Brickell Biotech Inc (BBI) 2005 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Vical, Inc. financial results conference call. At this time, I would like to inform you that the conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers from invited participants after the presentation. I will now turn the conference over to Mr. Alan Engbring. Please go ahead, sir.

Hello, I'm Alan Engbring, Executive Director of Investor Relations at Vical. Welcome to our third-quarter 2005 financial results conference call. Participating on the call today are Mr. Vijay Samant, our President and Chief Executive Officer; Ms. Jill Church, our Chief Financial Officer; and Dr. David Kaslow, our Chief Scientific Officer.

I will begin with a brief notice concerning projections and forecasts. This call includes forward-looking statements including financial expectations and projections of progress in our research and development programs that are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including the risks set forth in Vical's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, as well as the specific risks and uncertainties noted in Vical's news release on third-quarter 2005 financial results.

These forward-looking statements represent the Company's judgment as of today. The Company disclaims, however, any intent or obligation to update these forward-looking statements. Now I would like to introduce Vical's President and Chief Executive Officer, Mr. Vijay Samant.

Thank you, Alan. Today we are going to provide an update on our key internal and partner programs. We will provide some perspective on the growing global concern about influenza and discuss the role of our DNA vaccine technology may plan in addressing a potential pandemic as well as the seasonal flu vaccine. But before I do that let me ask Jill Church, our Chief Financial Officer, to review the financial results for the third quarter of 2005. Jill?

Thank you, Vijay, and good morning. Today we reported revenues of $2.7 million for the third quarter of 2005 compared to $2.9 million in the third quarter last year. Revenues for the third-quarter 2005 included recognition of payments under our anthrax grant from the NIH and the completion of delivery of items to the U.S. Navy related to the malaria program. Revenues for the third-quarter 2000 included 2004 included reimbursements under the anthrax grant and recognition of deferred revenue under our license agreement with Corautus Genetics. Year-to-date revenues for the first nine months of 2005 were $10.2 million, compared with $9.5 million in the prior year.

The net loss for the quarter ending September 30, 2005, was $6.1 million or $0.26 per share, compared with $4.9 million or $0.21 per share in the prior year. The increase in the net loss for the quarter was a result of slightly lower revenues, increased manufacturing expense in support of our independent development program, and the recognition of onetime gains on sales of our Corautus shares in the third quarter last year.

The net loss for the nine months ended September 30, 2005, was $18.7 million or $0.79 per share, compared with $19.3 million for $0.86 per share in the prior year. These results are consistent with our forecast for a net loss of 23 to $26 million for the full year 2005.

We have begun production under our $12 million order for HIV vaccines in support of a planned NIH Phase II trial, all of which we expect to ship next year. We ended the quarter with 52 million in cash, cash equivalents, and marketable securities.

In October, we completed a registered direct placement of 4.7 million shares of Common Stock to a select group of institutional investors, yielding net proceeds to the Company of approximately $21 million. The proceeds from this offering will be used primarily to fund our ongoing clinical and preclinical programs and general corporate expenses. I will now turn the call back to you, Vijay.

Thank you, Jill. Before I begin my program review, I think I want to give David Kaslow, our Chief Scientific Officer, an opportunity to give you an update on our lead program for CMV. David?

Thank you, Vijay. I would like to begin by mentioning two landmark clinical studies that were recently published and provide further evidence that it is biologically feasible to make vaccines against herpes viruses, including therapeutic vaccines, and vaccines against congenital CMV disease. The first article was published by Dr. Oxman UC-San Diego and his colleagues in the Shingles Prevention Study Group, who reported compelling efficacy data for a herpes zoster vaccine that showed protection against shingles, which is cause by a herpes virus related to CMV. The data indicated that it is biologically feasible to use a therapeutic vaccine to protect humans against symptomatic reactivation of herpes virus. The mechanism is likely T-cell mediated.

The second landmark study was published by Dr. Nigro from Italy and the Congenital Cytomegalovirus Collaborating Group, who reported that infants born to pregnant women given hyperimmune CMV globulin had lower CMV-associated disease than women who did not receive the passive antibody therapy. Although the study was not a randomized placebo-controlled study, it did suggest that, in addition to being safe, treatment of pregnant women with CMV-specific antibodies may be an effective treatment and prevention of congenital CMV infection.

Recall also that passive transfer of high-titer CMV antibodies and that administration of activated and CMV-specific T-cells have both been shown to protect transplant patients from severe CMV disease. The picture that continues to emerge from years of research indicates that both arms of the immune system, D-cells and T-cells, are needed to provide optimal protection against herpes viruses in general and CMV disease in particular. We believe DNA vaccines are the best modality for achieving both types of immune responses in the transplant setting, and we remain bullish on CMV as a target for our patented technology.

Working with several well-recognized transplant experts, we have finalized the dose regimen for our immunotherapeutic CMV vaccine formulation in HCT patients. Transplant donors are to receive three vaccinations prior to donation, and transplant recipients are to receive one vaccination just prior to transplantation, and two more vaccinations posttransplant.

