SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File No. 0-27072
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
Common Stock, $.001 par value
Class A Common Stock Redeemable
Purchase Warrant
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities and
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
this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates
at December 31, 1999 was $378,349,400. For purposes of this
calculation, it was assumed that all Common Stock is valued at the
closing price of the stock as of March 5, 2000.
The number of shares of the registrant's Common Stock outstanding
as of December 31, 1999 was 27,806,572.
DOCUMENTS INCORPORATED BY REFERENC
Registrant's definitive Proxy Statement which will be filed on or
before July 12, 2000 with the Securities and Exchange Commission in
connection with Registrant's 1999 annual meeting of stockholders is
incorporated by reference into Part III of this Report as well as
certain exhibits filed with the Registrant's Registration Statement
on Form S-1 (No. 33-93314).
ITEM 1. Business
General
In the course of almost three decades Hemsipherx Biopharma, Inc.
(the Company) has established a strong platform of laboratory, pre-clinical
and clinical data for the purpose of successfully
commercializing its portfolio of nucleic acid drugs for the
treatment of viral diseases, immune system dysfunction and certain
cancers. The Company's proprietary drug technology utilizes
specifically configured ribonucleic acid (RNA). The Company's lead
double-stranded RNA drug product, trademarked Ampligen , which is
administered intravenously, is in human clinical development for
various therapeutic indications. Ampligen is presently undergoing
Phase III clinical trials in the United States and Europe for the
treatment of Myalgic Encephalomyelitis/Chronic Fatigue Syndrome
("ME/CFS"). Based on the results of pre-clinical studies and
clinical trials, Hemispherx believes that Ampligen may have broad-spectrum
anti-viral and anti-cancer activities. Hemispherx business
strategy is designed around seeking the required regulatory
approvals which will allow the progressive introduction of Ampligen
and other compounds based on similar mechanisms of action.
The Company was incorporated in Maryland in 1966 under the name HEM
Research, Inc., and originally served as a supplier of research
support products. The Company's business was redirected in the
early 1980's to the development of nucleic acid pharmaceutical
technology and the commercialization of RNA drugs. The Company was
reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp., in 1991 and to Hemispherx, BioPharma, Inc.,
in June 1995. The Company has three domestic subsidiaries BioPro
Corp., BioAegean Corp., and Core BioTech Corp., all of which are
incorporated in Delaware. Our foreign subsidiary, Hemispherx
BioPharm-Europe, was established in Belgium in 1998. The Company's
principal executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103, and its telephone
number is (215) 988-0080.
The Company holds more than 300 patents worldwide, with over 80
additional patent applications pending to provide further
proprietary protection in various international markets. The U.S.
FDA has granted the Company "Orphan Drug Status" for its nucleic
acid-derived therapeutics for CFS/ME, HIV and renal cell carcinoma
and malignant melanoma. Orphan Drug Status grants protection
against competition for a period of seven years following FDA
approval, as well as certain tax incentives. While the Company's
clinical advancements to date exceed the vast majority of
biotechnology companies (in a universe of approximately 1,300
companies) no assurance can be given that any of these
programs will lead inevitably to major commercial success and/or
further regulatory advances.
The Company outsources significant components of its research and
development, manufacturing, marketing and distribution while
maintaining tight control over the entire process through 'system
management'. A portion of the Company's research and development
is provided under contract with scientists and technicians who are
not employed by the Company but who are employed by academic
institutions. The Company also draws upon the expertise of outside,
part-time consultants from time to time.
The efficacy and safety of Ampligen is currently being examined for
the treatment of ME/CFS in a confirmatory Phase III multicenter,
placebo-controlled, randomized, double-blind clinical trial in the
United States. The Company plans to enroll up to 230 ME/CFS
patients in this clinical trial. Other ME/CFS clinical efforts
include the Cost Recovery Treatment Programs underway in the United
States, Canada, Belgium and Austria. In late 1999, the Company
announced the roll-out of a new pan-European, expanded access cost
recovery treatment program for severely ill ME/CFS patients. This
program was implemented in response to growing requests from
physicians and patients. The Company will work with certain
physicians and medical centers seeking regulatory approval to
administer Ampligen to severely ill patients.
In addition to the ME/CFS clinical effort, the Company is ramping
up its focus on HIV and the complications of AIDS. A potential
effect of Ampligen may lie in treating HIV patients, especially
those with a multidrug resistant virus. The Company is developing
clinical programs with Anderson Clinical Research designed to
address the growing problem of multi-drug resistance found in
battling the AIDS epidemic in the United States and the rest of the
world. Anderson Clinical Research is based in Pittsburgh and is a
renowned clinical research organization that specializes in
sponsoring clinical trials in AIDS and related immunological
disorders. The clinical programs being developed are a direct
outgrowth of data obtained in comprehensive ex vivo testing
sponsored by the Company through a non-restricted research grant at
the University of California at Irvine as well as a research
contract at the California Institute of Molecular Medicine, based
on leadership provided by an expert in HIV from Vanderbilt
University School of Medicine in Nashville. The focus of this
effort is to evaluate the potential of RNA technology to be used in
conjunction with approved antiviral "cocktails" to overcome the
emergence of multi-drug resistant HIV strains. Because of the
complexity of existing multiday regimens for treating HIV, the
Company may elect initially to treat individual patients brought to
its attention (on an emergency basis) by specific physicians rather
than to implement a standard protocol
involving a group of patients authorized by regulatory authorities.
Other programs will be established to determine the potential of RNA
technology in treating other chronic viruses including hepatitis
B and C.
The development of the Company's products has required and will
continue to require the commitment of substantial resources to
complete the time-consuming research, preclinical development, and
clinical trials necessary to bring pharmaceutical products to market
and establish commercial production and marketing capabilities.
Accordingly, the Company may need to raise additional funds through
additional equity or debt financing, collaborative arrangements with
corporate partners, off balance sheet financing or from other
sources in order to complete the necessary clinical trials and the
regulatory approval processes and begin commercializing its
products. There can be no assurances that the Company will be
successful in obtaining regulatory approval.
ME/CFS
Chronic Fatigue Syndrome (ME/CFS), also known as Chronic Fatigue and
Immune Dysfunctional Syndrome (CFIDS) or, in Europe, Myalgic
Encephalomyelitis (ME) is a debilitating disease that has been
difficult to diagnose and for which, at present, there is no cure.
People suffering from this illness experience amongst other, a
constant tiredness, recurring dull headaches, joint and muscle
aches, a feeling of feverishness and chills without fever,
depression, difficulty in concentrating on tasks, and tender lymph
glands. Central nervous symptoms include memory loss and dementia.
In October, 1998, the Company initiated, with the U.S. Food and Drug
Administration ("FDA") authorization, a confirmatory, double-blind,
placebo-controlled clinical study with Poly I:Poly C12U (Ampligen )
in patients with severely debilitating Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS). The objective
of this confirmatory Phase III clinical study is to evaluate the
safety and efficacy of Ampligen as a treatment for ME/CFS.
As of February 29, 2000, ten clinical investigators, at various
medical facilities throughout the U.S., were recruiting patients for
this clinical study. These clinical investigators have recruited
and enrolled more than 60 per cent of the required 230 patients
needed to complete this clinical study. The Company expects to
engage the services of several additional clinical investigators
to assist in the recruitment of the additional patients needed to
participate in this study.
