Technology keeps Vical moving; company is 'quietly building value on its vaccine franchise'.

Biotechnology companies are known for their entrepreneurial spirit, resilience, and their chameleon-like ability to reinvent themselves when times get tough.

San Diego-based vaccine developer Vical Inc. is no exception.

In its 16-year existence, publicly held Vical has changed its scientific focus at least three times, weathered clinical disappointments, and survived financial droughts.

Today, the firm is nowhere near profitability, has no products on the market, and none in the pipeline that could go up for Food and Drug Administration approval any time soon.

Yet despite all that, Vical keeps going strong. And Vijay B. Samant, who was recruited from Merck's vaccine unit to become Vical's president and chief executive in November 2000. stands firmly behind the company's technology.

In his view, the beauty of Vical's "DNA delivery technology" lies in its wide applications. The technology can be used for making vaccines, cancer therapies, and therapeutic proteins, Samant said.

Though the technology platform has yet to translate into a marketable product, Samant is chasing FDA success with a whole slew of experimental vaccines for infectious diseases.

For example, Vical's own programs for anthrax and CMV (cytomegalovirus) for transplant patients are poised for human testing this year.

The firm's government and corporate partnerships target multiple diseases, including malaria, AIDS, Ebola, and West Nile Virus.

The firm also has an ongoing Phase II trial testing its own cancer drug Allovectin-7, which disappointed in a Phase III trial in late-stage melanoma patients.

"We want to work on vaccines where there is a medical need, a commercial market and where the clinical trials are small," Samant said. "For much larger targets we'll partner with larger companies, such as Merck for HIV, because we don't have the resources."

It was Samant's decision, shortly after his arrival in 2000, to move Vical's focus from DNA-based therapeutic vaccines to infectious disease vaccines where he felt Vical's scientists had the most expertise.

Eric Schmidt, an analyst with SG Cowen Securities Corp. in New York, gave another possible reason for the directional change.

In the March 11 issue of BioWorld Today, a biotechnology newsletter, Schmidt was quoted as saying that "investors have taken a negative view of (Vical's) therapeutics because of past failures."

Analyst Still Upbeat

Vical last year discontinued a Phase II trial of Leuvectin in kidney cancer. In 2002, Allovectin failed to meet its primary endpoint in a 200-patient trial for melanoma.

Still, Schmidt remains upbeat about Allovectin. In his most recent analysis report on Vical from July 31, Schmidt wrote that "despite the disappointing Phase III results, physician interest in the product remains strong, leading Vical to continue developing higher doses (2mg, roughly 100 x higher) of Allovectin-7 in Phase II studies."

His positivism goes beyond Allovectin:

"Though Vical's stock lacks near-term triggers, management is quietly building value on its vaccine franchise," Schmidt wrote.

That is in spite of Vical's disappointing second-quarter earnings

Schmidt expected a $6.3 million net loss for the quarter, slightly less than the actual $6.9 million net loss reported by Vical.

Total revenue of $600,000 also came up short; Schmidt expected $2.3 million for the quarter. Management blamed the shortfall on "revenue recognition issues."

Vical ended the quarter with $98 million in cash and cash equivalents.

Schmidt left his projected net loss of $26.6 million and $1.32 per share for the year unchanged.

Two Vaccines On Track

Samant said Vical burned $17 million in both 2001 and 2002, and forecast a similar burn rate for 2003.

Vical is on track to test its anthrax and CMV vaccines in humans late this year, he said.

News of encouraging small animal data and plans to move the DNA anthrax vaccine into humans sat well with investors on March 11.

Investors boosted the firm's stock 26 percent on the news, or 58 cents, to close at $2.81.

Collaborating with Ohio State University. the vaccine showed in rabbits that "it can offer equal or greater protection" against anthrax than the available vaccine, Schmidt wrote. Vical's anthrax research is supported by a $5.7 million Small Business Innovation Research (SBIR) grant from the National Institutes of Health in Bethesda, Md.

Samant believes Vical's anthrax vaccine is superior to the currently available vaccine made by BioPort Corp. of Lansing, Mich.

For one, BioPort's vaccine requires six injections over an 18-month period, confers immunity over weeks, and has side-effects. Vical aims for two injections, he said.

He hopes to show that the vaccine can elicit an immune response, or neutralize antibodies to anthrax, in humans. A safety study in a handful of people is also required by regulators.

First With Anthrax Drug?

Because it would be unethical to infect humans with anthrax to test a vaccine, the FDA instituted a "two-animal rule."

The rule requires that the vaccine must prove it is safe and effective in two animals before it can be tested for safety in humans.

No vaccine has been approved under the two-animal rule. Samant hopes Vical's anthrax vaccine will be first.

But he is not alone. Brisbane, Calif.-based VaxGen Inc. and Needham, Mass.-based Avant Immunotherapeutics Inc. are also working on anthrax vaccines thanks to government money.

But Vical isn't banking on anthrax alone. A vaccine for CMV is also in the works.

Schmidt noted in his report that about 30 to 60 percent of transplant patients succumb to CMV infection, which often results in transplant rejection, other serious illness, or death.

Vical hopes to start testing the vaccine in patients undergoing bone marrow transplant and solid organ transplant surgery by year-end.

There is no existing CMV vaccine and the medical need is huge, Samant said.

Vical's strategy is to develop smaller programs in-house and partner for the bigger targets requiring more financial resources.

The company's current corporate partners include Merck and Co. Inc. for an AIDS vaccine, Johnson & Johnson (Centocor), and Aventis Pasteur for cancer and infections disease vaccines. These programs have generated $60 million in milestone payments over the last seven years, and $10 million in manufacturing revenue over the last five years, Samant said.

Vical also relies on government contracts to boost its revenue income and cash.

In July, Vical announced the NIH placed a manufacturing order for an experimental DNA vaccine against West Nile virus.

Vical owns the rights to commercialize it.

The firm also works with the U.S. Navy on a malaria vaccine and with the NIH on Ebola.

Given the many uncertainties in drug development, Allovectin's future is unclear.

At the American Society of Clinical Ontology meeting in June, Vical presented encouraging interim data from a 127-patient Phase II study.

The next results are expected for the second quarter of 2004. "Then we'll discuss the next steps with the FDA," Samant said.

Vical Inc.

Founded: 1987

Earnings: For the six months ended June 30, 2003, Vical had revenues of $1.5 million on a net loss of $13.9 million, or 69 cents a share.

Employees: 160

Location: 10390 Pacific Center Court, San Diego

Business: Vaccine developer with programs in anthrax, Ebola, West Nile virus, HIV, CMV, and other diseases.