Vaccination of recipients just prior to transplantation has been shown with other vaccines to provide better immune responses in part, it is thought, because vaccine product is present to stimulate the donor T and D cells when they are transferred to the recipient. This approach has been demonstrated to improve the immunogenicity in transplant patients immunized with conventional vaccines for list hemophilus influenza type B, tetanus, and hepatitis B.

Working with FDA we now have a final Phase II protocol for testing our immunotherapeutic CMV vaccine formulation in HCT patients. The study is a randomized, double-blind, placebo-controlled Phase II trial in approximately 80 HCT donor recipient pairs. That is 160 subjects total. For both donors and recipients, safety of the vaccine will be compared against placebo.

We intend to start by enrolling 40 subjects -- 10 transplant donors and 10 transplant recipients who will receive the vaccine; and 10 donors and 10 recipients who will receive the phosphate buffered saline control. This cohort will be followed through the full course of treatment, including vaccination of the donors three times within the 21 days before donation, and vaccination of recipients initially three to five days before transplantation, and again at three to four weeks and 12 weeks after transplantation.

After review by a data and safety monitoring board, the trial may be further enrolled up to approximately 160 subjects, with approximately 40 donor recipient pairs receiving our investigational vaccine and 40 receiving placebo.

An important endpoint in this Phase II trial will be the occurrence rate of clinically significant CMV levels in recipients receiving active vaccine, compared with the occurrence rate in recipients receiving placebo, and in historical controls. In addition to this endpoint, other virologic and clinical endpoints will be assessed in an effort to define the appropriate efficacy endpoint for a Phase III trial.

We expect to conduct this Phase II HCT trial at the leading 15 to 20 U.S. transplant centers beginning in early 2006, once we've established all the logistics required to support this complex protocol. Based on our progress with this Phase II HCT trial, we may have several options for conducting a second Phase II trial in solid organ transplant patients, including potential funding from the NIH.

An important long-term goal of our CMV vaccine program is to evaluate the potential for the much larger commercial opportunity to protect against congenital CMV infection. The goal here is to protect females of childbearing age from infection with CMV, to prevent transmission to the unborn fetus. Although the passive antibody treatment I mentioned at the beginning of my comments may hold some promise for preventing and treating congenital CMV, clearly a protective vaccine for the target population would be a superior option. With that, I will turn the call back to you, Vijay.

Thank you, David. Next I would like to discuss the opportunities for our technology to address particular sectors of the flu vaccine market. Before I began, though, we are pleased with the President's announcement this morning of a potential funding of $2.8 billion for Next Generation vaccine technologies.

Before I discuss the Vical program, let me start with the shortcomings of the current flu vaccine. There has been a lot of media write ups on the shortcomings of both the seasonal and pandemic applications, but I really want to lay out for you what the shortcomings are.

First of all, the most important shortcoming is the egg-based manufacturing. The availability of two pathogen-free eggs, which is the ideal substrate in large quantities is limited at best, okay? It will be very limited in a pandemic situation. There are limitations related to purity, consistency, and capacity.

Second, the efficacy, the lowest in the elderly which is the group which needs the highest amount of protection. Third, the current vaccine provides protection via B-cell mediated response directed against the glycoprotein, which is the variable component, and therefore in reality has little ability to provide cross-protection against different strains of flu, which is the reason you need to get a new shot every year.

Before I tell you how our approach can work on some of these programs, there has been a lot of talk regarding switching from eggs to cell cultures. There are four issues with cell culture that everybody needs to fully understand, and they need to be highlighted. Yes, switching to cell culture, whenever that happens, will remove the dependency on eggs. But eggs offer the potential blocking mechanism that prevents the growth of other human pathogens. Now, mammalian cell cultures won't do that. So the killing process for such a vaccine derived from cell culture -- and this is just a speculation -- could be multifactorial, and that is not an easy task.

Cell cultures, for some of us who have been in manufacturing before, on a very large-scale from a production perspective are complex. They are no piece of cake, compared to egg-based production. That is why measles and mumps, which are two egg-based vaccines produced since 1960 continue to be produced in egg culture. They are not being switched to cell cultures.

The other thing is there are no guarantees with productivity, because the egg-based vaccines, particularly as they apply to mumps and measles are very productive. So productivity is going to be a real important issue.

The rate limiting step in producing influenza vaccine is the timing and availability of each year's new strains. You can switch to cell culture; you're not going to solve that particular issue.

Finally, the fourth and the most important issue is the approval of cell lines could pose substantial regulatory hurdles, particular on the nature of the cell line. Even when companies switched from WI38, the human deployed cell line, to MRC-5 cell line several years ago for new live virus vaccines, it took them several years to even get a pristine cell line approved. So this is not a piece of cake and this is not going to be solved tomorrow, okay?

So let me tell you how our approach how may be able to overcome some of these potential problems. First, our team here, led by David Kaslow, is designing a vaccine that will encode for the HA surface protein and then code for nuclear protein NP and M2 -- these are the conserved proteins -- with the goal of engaging both arms of the immune system and hopefully improving cross-protection; and more importantly, improving efficacy in the elderly.