In March, 1999 the U.S. Food and Drug Administration authorized the
Company to expand it's ME/CFS Cost Recovery Treatment Program to
provide therapy to 100
active patients. Under this clinical
program, the enrolled patients may pay the Company for the cost of
the Ampligen doses infused. This usually totals approximately
$7,200 for a 24 week treatment program. Approximately 82 per cent
of the patients who enter the program opt to extend their therapy
by an additional 24 weeks with the consent of their health care
providers. In the twelve months ending December 31, 1999, the
Company has received $391,681 in reimbursement for Ampligen used
under this plan from the U.S. component of ME/CFS treatment
protocols. Overall income from these programs was $678,248 for the
twelve month period, which includes Europe and Canada.
The Company has established strategic relationships with three other
companies to provide clinical/pharmacy support services and to
facilitate the conduct of its clinical studies according to Good
Clinical Practice ("GCP") standards. Two entities, Gentiva Health
Services (formerly Olsten Health Services) and Clinical Studies
Management Group provide clinical monitors who verify the accuracy
of the data collected by the clinical investigators for ultimate
analysis by the Company. Additionally, a third entity consisting
primarily of exercise physiologists, WorkWell, a company comprised
of professional exercise physiologists, provides exercise
physiologists to conduct standardized exercise tolerance and oxygen
consumption tests at the various clinical facilities across the
United States. The Company believes that it has in place various
corporate relationships and programs to insure the quality of data
collection to a high international regulatory standard.
The ME/CFS Cost Recovery Treatment Program in Belgium was started
in 1994 with the approval of the Belgium Regulatory authorities.
Since its inception, over 120 patients have enrolled in this
program. Clinical data being collected in the treatment of these
ME/CFS patients will be of support within the European Medical
Evaluation Agency ("EMEA") Drug Approval Application and in other
regulatory jurisdictions. This program is being expanded to several
other affiliated hospitals in the Brussels area and clinical experts
in this disease category have been identified in other European
countries to establish similar clinical research/treatment centers
for ME/CFS. A similar program in Austria is undergoing expansion.
Recently, the physicians involved in this program were brought
together for a three day conference to share clinical results and
to plan further clinical collaborations in the U.S., Canada and
Europe.
ME/CFS was also given official recognition by the U.S. Social
Security Administration, rendering ME/CFS patient potentially
eligible for disability benefits and heightening awareness of this
debilitating disease in the medical community. A scientific article
by independent academicians on the accurate laboratory diagnosis of
CFS was published in February, 2000 in a peer-reviewed
journal. The U.S. Centers for Disease Control (Atlanta, GA)
reconfirmed its research commitment to CFS following an audit
by the U.S. Government Accounting Office (GAO) which was announced
approximately July 28, 1999.
The Company has entered into a research collaboration with RED
Laboratories, N.V. (`RED'), a Belgium company dedicated to the
development and commercialization of ME/CFS diagnostics. RED
reported significant progress in developing a diagnostic test
(designated REDD) for ME/CFS. The testing platform is based on the
measurement of an abnormal form of protein RNase L, an antiviral
enzyme found in the white blood cells of CFS/ME patients. This
abnormal enzyme was first discovered in 1996 by researchers at
Temple University who have been actively collaborated with The
Company's scientists for a number of years. It is believed that the
new RED diagnostic test may identify up to 80-90 per cent of CFS/ME
patients by recognizing a defect caused by the disease. The test
may enable doctors to more quickly identify CFS/ME patients and
start immediate treatment to help facilitate a positive medical
outcome for the patient as well as a cost-effective solution for the
health-care provider. Hemispherx has independently filed patents
on certain aspects of the diagnostic technology in the U.S. and
abroad.
Also, preclinical collaborative studies are being conducted on Gulf
War Syndrome. Patients with this illness appear to have certain
symptoms similar to patients with ME/CFS.
HIV
While the Company is currently concentrating on the use of Ampligen
as a treatment for ME/CFS, recent developments in the healthcare
community with respect to future care and treatment of HIV patients
is now prompting the Company to reexamine and consider the
acceleration of developing RNA technologies for the treatment of
patients with HIV.
Today, patients infected with HIV receive a number of different
combinations of anti-retroviral compounds (so called "Cocktails")
that target the essential viral enzymes, including reverse
transcriptase and protease. However, it appears that after some
period of time, the HIV virus may become resistant to these
antiviral drugs and that drug resistance profile is a critical
obstacle to the long-term efficacy of present 'cocktail' therapies
for HIV.
Most recently, HIV strains which are resistant to essentially all
of the currently available anti-retroviral drugs are now being
increasingly reported in patients in the U.S. who have received
highly active anti-retroviral therapy,
termed "HAART." Many HIV patients who receive HAART (including
a protease inhibitor) may encounter virologic failure within one year.
According to independent sources, of an estimated 100,000 new patients
in the U.S.A. initiating HAART last year, there were approximately
150,000 "treatment switches," evidencing significant problems with the
regimens. Moreover, the presence of latently infected, resting
immune cells termed CD4+ T cells carrying replication-competent HIV
has been demonstrated in patients receiving HAART.
Ampligen may have certain potential, as an adjunct to HAART to
restore certain functional components of the immune process which
becomes deficient in HIV disease. Second, Ampligen may have
potential to mitigate the deterioration in CD4 count when patients
are failing HAART therapy. Third, Ampligen may have potential to
assist HAART therapy because of its apparent synergistic activity
with AZT and possibly other cocktail components (these studies are
underway). These presumptive benefits are being evaluated by the
Company in either ongoing ex vivo or in proposed in vivo clinical
programs. The molecular basis of the putative drug synergism has
not yet been established at the clinical level and will require
clinical studies which have not been initiated.
In conjunction with AZT, Ampligen infusion therapy was historically
well tolerated in the initial clinical tests, some of which has been
published in peer reviewed journals. Thus, overall safety
assessments supported a reasonable safety profile of this drug
combination consisting of an antiretroviral agent (AZT) utilized in
conjunction with a specific dsRNA (Ampligen ). Studies are now
being considered to combine Ampligen with other reverse
transcriptase inhibitors of HIV as well as protease inhibitors of
HIV. Ex vivo tests are presently being conducted at various
academic and industrial laboratories around the U.S.A. via research
agreements and corporate partnerships recently initiated by the
Company.
The Company is working with Anderson Clinical Research to develop
immunologically based Clinical Programs that are designed to address
this growing problem of multi-drug resistance found in battling
AIDS. These clinical programs are an outgrowth of comprehensive ex
vivo testing recently sponsored by the Company which examined the
relative antiviral strengths of fourteen FDA approved antivirals.
The results of these tests were presented in part at the IBT AIDS
meetings in Boston, MA (December, 1999) and will be presented in
full at the upcoming 13th Annual International Antiviral Conference
in Baltimore, MD in April 2000. These studies were funded in part
by unrestricted grants from the Company.
