occurs. Any remaining unsold Product may be collected by Evans after such six month period, and Evans shall pay to OraVax [**] percent of any amounts that Evans receives in respect of such Product net of expenses of collection and sale. (d) OraVax shall promptly forward to Evans, at OraVax's cost, all Confidential Information and all promotional and advertising materials and all technical information relating to the Product then in OraVax's possession; and OraVax shall not keep any copies of such materials and information, subject to the provisions of Section 9.4. (e) OraVax shall not be entitled to compensation for goodwill which may have accrued to the marketing of the Product in the Product Territory, and Evans may make such other arrangements for marketing the Product as it may deem expedient in order to preserve the goodwill in such marketing exercise. (f) OraVax shall have a [**] right of first refusal with respect to any similar agreement that Evans desires to enter into if the proposed terms of such agreement are more favorable than those in existence under this Agreement at the time of termination; provided, however, that this Section 14.3(f) shall not apply in the event that this Agreement is terminated by Evans pursuant to Section 14.1(b)(iv), on account of a material breach by OraVax of its obligations under this Agreement. 14.4 The termination of this Agreement shall be without prejudice to the rights, obligations and remedies of the Parties accrued up to the date of such termination or continuing thereafter. - 22 - 23 SECTION 15. ANCILLARY PROVISIONS 15.1 Assignment by Evans. Nothing herein shall restrict Evans's right to assign this Agreement or the rights or obligations hereunder to a third party, provided that such assignment does not have the effect of compromising any material rights and privileges granted to OraVax herewith. 15.2 Subdistributors. OraVax shall not sell the Product through a sales agent or sub-distributor except with the prior written consent of Evans to any sub-distributor unless the distributor is a wholly-owned subsidiary of OraVax. Sales of Product by any such distributor shall be deemed a sale by OraVax. OraVax shall be and remain responsible for the acts and omissions of any such distributor in relation to this Agreement and the resale of the Product. 15.3 Entire Agreement. This Agreement embodies all the terms binding between the Parties hereto and replaces all previous representations or proposals (whether written or oral) not embodied herein. Amendments hereto shall not come into operation until duly embodied in any amending Agreement properly executed on behalf of both Parties hereto. 15.4 No Waivers. No waiver by either Party of any default in the strict and literal performance of or any compliance with any provision, condition or requirement contained in this Agreement shall be deemed to be a waiver of strict and literal performance of and compliance with any other provision, condition or requirement contained in this Agreement nor to be a waiver or in any manner a release of the other Party from strict compliance with any provision, condition or requirement in the future. Nor shall any delay or omission of any party to exercise any right under this Agreement in any manner impair the exercise of any such right accruing to it thereafter. Unless otherwise expressly stated, no remedy granted in this Agreement to either Party shall be deemed to exclude any other remedy which would otherwise be available. Each Party shall bear its own legal costs and expenses of and incidental to the preparation of this Agreement. 15.5 Governing Law. The Parties will attempt to resolve all disputes under this Agreement in a friendly and constructive manner, and any such disputes remaining unresolved shall be governed by the laws of the State of New York, U.S.A., without regard to the conflict of laws and principles thereof. 15.6 Survival. Sections 7.9, 8.1, 9, 11, 12, 13, 14.2, 14.3 and 14.4 shall survive termination. 15.7 Assignment by OraVax. OraVax shall have no rights to assign this Agreement or the rights and obligations hereunder except (i) with the prior written consent of Evans or (ii) to a successor business entity which acquires or encompasses - 23 - 24 substantially all the business and assets of OraVax. A change in ownership or control of OraVax shall not be deemed an assignment of this Agreement. 15.8 Force Majeure. A Party shall not be liable for any failure to perform or observe any term of this Agreement if performance or observance has been delayed, hindered, restricted or prevented by any circumstance not within the direct control of such Party, including without limiting the generality of the foregoing, Acts of God, strikes, lock-outs or other industrial disturbances, war, hostilities or the threat or apprehension thereof or any interruption to the supply of materials or information or any accident or breakdown of machinery or the making of emergency or essential repairs thereto or compliance with any valid order of any governmental or public authority' and the time or times for performance of the obligations of the respective Parties to be performed herein shall be extended by a period equal to each such period of delay, provided that such Party shall forthwith give notice to the other Party in accordance with the provisions of this Agreement and shall endeavor to remove or remedy the cause thereof with all due diligence and expedition. Clause 14.1(b)(iv) shall apply. SECTION 16. NOTICES 16.1 Where this Agreement requires a written notice, the notice may be given by post, personal delivery or facsimile transmission to the other Party and is to be marked to the attention of the person from time to time designated for this purpose by the other Party. The signatories to this Agreement are the persons initially designated for this purpose and their respective initial addresses and facsimile numbers are set - out hereunder: Evans Medical Limited Evans House, Regent Park Kingston Road, Leatherhead Surrey KT22 7PQ United Kingdom Facsimile 01372 364018 OraVax, Inc. 38 Sidney Street Cambridge, MA 02139, U. S. A. Facsimile + 1 (617) 