We plan to use Vical's proprietary adjuvant Vaxfectin, which is a cationic lipid formulation, because we believe that it can enhance immune responses. As you know, we manufacture our vaccines by fermentation, in an equal I-based (ph) fermentation, so our process does not rely any way on any chicken eggs. Okay? I just want to make sure everybody understands that.

Our goal is to develop a vaccine that provides cross-strain D-cell and B-cell immunity with enhanced effectiveness for the elderly. Our program is starting with a mouse and ferret efficacy testing and we expect to advance through preclinical development with the support of our current NIH funding. Clinical testing is not covered by the initial grant, and we look forward for additional funding before advancing to Phase I.

Let me now turn to pandemic flu, which has the potential to emerge from circulating strains of the avian flu at any time. The shortcomings of the current vaccine technology would be compounded by the urgency of a pandemic situation. The process for producing pandemic vaccines is still based on chicken eggs, which may not be available if the avian flu continues to spread, because birds go first.

In addition the pandemic strains of flu may be toxic to eggs, even if they are available; that is why they need to be genetically reverse-engineered. The long manufacturing process for the flu shot requires substantial leadtime. But selection of a potential pandemic strain at this point is merely a guess, whether it will be based on H5 or H9 or some variation of H5 or H9's variation, we don't know. It is a big unknown.

The pandemic flu shot will still only to provide antibody-mediated protection against the outer glycoprotein, which may not be enough. We don't know, especially if the guess on the strain is not precisely on target. Early data suggest that the egg-based H5 vaccine -- and this is something that I am reading from the public domain, I don't have the exact data in my hand -- requires six times the current amount per dose, times two injections. So that is about 12 times what is required with the conventional killed vaccine.

Obviously an adjuvant could help and should help. But the bottom line is that it is unlikely that current technology can meet the demand, even if the correct strain is chosen.

Our approach for pandemic flu is not very different from our approach for seasonal flu. That is the beauty of our technology. We are focused on the conserved nuclear protein and M2 proteins to drive a T-cell response in the targeted glycoprotein for a B-cell response. David, the M2 is an outer protein, right, but it's a conserved outer protein, am I correct?

That is right.

And the nuclear protein is an internal protein. So the M2 also invokes the B-cell response, whereas the nuclear protein will invoke a T-cell response.

Right.

Conceivably in the case of an imminent threat of a pandemic outbreak, you could in concept -- and I put that in quotes -- vaccinate in two stages. You could vaccinate first with the DNA vaccine against the conserved proteins. That vaccine could be stockpiled in advance. You could then use either a DNA vaccine or a protein-based vaccine against the surface protein of the pandemic strain, when the particular features of the pathogen are fully understood and characterized.

In summary, we are excited about this opportunity both for a long-term solution for seasonal flu and a short-term solution for pandemic outbreaks. The two approaches are fundamentally the same; simple variations of the same concept. The initial stage of our program is funded by NIH including the mouse and ferret challenge studies, which will be conducted by St. Jude in Memphis. We're grateful to the NIH for the initial funding of $2.9 million that is supporting our current development efforts, but we may need additional funding to take the ideas to clinical testing in later-stage development.

Separately, we also announced during the quarter a separate $0.5 million grant from DARPA for a feasibility study of rapid-response DNA vaccine manufacturing processes that would allow production of a million doses in a matter of weeks. Now this has nothing to do with avian pandemic flu. It is much more of a generic grant to come up with a manufacturing concept so that you can produce vaccine in a very short period of time. This effort will be critically important in a pandemic situation, however, or for any emerging pathogen, as a matter fact. We will keep you posted as we achieve progress in these programs.

Next, we move on to IL-2/Electroporation program. We covered in our last call the initiation of a Phase I trial in the early part of third quarter in our IL-2/Electroporation program using technology we license from Inovio, a company based here in San Diego. As a quick review, this program involves injection of plasmids encoding IL-2 into metastatic melanoma tumors; and then applying electroporation locally at the site of the tumor. The goal is to produce high levels of IL-2 locally to achieve clinical benefit, without the toxicity associated with systemic IL-2 protein delivery. We have completed enrollment for the 0.5 mg and the 1.5 mg dosing levels in this trial, and are awaiting completion of the follow-up before we go to (indiscernible) in the highest dose, which is 5 mg level.

Next, high-dose Allovectin-7. Our lead product for metastatic melanoma is high-dose Allovectin-7. You may recall that we have completed a special protocol assessment of a Phase III trial. We are in active discussion with prospective partners, some of which have advanced to active due diligence. We will update the status of this program as soon as there is progress to report. However, as we said before we are unlikely to proceed with the Phase III trial without a partner.

Let me now jump into our collaborative programs. Angiogenesis, there are three programs going on in this area. The first program is by AnGes, which is approximately a year and a half into a Phase III trial in Japan for peripheral arterial diseases or PAD. Their marketing partner Daiichi has projected a product launch in Japan by late 2006, early 2007. This is on their website.