Anderson Clinical Research is a recognized clinical research
organization that specializes in sponsoring clinical trials in AIDS
and related immunological disorders. This experimental approach may
represent one of the first times that
immunomodulatory drugs are being overlaid in a systematic manner on
the approved antiviral "Cocktails" in an effort to overcome the growth
of emerging drug resistant HIV strains. No assurance can be given that
the outcome of these clinical studies will be similar to the ex vivo
studies or dates upon which these studies will receive regulatory
authorization to commence.
Manufacturing
The Company outsources the manufacturing of Ampligen to certain
contractor facilities in the United States and South Africa while
maintaining full quality control and supervision of the process.
Nucleic Acid polymers constitute the raw materials used in the
production of Ampligen. The Company acquires its raw materials from
Ribotech, Ltd., a subsidiary of Bioclones Proprietary, Ltd., and
Pharmacia Biotech, a former division of Pharmacia Upjohn which holds
a minority equity interest in the Company. Bioclones Proprietary,
Ltd. is a strategic partner with the Company that operates Ribotech,
Ltd. in South Africa. Two manufacturers in the United States are
utilized to process the raw materials and produce clinical grade
Ampligen.
Until recently, the Company has distributed Ampligen in the form of
a freeze-dried powder to be formulated by pharmacists at the site
of use. The Company has perfected a production process to produce
ready to use liquid Ampligen in a dosage form which will mainly be
used upon commercial approval of Ampligen. The Company has engaged
the services of Schering-Plough Products to mass produce ready-to-use
Ampligen doses. Schering-Plough has completed several pilot
runs which meets all required product specifications. Progressively
larger manufacturing runs are planned in the first half of 2000.
After appropriate quality assurance testing, the product from these
runs will be used for clinical purposes.
Bioclones (PTY) Ltd. has also successfully completed a series of
production runs for liquid Ampligen doses. This was done at
Ribotech's facility in South Africa that has inspection approval by
both the Food and Drug Administration of the United States and the
Medicine Control Authority of the United Kingdom. Bioclones (PTY)
Ltd. headquartered in South Africa and is the majority owner in
Ribotech, Ltd. (the Company owns 24.9%) which produces most of the
polymers used in manufacturing Ampligen. The licensing agreement
with Bioclones presently includes South Africa, South America,
Ireland, New Zealand and the United Kingdom. Bioclones has recently
initiated limited clinical testing in Great Britain.
European Operations
In 1998, the Company formed a wholly-owned European subsidiary
domiciled in Belgium under the name of Hemispherx Biopharma Europe.
This entity was created to facilitate the European ME/CFS Cost
Recovery Treatment programs as well as conduct ME/CFS clinical
trials in connection with eventually obtaining European approval by
the European Medical Evaluation Agency ("EMEA").
In response to growing requests from physicians and ME/CFS patients
in Europe, the Company is increasing its European Operations to
expand its cost recovery treatment programs into additional European
countries. Presently, Ampligen is available to certain ME/CFS
patients in Belgium and Austria.
The Company plans to establish a network of clinical centers with
experience in evaluating ME/CFS patients. These centers, termed
Fatigue Approved Clinical Treatment Centers (FACT), will be
developed as centers of medical excellence combining the state of
art diagnostic techniques, as well as, well-developed treatment
expertise in treating ME/CFS. The Company believes that
establishment of FACT may assist in obtaining regulatory approval
for the Cost Recovery Treatment Program in the other European
countries.
In December, 1998, the Company filed an initial application with the
(EMEA) for authorization to use Ampligen in the treatment of ME/CFS
in the European Union. The Company submitted extensive data and
analysis in support of the application. The review process by EMEA
has produced ongoing dialogue. The Company has sought an
acceleration of the overall process by requesting certain "special
circumstances" provisions which are being developed by the European
Parliament to accelerate drug availability for certain classes of
severe diseases without adequate treatment. There are no assurances
that the EMEA will accept the "special circumstances" provision to
accelerate their review and approval and no assurances that
commercial approval will be granted.
Hemispherx Biopharma Europe is developing an organization and
infrastructure to expand access to Ampligen while under clinical
development. Initial efforts include recruiting staff to establish
distribution and marketing processes with the immediate focus on
setting up Expanded Access Cost Recovery Treatment Programs of
ME/CFS patients in France, Italy, Spain and Germany. If successful,
this program will allow ME/CFS patients in those countries to have
access to Ampligen prior to the completion of the full commercial
registration process. During this time, the Company would also
realize enhanced revenues from its expanded access programs. Also
this program will allow the Company to have a basic marketing and
distribution system in place.
The Company recently acquired 3 per cent ownership in a Belgium
company, R.E.D. Laboratories, which developed a diagnostic test
designed to detect ME/CFS in patients. The R.E.D. diagnostic test
is in the process of being evaluated in the clinical setting. The
significance of this development is that the test may facilitate the
identification of a subset of ME/CFS sufferers who may be treated
with Ampligen. It is believed that introduction of such a test
might facilitate the regulatory approval process for the use of
Ampligen in treating ME/CFS, as well as identify suitable candidates
for therapy earlier in the disease process. R.E.D. has indicated
it may publish the results of its testing as early as July 2000.
The Company recently presented a comprehensive clinical overview of
its ME/CFS treatment program at "Fatigue 2000", an international
research conference held in London. The Company and its
collaborators have developed a report on the potential
pharmacoeconomics of using Ampligen to treat ME/CFS patients. This
data will eventually be submitted to various regulatory and drug
reimbursement authorities in certain countries making up the
European Union.
In addition, progress was made towards the development of inventory
control and to expand quality assurance facilities in the European
Union. The Company is seeking to identify and/or implement certain
quality control processes, packaging and storage capacity as well
as identifying new distribution channels in Europe.
Pharmacoeconomics
EPI-Q, an independent company based in Indianapolis, IN, conducts
in depth pharmacoeconomic studies, released the results of their
evaluation of the potential economic benefits of Ampligen therapy
versus existing conventional treatment. Their analysis found a
decrease in the number of doses of other medications used and
inpatient hospital treatment days when Ampligen was used in the
treatment of severe ME/CFS patients. Their results were presented
at the Second World Congress on CFS/ME held in Brussels on September
9-12, 1999.
The results of this analysis suggests a significant decrease in the
number of doses of so called concomitant medications (required to
alleviate ME/CFS symptoms) between the treatment and control groups.
The patients receiving Ampligen, the Company's lead compound, also
demonstrated the need for fewer inpatient hospital treatment days
during the 24 weeks study period. According to EPI-Q this effect
would translate into an approximate annualized decrease in hospital
charges alone of $5,806. According to the EPI-Q study, the mean
annualized healthcare charges for the treatment group were $2,097
versus $8,606 for the placebo group. No assurances can be given
that the results of this
pharmacoeconomic study, or any corollary results will result in
reimbursement by healthcare insurance
carriers.
An object of this study was to document the potential
pharmacoeconomic impact of using Ampligen in the treatment of
ME/CFS. This disease frequently leads to persistent disability and
requires frequent intervention by healthcare groups, as well as long
term outpatient treatment of pain and central nervous system
symptoms. Currently, the care of these patients leads to a
significant financial burden to both patients and payers as well as
society in general. Studies by various other health authorities
have placed the potential overall burden of untreated ME/CFS on
society to be in the billions of dollars.