494 1741 16.2 No written notice is to be effective until received, or deemed to be received by the other Party as follows: (a) in the case of personal delivery, upon delivery; - 24 - 25 (b) in the case of a letter, on the fifth business day after posting (business days to be determined according to the place of receipt); and (c) in the case of a facsimile transmission, on the business day on which it is dispatched, or, if dispatched on a non-business day, or after 5 pm on a business day then on the next business day (times and business days to be determined according to the place of receipt) after the day on which it is dispatched. A record from the dispatching facsimile machine detailing the time and date of the transmission shall be evidence of transmission, unless proved to the contrary. IN WITNESS WHEREOF the Parties hereto have executed this Agreement as of the date first written above. EVANS MEDICAL LIMITED By: /s/ John Murphy --------------------- Title: European Director ORAVAX, INC. By: /s/ Keith S. Ehrlich ----------------------- Keith S. Ehrlich Vice President and Chief Financial Officer - 25 - 26 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE 1 OUTLINE OF CLINICAL TRIAL AND RESPECTIVE RESPONSIBILITIES (Terms in the Agreement shall, if a conflict arises, apply instead of any terms in this Schedule or any documents contemplated by this Schedule) CLINICAL TRIALS WORKSCOPE CLINICAL PROTOCOL AND INVESTIGATOR'S BROCHURE - - Evans has prepared a clinical protocol for a pivotal trial of their YF 17D vaccine in the United States [**]. - - [**] Evans and OraVax will [**] taking into consideration input previously provided [**]. - - An Investigator's Drug Brochure (IDB) will be prepared by Evans and a copy provided to OraVax. - - The clinical protocol and IDB will be reviewed and approved by the Heads, Clinical and Regulatory Affairs at Evans and OraVax. - - Evans will file these documents as part of an IND submission to FDA [**]. IND - - Evans will be responsible for submission of the IND to FDA [**]. - - Evans will provide a complete draft copy of the IND to OraVax two weeks prior to submission to FDA. OPERATIONAL ASPECTS OF THE CLINICAL TRIAL(S) GENERAL - - OraVax and Evans will mutually agree in advance on the respective roles of the Companies in operational aspects of the clinical trials, listed below. The underlying principle is that OraVax is willing to independently undertake all components of the trial(s), but is pleased to collaborate on any and all these components, depending entirely upon the capabilities and interests of Evans in specific aspects of the trial(s). The details of such collaborations and the 27 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. responsibilities of the respective parties shall be worked out in meetings between the partners and documented in a Clinical Action Plan. CLINICAL ACTION PLAN [**], a Clinical Action Plan will be prepared that details the operational activities required to implement the trial(s), the parties responsible for these activities, and realistic timelines. The Clinical Action Plan will be approved by the Head(s), Clinical Affairs and Regulatory affairs, OraVax and Evans. - - All aspects of the clinical trial(s) will be performed according to guidelines and regulations for GCP, as specified in the FDA Code of Federal Regulations 21 CFR. - - Approved Standard Operating Procedures (SOPs) will be in place for all aspects of the clinical trial(s). - - Study documentation will be sufficient to withstand future inspections by the FDA. - - The overall budget for the clinical trial will be approved by OraVax and Evans. - - The Clinical Action Plan will contain the following information: -Specific responsibilities of OraVax and Evans -Completion of Clinical Protocol, IDB, Pharmacy Brochure, Study-specific SOPs -Number of subjects planned -Number of centers -Qualification of investigators, archiving CV's, and form 1572's -Confidentiality agreements with investigators -Start and finish dates -Case Report Form preparation -Regulatory and Ethics Committee approval -Shipment, distribution and storage of clinical trials material -Financial agreements and method of payment -Investigator's and study coordinator meetings -Subject enrollment -Clinical and medical monitoring -SAE reporting -Data base management -Data cleaning procedures -Statistical analyses -Serological testing (Baseline flavivirus serology, YF neutralization test) -Back-titration of vaccine -Other outcome and safety laboratory measurements 28 -Clinical study report -Publications, authorship - - Clinical trial sites and investigators with experience in conducting clinical trials will be identified. Insofar as possible, these sites will be geographically clustered in New England to facilitate clinical monitoring. Sites will be travel clinics or physicians having prior approval to administer YF vaccine. TRIAL IMPLEMENTATION - - OraVax will implement those parts of the Clinical Action Plan that are specified as OraVax's responsibilities. - - Evans will implement those parts of the Clinical Action Plan that are specified as Evans' responsibilities. - - Trial(s) will be implemented such that no undue delays or cost overruns occur, in the judgment of both parties. 29 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE 2 SALES TARGETS OraVax represents that it is reasonably able to and shall seek to achieve no less than [**] and [**] of the U.S. private market within the [**] years, respectively, following commencement of sales of the Product in the Product Territory. 