We have been told that the data for this trial are unblinded after final evaluation of each patient to allow crossover from placebo arm into treatment protocol. We are encouraged that the trial continues to enroll patients. AnGes is also conducting a Phase II trial for PAD, which I have been told has been fully enrolled, and a Phase I trial for CAD in the United States.

Another partner, Sanofi-Aventis, has been conducting multiple Phase II trials in Europe and the United States for PAD. We expect results from at least one of these trials in the near future.

Our third partner, Corautus Genetics, is already a year into a Phase IIb trial for treatment of coronary artery diseases. So we could see results hopefully sometime next year.

These angiogenesis programs address huge commercial markets. I am not going to speculate; you should call up deanis (ph) and ask them what the size of those markets are. Our participation in this is low to mid single digit rates for royalties, and milestone payments could generate substantial revenues in the years ahead.

NIH is one of our biggest collaborators among our many collaborative programs. The greatest progress during the third quarter through the Vaccine Research Center at NIH was the announcement of progress to HIV in a Phase II trial in a primu (ph) setting. This is a multinational program that they started, addressing three cletes (ph) of HIV that together account for some 85% of the cases worldwide. Under a $12 million production order for additional clinical lots of DNA vaccines in HIV, we have begun production; and we expect to make initial shipments in early 2006.

Just clarity, the Phase II trial I just target (ph) is not the material that is going to come from the $12 million order. The $12 million is a much larger trial, which is expected to start sometime late 2006 as far as we know.

Other DNA vaccine programs at the NIH include other infectious disease targets including Ebola, SARS. Ebola, ours is the first program in clinical trials. SARS, potentially ours is the only program, real program in clinical trials. West Nile, it is the second program as I know in clinical trial in the United States. Which are all in Phase I, testing, using supplies manufactured by Vical. We have commercialization rights in most of these programs. Data from some of these trials are expected to be available in the coming months.

On the animal health front, our partner, Novartis Aqua Health, has been selling the world's first commercialized DNA vaccine since they gained approval in Canada in July. This is a vaccine to protect farm-raised salmon against infectious hematopoietic necrosis virus, which can be highly fatal when fish are transferred into pens and oceans. We believe there are significant opportunities for expansion of this field to other geographic regions, and to other species of fish, and to other diseases affecting aquaculture industry.

Our other animal health partner, Merial, is projecting a conditional approval of its melanoma vaccine for dogs in the first quarter of 2006. This will be a significant milestone for our technology in the cancer vaccine area and our first opportunity to tap into the substantial market for companion animals.

Outlook for the future. We expect significant news for the next six to 18 months. We have potential news releases for clinical data from several partnered programs including NIH Phase I trials for HIV, Ebola, SARS, and West Nile, as well as trial results from our angiogenesis partners. Initiation of a new trial includes the recently started Phase II testing of the HIV program at NIH. We expect to begin our Phase II CMV vaccine trial in transplant patients.

We also expect Merck to begin its first cancer vaccine trial based on our technology? As you recollect that was licensed when, David? About a year and a half ago. It is a rapid movement from licensure to the clinic.

On the commercialization side, we expect initial approval of Merial's melanoma vaccine to come early next year. And of course we will keep you posted with progress on our partnering discussions on Allovectin-7. That concludes our prepared comments. Operator, we are now ready to open the call for questions from our invited participants.

(OPERATOR INSTRUCTIONS) Edward Tenthoff of Piper Jaffray.

Very fortuitous timing too, with President Bush's comments today. So I am sure you are thanking him. To that point, on the government contracts that have been sort of outlined here, what does Vical have to do to position the Company to stand to benefit from those contracts? With the ongoing NIH contract for preclinical development, when do you think you could actually reach the clinic with the flu program?

I think both of those questions are pretty well interrelated. The answer is in order to get funding, you need to produce good clinical, preclinical data. It is a circular argument. You need to get pretty good preclinical data. So we have a shot at funding a variety of sources in the NIH through -- David Kaslow knows the granting system better than anybody else here. So we have pretty preset milestones with the current grant that we have to produce certain data at some certain point in time, and that will lead to additional grants for us which we have applied for. But the other thing also is how fast we can get in the clinic depends upon how the regulatory process is going to be modified for influenza.

If it is business as usual, it is going to be a long-term project. If it's all stops are taken off this, then it could be a very short-term project. My guess would be it would be somewhere in between that. So I'm hesitant to predict how fast we can get into the clinic, but based on President's announcement, that is going to be a rapid progression into the clinic for all of the influenza vaccine programs, not just ours.

Okay, great. Thanks.

Eric Schmidt of SG Cowen.

Good morning, everyone. Vijay, just a quick question on this $12 million order for HIV vaccine from the NIH for next year. It seems like you're going to book all 12 million of that in 2006, and I know you're not prepared to give guidance at this point in time, but it would seem that we would see a significant uptick in revenue into '06. I assume that the other parts of your business aren't fluctuating that much, or just trying to get a little bit of guidance for how we view that order?