Financing
The development of the Company's products has required and will
continue to require the commitment of substantial resources to
conduct the time-consuming research, preclinical development, and
clinical trials that are necessary to bring pharmaceutical products
to market and to establish commercial-sale production and marketing
capabilities. During the Company's last three fiscal years, the
Company has spent approximately $12,475,031 in research and
development, of which $4,737,058 was expended in the year ended
December 31, 1999.
At the present time, the Company is funding its European subsidiary
from the Company's cash flows. The funding needs of the European
subsidiary could be substantial over the next few years. To address
the funds needed, the Company has engaged an investment banking firm
in Europe to evaluate the prospect of privately placing 20% of the
European subsidiary's equity with outside investors to fund European
operations. This method of acquiring additional funds may not be
needed as investors holding the Class A Redeemable Warrants
(AMEX:HEBws) are exercising their holdings thereby improving the
Company's cash flow and cash position.
Hemispherx Biopharma Europe has an exclusive license on all the
technology and support from the Company concerning Ampligen for the
use of ME/CFS and other applications for all countries of the
European Union (excluding the UK wherein Bioclones has a marketing
license) and Norway, Switzerland, Hungry, Poland, Czechoslovakia,
Russia, Ukraine, Romania, Bulgaria, Slovakia, Turkey, Iceland and
Liechtenstein. There is also an agreement between Hemispherx U.S.
and Hemispherx Europe to ensure that the commercialization of future
technologies can take place under conditions which would properly
incentivize Hemispherx Europe.
As of December 31, 1999, the Company had $8,549,389 in cash and
short term investments. Based on its current operating plan, the
Company expects that anticipated receipt of revenues from the cost
recovery treatment protocols and interest income on unused funds
will be sufficient to meet the Company's operating requirements well
into 2001. In addition, the Company may receive proceeds in the
form of equity from the exercise of shareholder warrants. In 1999,
the Company received $1,923,473 in equity from shareholders
exercising warrants. The amount of additional funding required, if
any, will depend on the timing of regulatory approval and
commercialization of Ampligen.
Accordingly, the Company may raise substantial additional funds
through additional equity or debt financing, collaborative
arrangements with corporate partners, off balance sheet financing
or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin
commercializing its products. If adequate funds are not available
from operations and if the Company is not able to secure additional
sources of financing on acceptable terms, the Company's business
would be materially adversely affected.
Research and Development/Collaborative Agreements
The Company has formed a strategic alliance with Bioclones
Proprietary for manufacturing and international market development
in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen and
Oragen . Bioclones is to pursue regulatory approval in the areas
of its franchise and is required to conduct Hepatitis clinical
trials, based on international GMP and GLP standards.
Bioclones has been given the first right to refusal, subject to
pricing, to manufacture at least one-third of the worldwide sales
requirement of Ampligen and other nucleic acid-derived drugs.
Pursuant to this arrangement, the Company received access to
worldwide markets and commercial-scale manufacturing resources, as
well as a $3 million cash payment from Bioclones, a 24.9% ownership
in a company set up by Bioclones to develop and manufacture RNA
drugs, and royalties of 8% on Bioclones nucleic acid-derived drug
sales in the licensed territories. The Company regularly conducts
quality control audits of the facility.
In the United States, the Company has entered into a strategic
alliance with Gentiva Health Services (formerly known as Olsten
Health Care Services) to develop certain marketing and distribution
capacity for Ampligen to patients suffering from ME/CFS, both in the
cost recovery treatment program as well as the
home infusion market upon commercialization. Gentiva is one of the
nation's largest home health care companies with over 600 offices and
several hundred thousand employees nationwide. Pursuant to the
agreement, Gentiva will be responsible for marketing, distribution,
billing and collecting. Through this arrangement, Hemispherx mitigates
the necessity of incurring significant up-front marketing and
distribution costs. There can be no assurances that this alliance
will develop a significant commercial position in any of its
targeted chronic disease markets.
The Company acquired a series of patents on Oragen , potentially an
oral broad spectrum antiviral, through a licensing agreement with
Temple University. The Company was granted an exclusive worldwide
license from Temple for the Oragen products. Pursuant to the
arrangement, the Company is obligated to pay royalties of 2% to 4%
on sales of Oragen , depending on how much technological assistance
is required of Temple. The Company currently pays minimum royalties
of $30,000 per year to Temple. These compounds have been evaluated
in various academic and government laboratories.
In December, 1999, the Company entered into an agreement with
Biovail Corporation International ("Biovail"). Biovail is an
international full service pharmaceutical company engaged in the
formulation, clinical testing, registration and manufacture of drug
products utilizing advanced drug delivery systems. Biovail is
headquartered in Toronto, Canada. The agreement grants Biovail the
exclusive distributorship of the Company's product in the Canadian
territories subject to certain terms and conditions. In return,
Biovail agrees to conduct certain pre-marketing clinical studies and
market development programs, including without limitation, expansion
of the Emergency Drug Release Program in Canada with respect to the
Company's products. In addition, Biovail agrees to work with the
Company in preparing and filing of a New Drug Submission with
Canadian Regulatory Authorities. Biovail invested several million
dollars in Hemispherx equity at prices above the then current market
price and agreed to make further payments based on reaching certain
regulatory milestones. The Agreement requires Biovail to penetrate
certain market segments at specific rates in order to maintain
market exclusivity.
Competition
There are several publicly held companies that place emphasis on
nucleic acid technology. Some are outlined below from publicly
available documents filed with the Securities and Exchange
Commission.
Gilead Sciences, Inc. (Foster City, California; GILD/NASDAQ). Gilead is
developing nucleotide as well as other innovative antiviral
technologies and is pursuing pre-clinical and clinical development
of a number of therapeutic product candidates for treating certain
viral diseases including, without limitation, cytomegalovirus
retinitis, HIV and Hepatitis B. Gilead reports that they have
investigational drug products in Phase II clinical trials for
treating Hepatitis B and Phase III for treating HIV. The FDA
recently granted a Fast Track designation to a Gilead product, but
marketing approval of this product was subsequently withdrawn.
ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIS/NASDAQ). This
company, founded in 1989, has devoted substantially all of its
resources to research, drug discovery and development programs.
Isis currently has one product, Vitravene, a treatment for CMV
Retinitis in AIDS patients, which has achieved limited market
acceptance in a small commercial market with significant
competition. Isis reports that most of their resources are being
dedicated to applying molecular biology and medicinal chemistry to
discovery and development of drug candidates based upon antisense
technology.
The Company anticipates that it may face increased competition in
the future as new products enter the market and advanced
technologies become available. There can be no assurance that
existing products or new products developed by the Company's
competitors will not be more effective than any that may be
developed by the Company. Competitive products may render the
Company's technology and products obsolete or noncompetitive prior
to the Company's recovering research, development or
commercialization expenses incurred with respect to any such
products.
Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than
the Company. In addition, many of these competitors may have
significantly greater experience than the Company in undertaking
certain aspects of research, preclinical studies and human clinical
trials of new pharmaceutical products, obtaining FDA and other
regulatory approvals, and manufacturing and marketing such products.
Accordingly, the Company's competitors may succeed in
commercializing the products more rapidly or more effectively than
the Company.