30 SCHEDULE 3 SPONTANEOUS ADVERSE DRUG EVENT (ADE) REPORTING PROCEDURE- INDIVIDUAL CASE REPORTS All Adverse Event (ADE) reports to the Distributor should be directed to a named individual, nominated by the Distributor. This nominated contact will be responsible for all communication between the Distributor and the Supplier's central ADE reporting procedure. Standard form ADE1/C may be used to record the initial report of an adverse experience. As much information as possible about the ADE should be requested and recorded. Each ADE Report should be assigned an identifying number by the nominated contact. All ADEs reported to the Distributor are to be forwarded as soon as possible, i.e. on the same working day, but in any event within 3 working days, by fax or telephone to the Product Safety Manager, at the Supplier's premises. The Distributor should follow up the ADE report to obtain additional details, and where the reporter is a non health professional, medical confirmation. Form ADE1/D may be used to obtain follow-up information and written confirmation of the initial report. On receipt of the initial report from the Distributor the Product Safety Manager will log it into Product Safety's centralized procedure, and assign a central reference number consisting of 3 letters (DIS) the last 2 digits of the year, and a sequential number. The Product Safety Manager will acknowledge receipt of the report and advise the Distributor of the central reference number assigned. The Product Safety Manager will submit the ADE report to Regulatory Authorities in all countries where the product is marketed, including the Regulatory Authority in the country where the report originated, according to regulatory requirements. The Distributor will be copied on any correspondence with the local Regulatory Authority. The Distributor will forward to the Product Safety Manager, as soon as possible after receipt, the reporter's written confirmation of the event and any additional information, clearly identified with the central reference number. ADE reports will be notified to the local Regulatory authority in other markets if appropriate, according to their requirements. The Distributor will be copies on any correspondence in the local market. A summary of the procedure, and forms ADE1/C and ADE1/D are attached. The name of the nominated contact should be forwarded to Product Safety as soon as possible so that other Pharmacovigilance issues of mutual interest can be discussed and agreed. 31 SPONTANEOUS ADVERSE EVENT (ADE) REPORTING PROCEDURE ADE report from e.g. medic, pharmacist, customer, regulatory authority NOMINATED CONTACT AT DISTRIBUTOR - - Report ADE to Product Safety Manager at Evans Medical Ltd. on form ADE1/C as soon as possible, (same day if possible but within a maximum of 3 working days, Fax No. +441372 364163, Tel No. +441372 364164). - - Request written confirmation of ADE from reporter/prescribing doctor. Form ADE1/D may be used for this purpose. PRODUCT SAFETY, Evans Medical Ltd. - - Assign central reference number to ADE1/C - - Acknowledge receipt and advise assigned central reference number. - - Obtain Evans Medical assessment on ADE2A form, is ADE serious? Unexpected? Associated with product administration? - - In accordance with medical assessment and regulatory requirements notify Regulatory authorities, (including Regulatory Authority in country of origin) of ADE - - Notify the Local Regulatory Authority, as appropriate, of ADEs occurring in other countries. - - Copy the Distributor on any correspondence with the Local Regulatory Authority. NOMINATED CONTACT, DISTRIBUTOR - - Fax all follow-up information, clearly identified with assigned central reference number, to Product Safety Manager, Evans Medical Ltd. - - Notify Product Safety Manager at Evans Medical Ltd. when considered no further information forthcoming and case is closed. 32
FORM ADE1/C/V ADVERSE EXPERIENCE REPORT (Vaccine) 1 Caller 2 Clinical to contact (if name supplied) Product Safety use Dr/Mr/Mrs/Ms Dr/Mr/Mrs/Ms AE No: Address Address Receipt Date: _____/____/____ DD MM YY Tel___________ Fax___________ Tel___________ Fax___________ Position_____________________ Alert report No: _______ 3 Was call an Enquiry? ___ Report of AE? ___ Other? ___ 4 Vaccine:________________ Date of Vacc.:____/____/____ B/No:_________________ Try course/Booster? ___________ If try, which dose? _________ Date of last vaccination:___/___/___ 5 Patient Initials ____ M/F DOB or Age (elderly/infant/child, if not precisely known) ____ Concurrent vaccines/medication: Medical history-Any events after earlier doses/any allergies? 6 Description of event Onset time (either date or time after admin. of vaccine):________________ 7 Action taken (state if none or unknown) Treatment given? Was patient admitted into hospital/hospital admission prolonged? 8 Outcome Disabled/Incapacitated ____ Recovered ____ Fatal ____ Continuing ____ 9 Does reporter consider that the adverse event was related to the vaccine? Any other explanation for events? Company Nominated Contact's Signature:______________________ Date:___/___/___ (DD/MM/YY)
33 FORM ADE1/D/V ADVERSE EXPERIENCE REPORT (MARKETED VACCINE) DESCRIPTION OF ADVERSE EXPERIENCE (including relevant investigations and treatment required): DIAGNOSIS: MOST SIGNIFICANT SYMPTOM: AE onset date: ____/____/____ time to onset: ______ Date AE resolved: ____/____/____ DD MM YY (if less than 24hrs) DD MM YY SUSPECT PRODUCT:_________________ B/No.____________ storage conditions:__________ Date of vaccination: ____/____/____ Dose:________ Route/Site:______ Indication:__________ DD MM YY Course: Try ___ booster ___ If try, which dose:______ Date(s) of prev. dose(s): ____/____/___ DD MM YY Previous exposure? Yes ___ NO ___ AE experienced with previous exposure? Yes ___ No ___ If YES, describe:_____________________________________________________________________________ PATIENT'S DETAILS: Patient Initials:______ Sex: M ___ F ___ Pregnant: Yes ___ No ___ Patient's date of birth: ____/____/____ or Age:_____ If under 6 yrs, no. of siblings:_____ -- DD MM YY Ethnic Origin:______________ (Caucasian, Asian, etc.) Weight:______ Height:_______
Relevant Medical History, including Allergies: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ CONCOMITANT MEDICATION DETAILS (any medication taken in 3 months prior to AE onset)
Medication Name Dose Frequency Route/ Indication Dates include batch or lot no. if known) Site start stop - ------------------------------------------------------------------------------------------------------------------------------------
34