I think Jill had made a subtle comment that the order will be shipped next year, but you caught it right. Yes, all of the revenue from that order will be booked next year. Obviously, people look at revenues on a rolling 12-month basis in a small biotech, which we were dependent on grants and milestones. You really need to look at it on only 18 of 24-month basis. So it is hard to predict, but I can tell you that $12 million revenue base, we should be doing better than what we did last year, which is 2004. That is really the goal. And if you recollect our goal 2004, we had revenues of close to $15 million. So I don't know what other milestones and grants, but with the announcement of flu, if we get more monies in the flu grant, the answer is yes, there will be a lot of upside. But no, I'm not ready to predict right now.

Can you give us a sense of what the margins are to Vical on an order like that?

If I told you, then I will have to shoot you. I think those margins, rather than talking about margins, let me talk about how this program helps us, okay? It allows us, first of all, to improve our manufacturing processes. B, it allows us to validation of this technology because it allows us to put improvements, whether it's in the construct itself or in the formulation of the others. But, you know, the margins depend on what else is going on in the factory at the point in time. If the factory is making a lot of our own products, then the margins are higher. If they're not making anything else in there, then this contributes to an absorption of our fixed cost. But our goal here is not to make a lot of money on it, but to cover our fixed cost and make some profit on it. I will stop there.

Okay, thanks a lot.

Navdeep Jaikaria of Rodman & Renshaw.

Good morning, Vijay. A quick question for you. With regards to the pandemic flu, can you walk us what the regulatory process is right now? Can you get by just with animal studies under the BioShield agreement legislation, or do you need to do human studies as well?

First of all, let me explain to you that there is no formal guidance from the FDA, but you know Dave and I, actually just since you asked that question, had put together for somebody else on the outside who had asked us a question about what is our best assessment of regulatory guidance from some of the presentations that DFD (ph) officials have made. And right now, the guidance is a very restrictive guidance. Let me have David explain it to you.

The guidance, and again (technical difficulty) when there has actually not been an issued guidance as Vijay says yet, but in presentations from folks from CBER it depends on what manufacturing process was used. So if it's the standard conventional manufacturing process, it appears that what you'll need to show is human immunogenicity data with the pandemic flu strain. Let's say it's H5.

(indiscernible) that's for the current killed vaccine, right?

The current killed vaccine manufacturing process, that is what the regulatory pathway looks like for at least provisional approval. If you are using the conventional killed vaccine manufacturing process, but you're using a different dose or you're using a different adjuvant or some other delivery, novel delivery system, then that probably will not be adequate. You will probably also need to do some animal studies, and you may actually be required to do an efficacy study. And in that case what you would use is the HA of the currently circulating strains, which are H1 and H3. If it is not using the current conventional manufacturing process, if it's a novel manufacturing process --.

Cell culture, for example, or DNA vaccine.

Cell culture or a DNA vaccine or just a subunit protein vaccine made by recombinant DNA technology, it appears that the regulatory pathway will include clinical efficacy with the circulating strains. Now, as Vijay said, that is subject to change as this avian flu increases from -- in its stages from just being circulating in birds to actual transmission to humans. But currently, that is where it stands.

To summarize it, the current regulatory burden is -- hurdle is pretty high, and I think it is going to hopefully be CBER guys come onto position paper to give people guidance, so that there are pathways created so that you can move to the clinic quickly.

Thank you, Vijay.

Michael Zasloff, Ferris, Baker Watts.

Thank you, Vijay and David. I wanted to focus just a bit on the application of Vical's technology again for the flu. And again, I wanted to ask just a few questions. It would seem -- obviously seem to me that if Vical were to demonstrate that in an appropriate animal model --.

Ferrets, for example.

Pardon?

Ferrets.

I'm sorry, Vijay, I didn't hear you.

I said the animal model is ferrets.

Oh, in ferrets, yes, yes, yes. In ferrets -- that you could actually mount an immune response that was equal to the existing vaccine, at least immunologically. But that would be very big news, would it not?

David, do you want to comment?

Yes, I would agree. I think that ferrets are seen as probably the best model we have today to look at human flus.

So that would be huge news?

Yes.

Because I guess in response to the question that was posed by one of the other folks on the -- individuals on the line, regardless of what the FDA would demand of you, I as a physician would not administer a new vaccine to my child unless I felt that that new vaccine was safe.

Correct.

So issues of safety clearly arise. Issues of efficacy can be handled -- might be handled in a ferret. And I guess one never really knows when one begins to use a new vaccine ultimately what the issues of toxicology are, so there is a certain risk that has to go into that, correct?

Yes.

And if you're going to be immunizing millions of people in a sense it is almost impossible to fully evaluate risk except if you go into the field. But as far as efficacy, you could in a sense jump relatively rapidly from the ferret. So my question to you is, should -- I assume then that Vical is terribly excited. I mean, I would be terribly excited to start ASAP, super ASAP, in getting to the point where I could demonstrate what would appear to be a protective immune response in the ferret.