Government Regulation
Regulation by governmental authorities in the U.S. and foreign
countries is and will be a significant factor in the manufacture and
marketing of the Company's proposed products and in its ongoing
research and
product development activities. The Company's existing
product and the products of its ongoing research and product
development activities will require regulatory clearances prior to
commercialization. In particular, human new drug products are
subject to rigorous preclinical and clinical testing as a condition
of clearances by the FDA and by similar authorities in foreign
countries. The lengthy process of seeking these approvals, and the
ongoing process of compliance with applicable statutes and
regulations, has required and will continue to require the
expenditure of substantial resources. Any failure by the Company or
its collaborators or licensees to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect the marketing
of any products developed by the Company and its ability to receive
product or royalty revenue. The Company has received orphan drug
designation for certain therapeutic indications which might, under
certain conditions, accelerate the process of drug
commercialization.
The Company has not received a "Fast-Track" designation for any
of its potential therapeutic indications. A Fast-Track
designation by the FDA, while not affecting any clinical
development time per se, has the potential effect of reducing the
regulatory review time by 50 percent (50%) from the time that a
commercial drug application is actually submitted for final
regulatory review. The Company will continue to present data in
support of obtaining a fast-track designation; the Company has
not yet submitted any New Drug Application (NDA) to a North
American regulatory authority. There are no assurances that such
designation will be granted, or if granted, there are no
assurances that such designation will materially increase the
prospect of a successful commercial application. The Company
submitted an emergency treatment protocol for clinically-resistant
HIV patients which was withdrawn by the Company during
the statutory approximately 30 day regulatory review period in
favor of a set of individual physician-generated applications
which are under review. There are no assurances that
authorizations to commence such emergency treatments will be
granted by any regulatory authority or that the resultant
treatments, if any, will support drug efficacy and safety. The
Company also has a Phase II HIV treatment protocol in which the
Company's drug was combined with certain presently available
antiretroviral agents; this application was deemed deficient
because: a) important adverse reactions known to be associated
with these agents [14 approved antivirals] were not adequately
addressed in the protocol and no clinical rationale was provided
for specific choice of antiretroviral drugs included in the
treatment regimen. The Company intends to address these issues
but no assurances can be given that such answers will materially
increase the prospect of a successful study or of a successful
commercial application, if submitted thereafter.
The Company is also subject to various federal, state and local
laws, regulations and recommendations relating to such matters as
safe working conditions,
laboratory and manufacturing practices,
the experimental use of animals and the use of and disposal of
hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in
connection with the Company's research work. The Company believes
that its Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all
material regulations applicable to these activities. However,
the Company cannot give assurances that facilities owned and
operated by third parties, that are utilized in the manufacture
of the Company's products, are in substantial compliance, or if
presently in substantial compliance, will remain so. These
facilities include manufacturing operations in San Juan, Puerto
Rico, Capetown, South Africa, and Columbia, Maryland, and
Melbourne, Australia.
Human Resources
The Company had 48 employees as of February 29, 2000 of which 20 are
full time
and 28 are utilized on a part-time basis. Such parties
are paid on a per diem or monthly basis. Thirty-one of our
employees are engaged in the Company's research, development,
clinical, manufacturing effort, including 2 individuals in Europe.
Twenty of our employees perform regulatory, general administration,
data processing, including biostatistics, financial and investor
relations functions. The Company believes that this arrangement
provides the most efficient approach to drug development at this
point in time. While the Company has been successful in attracting
skilled and experienced scientific personnel, there can be no
assurance that the Company will be able to attract or retain the
necessary qualified employees and/or consultants in the future.
Year 2000 Project
Since mid-1998, the Company has replaced and upgraded all computers
and software programs deemed to be non Y2K compliant. The new
hardware/software used in Administration, Finance and Research &
Development has been tested and proven to be Y2K compliant. The
critical databases have been converted to the new system and are
operating. As a back-up for the first few months, the computer
network was being run in parallel with the new system. The Company
discontinued the parallel operation on December 31, 1999.
As of December 31, 1999, the Company had received assurances from
all critical suppliers/vendors that they were Y2K compliant and that
the Y2K issue would not affect their ability to supply goods and/or
services after December 31, 1999.
The Company has incurred over $200,000 for hardware and software
needed to become Y2K compliant since mid-1998.
The Company has not, and does not expect to experience any
operational or financial problems relating to the Y2K matter.
Executive Officers
The executive officers of the Company, whose terms will expire
at such time as their successors are elected, are as follows:
Name Age Position Background
----------------- --- ------------- -----------------
William A. Carter, M.D., 62 Chairman, Chief HEM Pharmaceuticals Corp.
FACP Executive Officer, (the predecessor company)
President since 1978. Co-inventor of
record on more than 200
patents. A leading
innovator in the
development of human
interferon for a variety of
treatment indications.
Research Development
Awardee of NIH
Robert E. Peterson 63 Chief Financial Vice President of Omni
Officer Group, Inc. (business
consulting). Formerly VP
and CFO of several major
Pepsico Divisions.
David R. Strayer, M.D. 54 Medical Director, Formerly Professor of
Regulatory Affairs Medicine at Allegheny
University of the Health
Sciences. Formerly
Research Associate at NIH.
Carol A. Smith, Ph.D. 48 Director, Virotech International,
Manufacturing Inc., '89-91,
and Process Scientist/Quality Assurance
Development Officer.
Josephine M. Dolhancryk 37 Treasurer, Medical/Business
Assistant Enterprises, '89-90,
Secretary President
Richard Piani 72 Director Principal Delegate for
Industry to the City of
Science and Industry,
Paris, France, a scientific
and educational complex
since 1995. Chairman of
Industrielle du Batiment-
Morin,a building materials
corporation, from 1986-1993.
Professor of
International Strategy at
Paris Dauphine University
from 1984-1994. Law degree
from Faculte de Droit,
Paris Sorbonne. Business
Administration degree from
Ecols des Hautes Etudes
Commerciales, Paris
William Mitchell, M.D., 64 Director Professor of Pathology at
Vanderbilt University
School of Medicine. MD
from Vanderbilt University.
Ph.D. from Johns Hopkins
University, and Fellowships
at Johns Hopkins University
and the University of
Lausanne as an Eleanor
Roosevelt International
Cancer Scholar. Published
over 200 papers dealing
with viruses and anti-viral
drugs. Consultant to the
National Institutes of
Health including service on
the AIDS and Related
Research Review Group.
Served as a director of the
Company from 1987 to 1989.
Ph.D.
Harris Freedman 65 Vice President Business consultant for
for Strategic emerging technology
Alliances companies and private
venture capitalist.
Ransom Etheridge 59 Director Attorney specializing in
commercial and
transactional law. A
Judicial Remedies Award
Scholar. Served as
President of the Tidewater
Arthritis Foundation.
Graduate of Duke
University, the Wharton
School of Business Real
Estate Investment Analysis
Seminar, and the University
of Richmond School of Law.
ITEM 2. Properties
The Company leases and occupies a total of approximately 18,850
square feet of laboratory and office space in two states. The
corporate headquarters in Philadelphia, Pennsylvania are located in
a suite of offices of approximately 15,000 square feet. The
pharmacy, packaging, quality assurance and quality control
laboratories, as well as additional office space, are located in
Rockville, Maryland. These facilities occupy approximately 3,850
square feet, approximately 2,000 of which are dedicated to the
packaging and quality control product release functions. The Company
believes that its Rockville facilities will meet its production
requirements, including sufficient quantities of Ampligen for
planned clinical trials and treatment protocols, through 2000, after
which time it may need to increase its manufacturing capacity either
through third parties or by building or acquiring commercial-scale
facilities.