FORM ADE1/D/V AE No. ___________________________ ACTION TAKEN (CHECK ALL THAT APPLY) required intervention ____ specify:_______________________________________________________________________________________ _______________________________________________________________________________________________ _______________________________________________________________________________________________ new ____ hospitalization From:____/____/____ To:____/____/____ DD MM YY DD MM YY prolonged ____ OUTCOME (CHECK ALL THAT APPLY) disability ____ life threatening ____ congenital anomaly ____ resolved ____ resolving ____ continues ____ unknown ____ fatal ____ date died:____/____/____ cause:______________________ confirmed by autopsy ____ ASSESSMENT Relationship of AE to Drug: none ____ unlikely ____ possible ___ probable ____ highly probable ____ unclassifie ___ mild ____ moderate ____ severe ___
REPORTER'S DETAILS: RESPONSIBLE PHYSICIAN'S DETAILS: (if different) Name:__________________________________________ _______________________________________ Occupation:_____________________________________ _______________________________________ Address:________________________________________ _______________________________________ ________________________________________ _______________________________________ Country:________________________________________ _______________________________________ Telephone:______________________________________ _______________________________________ Has the Regulatory Authority been notified? Yes __ NO __ If YES, Date sent ____/____/____ and ref. No. ___________ DD MM YY HEALTH PROFESSIONAL'S SIGNATURE:____________________________ Date:____/____/____ Please state: Physician/Dentist/Pharmacist/Nurse/Coroner DD MM YY
EX-10.31 3 EMPLOYMENT AGREEMENT WITH ROBERT J. GERETY 1 EXHIBIT 10.31 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of April 3, 1997 is entered into by OraVax, Inc., a Delaware corporation with its principal place of business at 38 Sydney Street, Cambridge, Massachusetts 02139 (the "Company"), and Robert J. Gerety, residing at 103 Livingston Road, Wellesley, MA 02181 (the "Employee"). The Company desires to employ the Employee, and the Employee desires to be employed by the Company. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows: 1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Employee, and the Employee hereby accepts employment with the Company, upon the terms set forth in this Agreement, for the period commencing on April 3, 1997 (the "Commencement Date") and ending on April 3, 2000 (such period, as it may be extended, the "Employment Period"), unless sooner terminated in accordance with the provisions of Section 4. The Employment Period will be automatically extended, after the initial three-year term, for successive twelve-month periods unless terminated by either party by written notice to the other not less than six months prior to the commencement of the next succeeding twelve-month term. 2. TITLE; CAPACITY. The Employee shall serve as Vice President of Development and Regulatory Affairs or in such other position as the Company's President may determine from time to time. The Employee shall initially be based at the Company's offices in Cambridge, Massachusetts. The Employee shall be subject to the supervision of, and shall have such authority as is delegated to him by, the President of the Company. The Employee hereby accepts such employment and agrees to undertake the duties and responsibilities inherent in such position and such other duties and responsibilities as the President of the Company shall from time to time reasonably assign to him. The Employee agrees to devote his entire business time, attention and energies to the business and interests of the Company during the Employment Period; provided, however, that the Employee may engage in consulting activities as specified in Schedule C hereto. The Employee agrees to abide by the rules, regulations, instructions, personnel practices and policies of the Company and any changes therein which may be adopted from time to time by the Company. 3. COMPENSATION AND BENEFITS. a. SALARY; BONUS. The Company shall pay the Employee, in monthly installments, a base salary at the annual rate of $250,000 for the balance of the 1997 calendar year, commencing on the Commencement Date. Such salary shall be subject to adjustment thereafter as determined by the President and the Compensation Committee of the Board of Directors (the "Compensation Committee"). In addition, the Employee shall participate annually in the bonus program for executive officers of the Corporation, which is administered by the Compensation Committee. The Employee will be eligible for a bonus of up to 20% of base salary for the balance of the 1997 calendar year after the Commencement Date. 1 2 b. FRINGE BENEFITS. The Employee shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its employees to the extent that Employee's position, tenure, salary, age, health and other qualifications make him eligible to participate, including, but not limited to, the health, dental and disability programs indicated on SCHEDULE A to this Agreement. In addition, the Company shall assume payment during the Employment Period of the premiums on existing individual term life insurance policies on the Employee's life with Equitable, Prudential, Serviceman's Group Life and Sun Life, designating family member(s) of his choice as beneficiary(ies), with combined coverage in the face amount of approximately $1,050,000, each such payment to be made by the Company promptly upon submission of the bills by the Employee. c. VACATION. The Employee shall be entitled to three weeks paid vacation per year, to be taken at such times as may be approved by the President of the Company. The three weeks of paid vacation shall accrue as follows: (i) in year one, (a) the Employee shall receive one day of vacation per month worked for the first six months, and (b) after the first six months of employment have passed, the Employee shall receive the remaining number of vacation days necessary to bring the annual total of vacation days accrued to three full weeks of vacation; and (ii) after year one, the three weeks of vacation shall accrue on the anniversary of the Commencement