The answer to the question is yes, we are terribly excited, and we are actually collaborating with St. Jude's in Memphis who have the ability to run a H5 challenge. We can't run an H5 challenge here, and they will be running the H5 challenge in ferrets; right, David?

That's right.

So just give me -- I know you can't, obviously, monitor or even necessarily know what the timing of these sorts of things would be, but if all went well for you, when would that type of information -- when do you think you would have that information? Are you talking about six months, a year, three years?

No, it is not three years. It's got to be in 2006 under this program. We have to get this data in 2006, sooner in 2006 than later.

So if you actually were effective in demonstrating an immune response in a ferret, and you had already with the FDA demonstrated the necessary safety of the use of DNA vectors, for example, as you have in your HIV studies --.

There is a huge amount of safety database right now on (indiscernible) vaccines.

So the intrinsic safety or risk associated with the vector itself to some extent has been put to rest, I guess. But what is unknown is fundamentally what the dangers are of the immune response that is provoked by the particular construction, construct that you use in every particular case of vaccination. Then you should be able, I would imagine, to progress -- you would progress to a Phase I. You could progress to a Phase I pretty fast, considering what pressure exists right now on the scientific community and medical community to get something out, right?

The answer to the question is yes, but if you now superimpose on that the issue of SARS going back a few years ago, and we rushed into the clinic very rapidly with SARS, and the funding for SARS essentially has dried up now, okay? So monies are being allocated, and the project BioShield really -- we obviously can use some of our own internal funding which we intend to. However, we continue to need government funding, so today's announcement by the President is a really positive move.

Yes, yes, yes. I didn't mean so much where the money would come from. I am assuming, unless the President is psychotic, that progress in the correct direction would presumably be further supported by these funds that are presumably being made available.

Absolutely. I think there is a recognition that the cell -- which I kind of commented in my little speech here today is -- you know, people have been working on cell culture switch based for flu for a very long time. And you know that switch to cell culture is going to be pretty complicated, because eventually if you make that switch to cell culture, the collection of flu strains that occur worldwide every year to identify the strains that go in, you have to switch to cell cultures to (indiscernible). And most of the centers and parts of -- different parts of the world are really not equipped to switch to cell culture from egg base. So if you're collecting strains, for example, in Chennai, India, I don't think they have cell culture (indiscernible) where they actually take the swabs and grow them in chicken eggs.

The reason you want to switch to cell culture at the source of collection is simply because right now, what occurs is the strains that you're collecting from the field, they go pretty a reasonable amount of drift by the time they're collected, processed, grown, detoxified. So what you exactly put in the man finally is slightly different from what you originally started with. And that is one of the reasons for -- could be a potential reason why those vaccines are not that efficacious.

So if you were to go to cell culture, you want to move the collection system of cell culture, and my God, that is a huge issue. That is not an overnight issue that these companies can manage. So it is a challenge.

As opposed to the stable and relatively simple --.

Egg-based collection.

I meant really DNA-based.

Oh, absolutely. We don't have to worry about it. All we need is to get the original strain and get the genome.

I guess really what I would like to tell you guys is why don't you get going?

We are. Thank you.

May-Kin Ho of Goldman Sachs.

I had a couple of questions, again on the flu vaccine. How many people have been exposed to DNA vaccines in the various programs that you have, number one? And how many of those are elderly and children, which are the high-risk population for flu? I ask partly because I assume this will affect the FDA view of how much data they would need. As you know for some of the other vaccines that people have developed lately, for example, Medimmune, they have over 60,000 people exposed to the vaccine. And, of course, there are I think by now six pandemic flue vaccines, at least, under development. So I am just wondering from a regulatory perspective how they would look at the other vaccines which use kind of the old technology which the regulatory agencies might be more comfortable with versus a DNA vaccine?

I think it is an excellent question. Most of our experience in databases are more than 1000 patients, I would say, and our experience with the pediatric segment is small. Most of our experience has been in the adult segment. In the cancer segment, as you know in our Phase II trial, the median age of treatment in that 127 (indiscernible) was like 63. So we have given this vaccine really to old people, and I don't have access to Merck's database, but no, we have not had a lot of exposure to pediatric. That is why when I said in my comments our focus is really on the elderly segment, okay? We don't intend to go into the pediatric segment at this stage.

So how many elderly people have you given DNA vaccines to?

The majority of the 1000 people that have gotten this vaccine are all over 55, I would guess, because the median age I told you in most of our studies is in the '50s.

Right, right.

Your point is well taken. If you have to go into the pediatric segment, it is going to require huge safety database on any technology, and forget DNA. Even if you come with the cell line, that is the point I was making when MRC-5's human-deployed cell line was chosen to develop the varicella vaccine, it took almost 2.5, 3 years of hold-up to get that cell line approved because children had not seen that cell line before, whereas WI-38 cell line, which is a very similar cell line which currently is simply used for varicella would have gotten that vaccine approved two years sooner. You just be very cautious and occasionally, rightfully so.