In addition, the Company has entered into the Bioclones Agreement,
which provided the Company with 24.9 % of the capital stock of
Ribotech, Ltd to develop and operate a new manufacturing facility
which is financed by Bioclones. Manufacturing at the pilot facility
commenced in 1996. The Company expects that Ribotech will start
construction on a new commercial production facility in 2001,
although no assurance can be given that this will occur. The Company
has no obligation to fund this construction.
ITEM 3. Legal Proceedings
Ell & Co., and the Northern Trust Company, as Trustee of the AT&T
Master Pension Trust filed a complaint against the Company in the
Court of Chancery of the State of Delaware in and for New Castle
County on September 23, 1998. This complaint alleges that the
Company breached its contractual obligations as set forth in the
Certificate of Powers, Designations, Preferences and Rights of the
Series E Convertible Stock. The Plaintiff seeks to enforce its
rights to convert 1,500 shares of Series E Preferred Stock into
750,000 shares of freely traded common stock and to recover damages
for its inability to convert the preferred stock when it requested
to do so. Although the Company maintains that the 1,500 shares of
Series E Preferred Stock had been properly redeemed and, therefore,
the plaintiff was not contractually able to effect a proper
conversion into common shares, the Company agreed in December, 1998
to convert the plaintiffs preferred stock to common stock. In
February 2000, the plaintiffs dropped the lawsuit.
On September 30, 1998, the Company filed a multi-count complaint
against Manuel P. Asensio, Asensio & Company, Inc., and others in
the United States District Court for the Eastern District of
Pennsylvania. On October 22, 1998, the Company
amended the complaint to add additional counts and to conform the
complaint to agreed upon dismissals without prejudice as to certain
of the defendants. On August 13, 1999, the Company amended and
supplemented the complaint for a second time to conform the
complaint to court ordered dismissals of certain counts of the
complaint and parties, to add Asensio.com, Inc. (formerly known as
Asensio Holdings, Inc.), the holding company of defendant Asensio
Company Inc., and to add a conspiracy charge against the remaining
defendants and certain unnamed John Does.
The complaint presently contains claims of defamation,
disparagement, tortious interference with existing and prospective
business relations and conspiracy, arising out of the current
defendants' false and defamatory statements. (The complaint further
alleges that defendants defamed and disparaged the Company in
furtherance of a manipulative, deceptive and unlawful short-selling
scheme between August, 1998, and the present.
On April 19, 1999, defendants Asensio and Asensio & Company, Inc.,
filed an answer and counterclaim against the Company. The
counterclaim alleges that on or about September, 1998, and in
response to defendants' strong sell recommendation and other press
releases about Hemispherx and its officers and directors, the
Company made defamatory statements about defendants, including that
defendants' attacks and manipulative short-selling scheme may have
constituted criminal wrongdoing on the part of defendants. The
Company has denied the material allegations of the counterclaim and
is vigorously defending against the counterclaim. In August, 1999,
several of the short sellers in Hemispherx were indicted by the U.S.
Attorney in New York for money laundering and manipulation in
another non-Hemispherx matter. The parties are presently engaged in
discovery with a trial date of May 1, 2000.
In October, 1998, the Company contacted the SEC regarding what it
believed may have been illegal short selling and unlawful market
manipulation in furtherance of the short selling of Manuel P.
Asensio and others. Thereafter, in April, 1999, the Company was
advised by the Securities and Exchange Commission ("SEC") of a
private investigation into various allegations of misrepresentations
by the Company and its officers. Specifically, the SEC sought
information relating to allegations about the Company's
investigational drug application for treatment of various diseases,
results of clinical research, incidence of ME/CFS in the United
States, the Company's patents, and Ampligen's safety and efficacy.
These allegations had also been included by Asensio & Co. in its
various "research reports." The SEC has declined to be more
specific about the nature or substance of the investigation. The
Company is cooperating fully with the investigation.
The Company has also been advised that the NASD has initiated an
investigation into the short selling of Hemispherx Securities (Enf-303).
Asensio has admitted, in deposition testimony in the
Company's litigation against him, that he and his company was the
subject of such an investigation. Hemispherx is also cooperating
with the NASD in its investigation of the short selling of its
stock.
On March 6, 2000, Cook Imaging Corp, et al filed a complaint against
the Company in the United States District Court for the Eastern
District of Pennsylvania. Cook Imaging Corp., asserts that the
Company refuses to pay for certain Ampligen manufacturing efforts by
Cook. The Company maintains that Cook Imaging Corp., did not
perform as required by the contract. The Company plans to respond
to the complaint and defend against the charges.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
In October, 1997, the Company's Common Stock and Class A Warrants
commenced trading on the American Stock Exchange under the symbols
HEB and HEB/ws, respectively. Simultaneously these securities were
delisted from NASDAQ. The securities had traded on NASDAQ since the
IPO in November, 1995.
In February, 1998, the Company filed a Registration Statement with
the Securities and Exchange Commission (SEC) to register the common
stock placed in the September 1997 private placements. The
statement included common stock underlying certain stock purchase
warrants with registration rights.
In July, 1998, the Company's Common Stock and Class A Warrants were
listed on the Berlin Stock Exchange. The shares and warrants will
trade under the symbols HXB and HXBA respectively. The listing on
the Berlin Stock Exchange has been facilitated by Berliner
Freiverkehr, a major German investment banking and brokerage firm,
with assistance from Value Management & Research, GmbH, a European
based Research and Investment Firm.
In April, 1999, the company filed a Registration Statement with the
Securities and Exchange Commission (SEC) to register the common
stock privately placed in July, 1998. In addition, certain warrants
and underlying common stock was included in the Registration.
In June 1999, the Company filed a registration statement on Form S-3
with the SEC registering certain warrants and the shares of Common
Stock underlying those warrants on behalf of certain warrantholders.
The Company has entered into agreements with certain of the
warrantholders providing for, among other things, (a) an escrow and
conditional lockup of one year from the effective date of the
registration statement; and (b) the sale of such warrantholders'
warrants during such one year lockup through an agent or by the
Company at prices set by the warrantholders. On September 29, 1999,
the Registration Statement was amended. This amended document
became effective on October 1, 1999.
In 1999, the Company acquired 290,811 shares of Common Stock on the
open market at an average cost of $6.76 per share. This acquisition
is part of the share buy back program authorized by the Board of
Directors. These shares may be retired in part thereby reducing the
number of shares outstanding. Certain shares of the Company's
Treasury Stock may be utilized to fund acquisitions, strategic
alliances, or to obtain equity positions in other companies in order
to potentially increase the breadth and depth of the Company's drug
technology portfolio including the Company's potential position in
the emerging area of human genomics.
The foregoing private offerings were private transactions and exempt
from registration under section 4(2) of the Securities Act pursuant
to regulation D of the Act. All investors in these transactions are
accredited.
The following table sets forth the high and low list prices for the
Common Stock and the Warrant for the periods indicated as reported
by the American Stock Exchange. Such prices reflect inter-dealer
prices, without retail markup, mark downs or commissions and may not
necessarily represent actual transactions.