Date. d. REIMBURSEMENT OF EXPENSES. The Company shall reimburse the Employee for all reasonable travel, entertainment and other expenses incurred or paid by the Employee in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, upon presentation by the Employee of documentation, expense statements, vouchers and/or such other supporting information as the Company may request, PROVIDED, HOWEVER, that the amount available for such travel, entertainment and other expenses may be fixed in advance by the Board. e. STOCK OPTIONS. As approved by the Company's Board of Directors (the "Board"), the Company grants to the Employee an incentive stock option to purchase 125,000 shares of the Company's Common Stock, $.001 par value per share (the "Common Stock") at fair market value on the Commencement Date. The stock option agreement evidencing such option shall provide that the option shall become exercisable as to installments of 31,250 shares on each of the first four anniversary dates of the date of grant. In the event of a Change in Control of the Company as defined in the stock option agreement, such option shall become fully exercisable. 4. EMPLOYMENT TERMINATION. The employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: a. Expiration of the Employment Period in accordance with Section 1; b. At the election of the Company, for cause, immediately upon written notice by the Company to the Employee. For the purposes of this Section 4.2, cause for termination shall be deemed to exist only in the event of (a) the willful and continued failure by the Employee to substantially perform his duties hereunder (other than any such failure resulting from the Employee's inability to perform such duties as a result of physical or mental illness or incapacity) after delivery to the Employee of a written demand for substantial performance that specifically identifies the manner in which the Company believes that the Employee has not substantially performed his duties and provides a reasonable opportunity to cure; (b) dishonesty, gross negligence or willful misconduct; or (c) the conviction of the Employee of, or the entry of a pleading of guilty or nolo contendere by the Employee to, any crime involving moral turpitude or any felony. No act or failure to act shall be considered 2 3 "willful" for this purpose unless done, or omitted to be done, by the Employee other than in good faith and other than with a reasonable belief that his action or omission was in the best interests of the Company. The Employee shall not be deemed to have been terminated for Cause unless the Employee shall have been provided with (i) a reasonable notice, setting forth the reasons that the Company believes constitute Cause for the termination of his employment; (ii) a reasonable opportunity to be heard by the Board, with his counsel; and (iii) a notice of termination from the Board finding that, in the reasonable good faith opinion of the Board, Cause for the termination exists and setting forth in reasonable detail the facts and circumstances relied upon as providing a basis for the termination under the provision so specified. c. Thirty days after the death or disability of the Employee. As used in this Agreement, the term "disability" shall mean the inability of the Employee, due to a physical or mental disability, for a period of 90 consecutive days during any 365-day period to perform the services contemplated under this Agreement on a substantially full-time basis. A determination of disability shall be made by a physician satisfactory to both the Employee and the Company, PROVIDED THAT if the Employee and the Company do not agree on a physician, the Employee and the Company shall each select a physician and these two together shall select a third physician, whose determination as to disability shall be binding on all parties; d. At the election of the Company, upon written notice of termination;or e. At the election of the Employee, upon written notice to the Company of not less than six months. 5. EFFECT OF TERMINATION. a. TERMINATION FOR CAUSE OR AT ELECTION OF EITHER PARTY. In the event the Employee's employment is terminated for cause pursuant to Section 4.2 or at the election of the Employee pursuant to Section 4.5, the Company shall pay to the Employee the compensation and benefits otherwise payable to him under Section 3 through the last day of his actual employment by the Company. b. TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment is terminated by death or because of disability pursuant to Section 4.3, the Company shall pay to the estate of the Employee or to the Employee, as the case may be, the compensation which would otherwise be payable to the Employee up to the end of the month in which the termination of his employment because of death or disability occurs. c. 0TERMINATION WITHOUT CAUSE. In the event the Employee's employment is terminated without cause pursuant to Section 4.4, the Company shall pay to the Employee compensation and benefits for a period of six months from the last day of the Employee's actual employment by the Company. d. SURVIVAL. The provisions of Sections 6 and 7 shall survive the termination of this Agreement. 3 4 6. NON-COMPETE. i. During the Employment Period and for a period of one year after the termination or expiration thereof, the Employee will not directly or indirectly: (1) as an individual proprietor, partner, stockholder, officer, employee, director, joint venturer, investor, lender, or in any other capacity whatsoever (other than as the holder of not more than one percent (1%) of the total outstanding stock of a publicly held company), engage in the business of, or accept employment with a business which is engaged in the business of, developing, producing, marketing or selling products of the kind or type developed or being developed, produced, marketed or sold by the Company while the Employee was employed by the Company; and the Employee acknowledges that the following companies are major competitors of the Company, employment with which would be damaging to the Company and would violate this covenant: Virus Research Institute, Inc.; Astra; and