Certainly, you have tremendous experience with vaccines coming from Merck and all of your responsibilities there. And if I look at the pandemic vaccines under development, most of them use the old technology, I assume partly because maybe the regulatory agencies are more comfortable with them or at least the companies thought that that would be a faster way of getting there?

Well, the answer is I don't think, to be honest with you, there is new concept or technology that people have come up with in those big companies. And the problem is the pandemic flue activity in most of these companies is a side project, okay? It is not a mainstream project. People are not working on that project as they would work, for example, on the rotavirus. It's an extension of their existing flu vaccine program, which basically has been over the years a commodity market. There were six players. So though there is a lot of excitement that is occurring in flu, in the conventional flu setting, if more people show up in the market, the commercial market is going to go to hell unless a party comes up with a vaccine which has attributes which show broader cross protection or which show better efficacy in the elderly and they can differentiate themselves from the conventional flu vaccine.

But the more players are coming, May-Kin, this market commercially in the killed vaccine side, seasonal flu vaccine, the price are going to go down to $3 or $4, the way they were a few years ago.

Yes, yes. Thank you very much.

Navdeep Jaikaria, Rodman & Renshaw.

Just continuing the discussion, I guess the question was answered partly in making (inaudible) the number of patients exposed, but in following up on that, how many patients do you think you would need to have in the Phase I study? And when can you begin those studies in terms of the timeline, Vijay?

I think, first of all, the side of the Phase I study is a very small study. We can do a study on 100 patients, because really the goal there is to make sure you get initial assessment of safety and (indiscernible) data. Obviously, you can extend that study to a Phase I-II study to get some kind of a challenge done. In terms of timing, I think really we've got to, as Michael Zasloff rightfully pointed out, get our data on ferrets and move rapidly. The question comes up, how much monies we are going to put at risk in terms of doing some of the activities in (indiscernible), but those are under internal assessment. I am not willing to comment in terms of when we could get into the (indiscernible).

A quick comment on that. Number one, I am asking from the perspective of (indiscernible). As you know, if you have done mice studies, two animal models; one of them is a primate and then you just need to demonstrate a Phase I safety in (indiscernible) that have been shown to be efficacious in primates. And that is enough for stockpiling purposes, not from the FDA approval purposes. So if one were to examine the potential of what you have for pandemic flu, then clearly you can destockpile before you're even approved by the FDA, and that process regulatory bar is lower for most bioterrorism agents, and I think pandemic flu clearly qualifies as that.

Now, obviously the situation is a little more complicated because we have flu as a human disease. So I think that is why the area is a little bit of gray. But assuming that stockpiling can happen, you have a very quick path to approval, and I don't see why you have to -- I see, so you will get the right does from the ferret studies and then use that in humans to show safety.

Yes, the other thing is just clarity on the animal model that everybody -- I see people making comments on the animal model. Your comment is correct, we don't whether influenza will ever qualify for it. We hope it does, but I doubt in will in terms of there will be something between a hybrid (indiscernible) animal (indiscernible) and a conventional approval. That is the approach that we'll take. But the fact that everybody believes that on the project BioShield you get an order, basically what you're doing is you're working with two arms of the government. One arm of the government is the procurement arm which tells you, I'm going to buy this stuff from you, but you know what, you need to go to the other arm of the government and make sure -- which is the FDA -- that you meet all the things; stability, efficacy, safety. And when you meet those, I will pay you, but I'm going to give you the order right now; you start making it. So it's a Catch-22.

So you've got the order, but you have got to meet all of the regulatory environment, and both arms are not in sync because people who are dealing on the regulatory side rightfully ask the self-regulatory questions and say, well, I don't like your stability data. I'm not going to -- and they will tell the procurement party, I don't think vaccine is worth buying. So the one thing that needs to occur is harmonization between the buying and the regulatory mechanism, and that has not occurred. So anybody who has got orders right now -- I won't mention the names -- that is a tough part of the (indiscernible).

Great, thanks.

Edward Tenthoff of Piper Jaffray.

Great, thanks. Just one quick follow-up question. With the CMV vaccine, what would be the time for the follow-up between the first cohorts that will be enrolled, the first patient (indiscernible) that will be enrolled, before you're able to do the second phase of that trial?

There is an interim analysis by that data and safety monitoring board on the patients, that first cohort, up to day 50 -- up to day 56. So it's relatively short.

Len Yassi (ph) of Stockdock (ph) Partners.

Thank you very much. I had a couple questions for you. I wanted to thank you for the great overview in terms of the competitive position on the pandemic flu virus. And I was just wondering if you could comment a little bit on the same issues as it relates to an HIV vaccine in regard to the fact that it seems that not all companies are approaching it via prime boost mechanism, and yet as you talked about with pandemic flu the necessity to bring in the T-cells seems to be very important.

How do you see an HIV vaccine being developed looking at the various technologies out there? And to the extent that they do look at a DNA prime as part of it, would that necessitate Vical's being involved?