COMMON STOCK High Low
Time Period:
January 1, 1998
through
March 31, 1998 4 5/16 3 1/8
April 1, 1998 through
June 30, 1998 4 9/16 2 5/8
July 1, 1998 through
September 30, 1998 13 3/16 4 1/16
October 1, 1998
through
December 31, 1998 9 1/4 5 5/8
January 1, 1999
through
March 31, 1999 7 3/8 4 11/16
April 1, 1999 through
June 30, 1999 10 1/16 5 9/16
July 1, 1999 through
September 30, 1999 8 1/8 5 7/8
October 1, 1999
through
December 31, 1999 10 1/2 6
WARRANTS
Time Period:
January 1, 1998
through
March 31, 1998 1 13/16 1 1/8
April 1, 1998 through
June 30, 1998 1 5/8 1 5/16
July 1, 1998 through
September 30, 1998 8 1/4 1 1/2
October 1, 1998
through
December 31, 1998 5 7/8 2 1/4
January 1, 1999
through
March 31, 1999 3 3/4 1 3/4
April 1, 1999 through
June 30, 1999 6 3/16 2 1/4
July 1, 1999 through
September 30, 1999 4 1/8 2 1/4
October 1, 1999
through
December 31, 1999 6 1/2 4 1/16
As of December 31, 1999 there were approximately 311 holders of
record of the Company's Common Stock. This number was determined
from records maintained by the Company's transfer agent and does not
include beneficial owners of the Company's securities whose
securities are held in the names of various dealers and/or clearing
agencies.
As of December 31, 1999, the Company had approximately 5,480,310
Class A Redeemable Warrants registered and outstanding at an
exercise price of $4.00 per share.
The Company has not recently paid any dividends on its Common Stock.
It is management's intention not to declare or pay dividends on the
Common Stock, but to retain earnings, if any, for the operation and
expansion of the Company's business.
ITEM 6. Selected Financial Data
Year Ended
December 31 1995 1996 1997 1998 1999
Statement of
Operations Data
Net revenues $2,965,910 $32,044 $258,715 $400,708 $678,248
Net loss (1,839,849) (4,554,489) (6,106,860) (7,324,093) (9,201,227)
Cash used in
operating
activities (1,939,219) (6,097,906) (4,641,611) (5,751,108) (6,989,791)
Capital
expenditures (3,625) (86,480) (15,477) (150,520) (251,022)
Balance Sheet
Total Assets 12,699,518 6,999,384 11,542,633 16,327,212 14,167,740
Total Debt 4,920,000 - - - -
Redeemable
Preferred
Stock - - - - -
Common
Stockholders
Equity
(Deficit) 4,420,785 5,852,994 10,745,422 15,185,300 12,656,864
Net loss per share:
Basic (0.18) (0.29) (0.35) (0.32) (0.35)
Diluted (0.18) (0.29) (0.35) (0.32) (0.35)
Shares used in
computing net loss per
share:
Basic 10,341,163 15,718,136 17,275,994 22,724,913 26,380,351
Diluted 10,341,163 15,718,136 17,275,994 22,724,913 26,380,351
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto, which are
included herein.
Background
Since 1980, the Company has raised funds of some $150,000,000 from equity
and debt financing which has been used in research and development of its
Nucleic Acid Technologies. Nucleic Acid compounds represent a new class
of pharmaceutical products designed to act at the molecular and genetic
level for the definitive treatment of certain devastating human diseases.
The Company's platform technology utilizes specifically configured
ribonucleic acids ("RNA") which are broadly protected by a patent estate
consisting of more than 300 patents. One of the Company's double-stranded
RNA drug products, trademarked "Ampligen", is in advanced human clinical
development for various therapeutic indications. Based on the results of
pre-clinical and clinical trials, the Company believes that Ampligen may
have broad spectrum anti-viral and anti-cancer potential. Over 400
patients have participated in clinical trials authorized by the Food and
Drug Administration ("FDA") at some twenty clinical sites across the
United States, representing the administration of more than 40,000 doses.
In October, 1998, the Company initiated a Phase III trial for the
treatment of 230 patients afflicted with Myalgic Encephalomyelitis/Chronic
Fatigue Syndrome ("ME/CFS") at various medical centers in the United
States. In parallel, the Company is conducting cost recovery treatment
programs for ME/CFS patients in the United States, Canada, Belgium and
Austria. The treatment program in the U.S. was expanded by FDA
authorization in early 1999. In December, 1998, the Company completed and
filed a full marketing application for approval to treat ME/CFS patients
in the European Union.
The Company is actively engaged in various market development strategies
in the United States and European Union, as well as other countries
including Canada, Australia and South Africa. Disease categories under
active development include ME/CFS, hepatitis and HIV. The Company
maintains offices and clinical operations in both the United States and
European Union, as well as ownership interests in a related European based
diagnostic company and in a South African manufacturing entity which
produces its raw drug materials.
The Company has reported net income only from 1985 through 1987. Since
1987, the Company has incurred substantial operating losses. Prior to
completing an Initial Public Offering ("IPO") in November 1995, the
Company financed operations primarily through the private placement of
equity and debt securities, equipment lease financing, interest income and
revenues from licensing and royalty agreements.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its four wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp., Core BioTech Corp. and Hemispherx Biopharma-Europe
NV/SA. The U.S. subsidiaries were incorporated in September 1994 for the
purpose of developing technology for ultimate sale into certain
nonpharmaceutical specialty consumer markets. The European subsidiary was
formed for the purpose of serving the Company's needs with respect to
pursuing clinical trials and regulatory approval in the European Union.
All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company expects to continue its research and clinical efforts for the
next several years with some benefit of certain revenues from cost
recovery treatment programs, notably in Belgium, Canada and the U.S..
Beginning in 1994, limited revenues were initiated in Belgium from sales
under the cost recovery provision for conducting treatment clinical tests
in ME/CFS; including the United States these sales were $678,248 in 1999.
The Company may continue to incur losses over the next several years due
to clinical costs which may be partially offset by expanded access cost
recovery revenues and potential licensing fees. Such losses may fluctuate
from quarter to quarter as a result of differences in the timing of
significant expenses incurred and receipt of licensing fees and/or
revenues. Acquisition of full or conditional marketing approval in any
major market would significantly affect the Company's cash flow. There
are no assurances that such approvals will ever happen in any major
pharmaceutical market.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 vs. 1998
The Company reported a net loss of $9,201,227 (including a non-cash loss
of $1,520,650 for stock compensation expense) for the year ended December
31, 1999 versus a net loss of $7,324,093 for the same period in 1998.
Several factors contributed to the $1,877,134 increase in net losses in
1999. In general, non-operating stock compensation expense, increased
clinical costs and legal fees account for the increase in net losses.
Revenues from the Company's Cost Recovery Treatment Program in the United
States and Europe were up by $277,540 in 1999 versus 1998. The Company
expects these programs may expand in the year 2000, especially in Europe
where efforts are being organized to increase the expanded access program
to other European countries. At present, these programs are operational
in Belgium and Austria.