Chiron; and PROVIDED, FURTHER, that, subject to the prior approval of the Company, which will not be unreasonably withheld, the Employee may become an employee of a business in the vaccine industry which does not compete with the Company; or (2) recruit, solicit or induce, or attempt to induce, any employee or employees of the Company to terminate their employment with, or otherwise cease their relationship with, the Company; or (3) solicit, divert or take away, or attempt to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of the Company which were contacted, solicited or served by the Employee while employed by the Company. ii. If any restriction set forth in this Section 6 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. iii. The restrictions contained in this Section 6 are necessary for the protection of the business and goodwill of the Company and are considered by the Employee to be reasonable for such purpose. The Employee agrees that any breach of this Section 6 will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief. iv. The Employee's performance of consulting services in conformity with the terms and conditions of Schedule C to this Agreement shall not be deemed to violate the provisions of this Section 6. 7. Proprietary Information And Developments. a. PROPRIETARY INFORMATION AND DEVELOPMENTS. Concurrently, with the execution of this Agreement, the Employee shall execute and deliver an Employee Confidential Information and Invention Assignment Agreement in the form attached hereto as SCHEDULE B. b. OTHER AGREEMENTS. Employee hereby represents that he is not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of his 4 5 employment with the Company or to refrain from competing directly or indirectly, with the business of such previous employer or any other party, except for an Invention and Nondisclosure Agreement with Immulogic Pharmaceuticals Corporation dated October 16, 1993 and a proprietary information and inventions agreement with Aviron. Employee further represents that his performance of all the terms of the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his employment with the Company. 8. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party at the address shown above, or at such other address or addresses as either party shall designate to the other in accordance with this Section 8. 9. PRONOUNS. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 11. AMENDMENT. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Employee. 12. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Massachusetts. 13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Employee are personal and shall not be assigned by him. 14. MISCELLANEOUS. a. No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. b. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. c. In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. ORAVAX, INC. By: /s/ Lance K. Gordon -------------------------- Title: President EMPLOYEE /s/ Robert J. Gerety ----------------------------- Robert J. Gerety 6 7 SCHEDULE A FRINGE BENEFITS The bonus and benefit programs in effect at the Company at the Commencement Date and in which the Employee is eligible to participate are listed in this Schedule A: HEALTH INSURANCE: Prudential Pru-Care Plus; Preferred Provider Option (PPO) Coverage: 100/80 Network/Outside Network; Annual Deductible: $200 per person/$500 per Family when out-of-network services are performed. Enrollment: First day of the next month following date of hire. Fully Paid by OraVax, Inc. DENTAL INSURANCE: Delta Dental Plan of Massachusetts; Preferred Provider Option (Approximately 95 percent of all dentists in MA participate in the plan). Coverage: 100%, 100%, 50% Type I, Type II, Type III; Annual Deductible: $25 per person/$75 per family on Type II and III Three services only. Enrollment: First day of the next month following date of hire. Fully Paid by OraVax, Inc. TERM LIFE INSURANCE: In lieu of the customary term life insurance plan for executives, the Company has agreed to assume payment of the premiums on existing policies as set forth in Section 3.2 of the Employment Agreement. BONUS. The Employee shall participate annually in the Company's bonus program for executives. There is no written bonus plan. LONG TERM DISABILITY: Available upon loss of employment greater than 90 days due to illness or injury. Monthly Benefit: 60% of monthly earnings to a maximum of $10,000 per month. Enrollment: One completion of 90 days full-time service. Fully paid by OraVax, Inc. VOLUNTARY LONG TERM DISABILITY: Voluntary participation whereby through company "gross-up" of payroll, the premiums are treated "as if paid" by the employee. Employees pay only the taxes on premiums resulting in significantly reduced income taxes on any proceeds of the policy. GROUP TERM TRAVEL/ACCIDENT INSURANCE: Available to all full-time employees traveling on corporate business. Benefit: $100,000 per employee payable to the designated beneficiary. Fully Paid by OraVax, Inc. DEPENDENT CARE: Tax-based program designed for employees to withhold gross earnings on a pre-tax basis to be reimbursed for qualified child or dependent day care expenses, resulting in up to $5,000 of earnings being income tax free. ORAVAX 401(K) PLAN: Allows employees to set aside up to 15% of pre-tax gross earnings free of Federal and State Tax Withholding in the plan. Available to all employees after three months of service. Enrollment: July 1 and January 1. OraVax, Inc. current makes a matching contribution of 50 percent of the first 6% of gross pay, contributed in shares of OraVax, Inc. Common Stock. EMPLOYEE STOCK PURCHASE PLAN: Allows employees the opportunity to purchase company stock through payroll deductions during two annual offering two annual offering periods 8 per year. The offering periods are 1 April to 30 September and 1 October to 31 March. The contribution range for the program is 1 to 15 percent. The stock is purchased at a 15 percent discount from the lower price at the beginning of the period or at the end of the offering period. Participants are required to open an account with DLJ Securities Corporation in order to participate. Available to employee after three months of full-time employment. Enrollment: 1 April and 1 October. TUITION REIMBURSEMENT: OraVax will reimburse employees for expenses incurred with continuing education up to the IRS limits. The course must be preapproved by Company management and completed with a grade of B or better for consideration. 