I think, first of all, the beauty about our technology is the simplicity. But HIV's a pretty tough target, and I think originally when the whole HIV vaccine field started, vaccine development started, the first attempt as you know very well was by Genentech and others, and Immune Response Corporation and others were there were going after killed vaccine or external proteins, pro gp100. Again, the circle, we did do a full circle and everybody jumped at the concept that protection against HIV is T-cell mediated, okay. Everybody went after internal proteins led by Merck primarily, okay, and whatever Merck did, everybody followed them blindly. So everybody went after (indiscernible), including academia and others. I think that enabled them finally at VRC, the Vaccine Research Center, came with a hybrid approach recognizing that you both need a balanced D-cell immediate response and a T-cell immediate response. And that's why this program actually had (indiscernible) from the envelope proteins. So you get both an antibody immediate response and a D-cell response.

Having said that, it remains to be seen and we'll find out next year at the end of Phase II trial whether the DNA vaccine on its own will be sufficient to give a level of protection or reduce viral load in those patients, or you need a prime boost regimen which is a combination of a DNA vaccine with an efficient boost delivered by a vector against which there is no prior immune response of pre-existing immunity. And people are trying (indiscernible) viruses, pox viruses, adenoviruses, and all of those programs that people have talked about trying to use those vectors as prime and boost have yielded not very great encouraging data. Even Merck's own data shows that prime boost modality (indiscernible) DNA has -- and an adeno boost is probably the best data that they have got. So we're pretty excited that no matter what happens with the DNA works on its own, we are right now the cornerstone of that approach. And if you go back to the HVTN trial network (indiscernible) on the Internet or the International AIDS Vaccine Initiative trial network, you'll find that there are more programs going on in HIV vaccine, a few active programs. DNA vaccines is an integral component of it. However, remember our main licensee is Merck who's really doing most of the work and has done a lot to advance the field in HIV vaccine as it relates to our platform.

The other thing that we are working on which we have told before on the field of HIV is we're working on an HIV therapeutic vaccine in the collaboration with NIH. We have a (indiscernible) with them, and the goal here really -- David, do you want to tell them what our goal here is with HIV therapeutic vaccine; what the vaccine is and how do we --.

The vaccine is to use a DNA base with electroporation to try to enhance the immune responses, particularly the T-cell responses, to increase the time before you have to start that chronic heart therapy. Once you start that, it is hard to get off. And it is clear that if you can reduce the viral set point that you can increase the time to having to start that chronic heart therapy. So using vaccination to drive down that set point so we delay the start of chronic heart therapy is the goal of this program.

And even if you delayed by a year, that is a huge win for the people, okay? You know, potentially then ability to give multiple shots and using that which will be -- the vaccine will (indiscernible) for an envelope protein as well as internal protein, and given the electroporation which is a technology that we have licensed. So to really increase the level of expression because we have seen about 3 to 5X improvement in expression levels when we use electroporation. Does that answer your question?

Yes, it does. My second question is as I look through the HHS directives as it relates to a pandemic flu vaccine, one of the points that they mention very specifically is that they want the vaccines to be directed against the constant portion of the flu virus to avoid the need to develop new vaccines each year and to also match the predominant strains that are most likely to cause the disease. You touched a little bit of this on your opening comments, but could you review with us how effective current technologies are in meeting those objectives versus the approach that you're using? Thank you.

Excellent question. I don't want to -- the current technology which is really primarily the killed vaccine, egg-based vaccine, (indiscernible) on either glycoprotein. And (indiscernible), first of all, it is not a purified vaccine by any stretch of imagination such as the hepatitis B surface antigen vaccine, which is a highly purified vaccine. So there is in that (indiscernible) after you break up the passage and you will have some traces of nucleoprotein and DM2 in there. But predominately that vaccine unless it is a response against the variable glycoprotein, and nobody really has done any measurement of any D-cell responses in the current killed vaccine, because all you do in that vaccine manufacturing is to preserve that glycoprotein. So there may be in that impure vaccine some level of D-cell responses, but the answer is no. It is primarily a B-cell mediated vaccine just like hepatitis A; not like measles which it works both B-cell or D-cell response.

And our approach basically is to have a plasmid which (indiscernible) the nuclear protein, which is really the core internal conserved protein, and together response against that. And then M2 which is an external protein, but it's a conserved external protein. So if you can go after that (indiscernible) externally which is conserved, because we know right now from the killed vaccine that if you hit the external protein, you could get protection. If you go after a conserved protein, you should get cross protection against difference strains. That is really the goal.

I don't think anybody has that approach right now. Most of the approaches right now are making recombinantly synthetic protein using insect cell lines, viruslike articles, but they're all focused on glycoproteins.

Andy Schopick of Nutmeg Securities. Hearing no response from his line, if there are no further questions, I will turn the conference back over to Mr. Samant.

Thank you very much for joining us this morning. And if you have any other questions, always Alan Engbring is available. Others, we will see you again next quarter. Thank you very much.

Ladies and gentlemen, this concludes our conference for today. All parties may disconnect.