In 1999, clinical trial costs increased $917,913 primarily due to
increased activity in the AMP 516 ME/CFS clinical trial initiated by the
Company in October, 1998. Manufacturing and related costs were $1,503,455
in 1999 versus $1,923,001 in 1998. The 1998 costs reflects the build-up
of drug inventories needed to support clinical trial and other research
and development efforts. At present, the Company expenses all raw
material and related production costs as incurred.
General and administrative expenses were up $1,146,039 in 1999 versus
1998. Legal expenses for attorneys increased $602,531 primarily due to
litigation associated with the Asensio & Company lawsuit, the ELL & Co.
lawsuit, settlement of the VMW lawsuit and other legal matters. Expenses
associated with stock transactions, registration statements and financing
were up $156,277. The cost of funding the European Operation was up by
$187,005 in 1999 due to establishing and some staffing of the Company's
European Subsidiary. The cost of evaluating the feasibility of the spin-off of
the Company's wholly owned subsidiary was $116,028 more than
expensed in 1998.
Stock compensation expense was $1,520,650 for 1999 versus $794,747
recorded for 1998. Stock compensation expenses reflect the fair value of
the common stock including the warrants granted to non-employees of the
Company. The increase in 1999 reflects warrants granted to consultants
for various types of assistance and professional services provided to the
Company.
Years Ended December 31, 1998 vs. 1997
The Company reported a loss of $7,324,093 in 1998 versus a loss of
$6,106,860 in 1997. Several factors contributed to the increased loss of
$1,217,233 in 1998.
Revenues increased by $141,993 in 1998 due to the increased enrollment of
patients
in the cost recovery treatment programs being conducted in Belgium, Canada
and the United States.
Research and development costs increased $1,386,860 in 1998 due primarily
to increased spending to start up the Phase III ME/CFS clinical trial in
the United States. In addition, the Company built up the inventory of
Ampligen raw materials and finished goods in anticipation of the drug
needs to support the Phase III clinical trial. All costs incurred were
part of the Company's plan to enhance the clinical data required to
support the eventual full marketing application in the United States and
European Union.
General and administration expenses totaling $2,957,831 in 1998 increased
$762,886 over the prior year. Litigation issues that arose in 1998 caused
an increase in legal fees by approximately $300,000. Preparation and
Filing of the European Union new drug application resulted in consultant
and related expenses to increase a total of $109,784, public
relations/shareholder communications expense increased by some $200,000 as
the Company responded to various charges brought by short sellers (see
Asensio Litigation) and administrative expenses supporting clinical trials
increased $69,000.
Consulting Stock Compensation Expense of $794,797 in 1998 relates to the
stock value of warrants granted to consultants engaged to assist the
Company on various financial, stock market and other matters.
Preferred stock conversion expense of $1,200,000 in 1997 primarily
resulted from the inducement to effect the early redemption of the Series
D Preferred Stock. The Company gave the Preferred Stockholder 200,000
shares of common stock with a guaranteed sales price of $6 per share.
Interest income was $590,085 in 1998 versus $267,291 in 1997. While
overall short-term interest rates were lower than those experienced in
1997, the amount of unused funds available for short-term investing was
greater causing the increase in interest income.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments at December 31, 1999 was
$8,549,389 reflecting a net use of cash totaling $5,628,650 in 1999.
Operating activities used $6,989,791. Non-operating expenditures totaled
$1,871,734. Cash proceeds include $1,969,272 from private placements of
the Company stock and $1,923,473 from
warrantholders exercising warrants.
Cash used for non-operating items include $1,966,548 used to acquire
290,811 of the Company's common stock pursuant to a share buy-back program
approved by the Company's Board of Directors. The Company privately
placed 150,000 of these shares producing proceeds of $1,329,495.
In addition, the Company spent $375,000 to acquire an interest in an
unconsolidated affiliate. $478,022 was spent on equipment (primarily
computers and software) and patents.
The Company's operating cash burn rate for the last six months of 1999 was
approximately $589,000 per month. All clinical trial drug products were
fully expensed although some are expected to be sold under the expanded
access,-recovery, pre-marketing programs authorized by FDA and various
regulatory bodies in other countries. As the clinical testing effort in
the United States accelerates and the European market development activity
increases, the operating burn rate may increase periodically. However,
certain of the operating, as well as the non-operating cash outlays are of
a one time nature and are expected to decline significantly. Also
revenues from expanded access product sales is expected to continue to
increase in the coming year.
The Company expects warrant holders to continue exercising the Class A
redeemable warrants and private warrants from time to time depending on
the trading price of the Company common stock. As of December 31, 1999,
the Company has 5,480,310 Class A redeemable warrants outstanding. These
warrants can be exercised at $4.00 per share. In addition, there are
462,000 Class A redeemable warrants outstanding at an exercise price of
$6.60 per share. Non-public warrants outstanding total 8,065,700 with a
weighted average exercise price of $3.67.
Because of the Company's long-term capital requirements, it may seek to
access the public equity market whenever conditions are favorable, even if
it does not have an immediate need for additional capital at that time.
Any additional funding may result in significant dilution and could
involve the issuance of securities with rights which are senior to those
of existing stockholders. The Company may also need additional funding
earlier than anticipated, and the Company's cash requirements in general
may vary materially from those now planned, for reasons including, but not
limited to, changes in the Company's research and development programs,
clinical trials, competitive and technological advances, the regulatory
process, and higher than anticipated expenses and lower than anticipated
revenues from certain of the Company's clinical trials for which cost
recovery from participants has been approved.
New Accounting Pronouncements
On December 31, 1999, the Securities and Exchange Commission, or SEC,
issues Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," or SAB No 101. SAB No. 101 provides the SEC
staff's views on the recognition of revenue including nonrefundable
technology access fees received by biotechnology companies in connection
with research collaborations with third parties. SAB No. 101 states that
in certain circumstances the SEC staff believes that up-front fees, even
if nonrefundable, should be deferred and recognized systematically over
the term of the research agreement. SAB No. 101 requires registrants to
adopt the accounting guidance contained therein by no later than the second
fiscal quarter of the fiscal year beginning after December 15, 1999. The
adoption of this standard should not have a material impact on the
Company's financial position of results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Statement 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
the instrument at fair value. The accounting changes in the fair value of
a derivative depend on the intended use of the derivative and the
resulting designation. This Statement, as amended, is effective for the
first fiscal quarter beginning after December 31, 2000. The adoption of
this standard will not have a material impact on the Company's earnings or
financial position.
ITEM 7a. Quantitative and Qualitative Market Risk
Market Risk
The Company had $8.5 million in cash and cash equivalents at December 31,
1999. To the extent that the Company's cash and cash equivalents exceed
its near term funding requirement, the Company invests the excess cash on
3 to 6 months high quality financial instruments. The company employs
established policies and procedures to manage any risks with respect to
any investment exposure.
ITEM 8. Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1998 and
1999, consolidated statements of operations, changes in stockholder's
equity (deficit) and comprehensive loss and cash flows for each of the
years in the three year period ended December 31, 1999, together with the
report of KPMG LLP, independent public accountants are included elsewhere
herein. Reference is made to the "Index to Financial Statements and
Financial Statement Schedule" on page F-1 which follows page 35.
ITEM 9. Changes in the Disagreements with Accountants on Accounting and
Financial Disclosures
None