50% of tuition and books for unrelated courses. 100% of tuition and books for accredited courses that are directly related to an employee's position within the company. PARKING: Each full-time employee is entitled to one parking pass for parking in the Forest City lots. The company pays the $85 per month cost of the parking pass. SHUTTLE SERVICE: Forest City Management provides a complimentary shuttle service to and from Central Square daily for MBTA buses and subway service. This service makes regular runs during select business hours and is available "on-call after hours. The above are summaries only. In the event of discrepancy, the plan document will govern the program. 9 SCHEDULE B EMPLOYEE CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT As a condition of my employment with OraVax, Inc., its subsidiaries, affiliates, successors or assigns (together, the "Company"), and in consideration of my employment with the Company and my receipt of the compensation now and hereafter paid to me by Company, I agree to the following: 1. CONFIDENTIAL INFORMATION. (a) INFORMATION. I agree at all times during the term of my employment and thereafter, to hold in strictest confidence, and not to use, except for the benefit of the Company, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any Confidential Information of the Company. I understand that "Confidential Information" means any Company proprietary information, technical data, trade secrets or know-how, including, but not limited to, research, product plans, products, projects, services, customer lists and customers (including, but not limited to, customers of the Company on whom I called or with whom I became acquainted during the term of my employment), markets, software, developments, inventions, processes, methods, techniques, formulas, compositions, compounds, technology, designs, drawings, research data, clinical data, hardware configuration information, marketing, finances or other business information disclosed to me by the Company either directly or indirectly in writing, orally or by drawings or observation of parts or equipment. I further understand that Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of mine or of others who were under confidentiality obligations as to the item or items involved. (b) FORMER EMPLOYER INFORMATION. I agree that I will not, during my employment with the Company, improperly use or disclose any proprietary information or trade secrets of any former or concurrent employer or other person or entity and that I will not bring onto the premises of the Company any unpublished documents or proprietary information belonging to any such employer, person or entity unless consented to in writing by such employer, person or entity. (c) THIRD PARTY INFORMATION. I recognize that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. I agree to hold all such confidential or proprietary information in the strictest confidence during the term of my employment and thereafter and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out my work for the Company consistent with the Company's agreement with such third party. 2. INVENTIONS. (a) INVENTIONS RETAINED AND LICENSED. I have attached hereto, as Exhibit A, a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by me prior to my employment with the Company (collectively referred to as "Prior Inventions"), which belong to me, which relate to the Company's proposed business, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, I represent that there are no such Prior Inventions. If in the course of my employment with the Company, I incorporate into a Company product, process or machine a Prior Invention owned by me or in which I have an interest, the Company 10 is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such Prior Invention as part of or in connection with such product, process or machine. (b) ASSIGNMENT OF INVENTIONS. I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, original works of authorship, developments, discoveries, methods, concepts, improvements or trade secrets, whether or not patentable or registrable under copyright or similar laws, and all related patents, patent applications, copyrights and copyright applications which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company, whether or not during normal working hours or on the premises of the Company (collectively referred to as ("Invention")). I further acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of and during the period of my employment with the Company and which are protectible by copyright are "works made for hire," as that term is defined in the United States Copyright Act. This Section 2(b) shall not apply to Inventions which do not relate to the present or planned research and development of the Company and which are made and concerned by the Employee not during normal working hours, not on the Company's premises and not using the Company's tools, devices, equipment or Proprietary Information. (c) INVENTIONS ASSIGNED TO THE UNITED STATES. I agree to assign to the United States government all my right, title, and interest in and to any and all Inventions whenever such full title is required to be in the United States by a contract between the Company and the United States or any of its agencies. (d) MAINTENANCE OF RECORDS. I agree to keep and maintain adequate and current written records of all Inventions made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches, drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times. (e) PATENT AND COPYRIGHT REGISTRATIONS. I agree to assist the Company, or its designee, at the Company's expense, in every proper way to secure the Company's rights in the Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which the Company shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to the Company, its successors, assigns and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. I further agree that my obligation to execute or cause to be executed, when it is in my power to do so, any such instrument or papers shall continue after the termination of this Agreement. If the Company is unable because of my mental or physical incapacity or for any other reason to secure my signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Inventions or original works of authorship assigned to the Company as above, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for an in my behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by me. 11 3. RETURNING COMPANY DOCUMENTS. I agree that, at the time of leaving the employ of the Company, I will deliver to the Company (and will not keep in my possession, recreate or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items developed by me pursuant to my employment with the Company or otherwise belonging to the Company, its successors or assigns. In the event of the termination of my employment, I agree to sign and deliver the "Termination Certification" attached hereto as EXHIBIT B. 4. NOTIFICATION TO NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby grant consent to notification by the Company to my new employer about my rights and obligations under this Agreement. 5. REPRESENTATIONS. I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any oral or written agreement in conflict herewith. 6. GENERAL PROVISIONS (a) GOVERNING LAW. This Agreement will be governed by the laws of the Commonwealth of Massachusetts. (b) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding between the Company and me relating to the subject matter herein and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this agreement, will be effective unless in writing signed by the party to be charged. No delay or omission by the Company in exercising any right under this Agreement will operate as a waiver of this or any other right. A waiver or consent given by the Company on any one occasion is effective only in that instance and will not be construed as a bar or waiver of any right on any other occasion. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. (c) SEVERABILITY. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect. (d) SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. (e) The restrictions contained in this Agreement are necessary for the protection of the business and goodwill of the Company and are considered by you to be reasonable for such purpose. You agree that any breach of this Agreement will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief. 12 IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date set forth below. Date: ____________________________ ___________________________________ Signature ___________________________________ Name of Employee (typed or printed) Acknowledged and Agreed to: _______________________________ by: Lance K. Gordon, President OraVax, Inc. 13 EXHIBIT A LIST OF PRIOR INVENTIONS AND ORIGINAL WORKS OF AUTHORSHIP Identifying Number Title Date Of Brief Description ----- ---- -------------------- _____ No inventions or improvements _____ Additional Sheets Attached Signature of Employee:___________________ Print Name of Employee:__________________ Date: _____________________ 14 EXHIBIT B ORAVAX, INC. TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to OraVax, Inc., its subsidiaries, affiliates, successors or assigns (together, the "Company"). I further certify that I have complied with all the terms of the Company's Employee Confidential Information and Invention Assignment Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that agreement. I further agree that, in compliance with the Employee Confidential Information and Invention Assignment Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants or licensees. I further agree that for one year from this date, I will not hire any employees of the Company and I will not solicit, induce, recruit or encourage any of the Company's employees to leave their employment. Date: ____________________________ (Employee's Signature) ____________________________ (Type/Print Employee's Name) 15 SCHEDULE C CONSULTING ENGAGEMENTS Notwithstanding the provisions of Section 2 of this Agreement, the Employee shall be permitted to act as an advisor to his former employer, Immulogic Pharmaceutical Corporation, after the date of this Agreement and to perform other consulting services, from time to time, with businesses not in competition with the Company, subject to the approval of the Company's President. In performing such permitted consulting services, the Employee (i) must not engage in activities which would violate the terms of Section 6(a) of this Agreement, and (ii) must schedule his consulting work so as not to interfere with the performance of his duties for the Company. EX-23.1 4 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of OraVax, Inc. on Forms S-8 (File Nos. 33-94986, 33-94988, 33-94990 and 33-94992) and Form S-3 (File No. 333-45637) of our report, dated March 27, 1998, on our audits of the consolidated financial statements of OraVax, Inc. as of December 31, 1997, and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. We also consent to the incorporation by reference in those registration statements of our report, dated March 27, 1998, on our audit of the combined financial statements of OraVax Merieux Co. and Merieux OraVax Co. (both development stage enterprises) as of December 31, 1997 and 1996, and for the year ended December 31, 1996 and the period from inception (March 31, 1995) through December 31, 1995 and cumulative from inception (March 31, 1995) through December 31, 1997, which report is also included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND, L.L.P. Boston, Massachusetts March 31, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 DEC-31-1997 1 10,274 1,448 1,425 0 0 14,098 7,669 4,415 17,344 6,261 0 0 5,601 10 4,174 17,344 0 8,853 0 18,011 6,236 0 418 (15,812) 0 (15,812) 0 0 0 (15,812) (1.58) (1.58)
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