By Debbie Strickland

In a deal worth up to $35 million plus royalties, Vical Inc. granted to Merck & Co. Inc. rights to use its naked DNA delivery technology for genes encoding several undisclosed growth factors. The agreement is the second between the two companies.

Vical, of San Diego, received $2 million up front and will receive other payments when Merck, of Whitehouse Station, N.J., exercises options and as candidate gene therapies progress through development.

"Naked DNA" is a gene transfer approach using plasmids — DNA segments whose ends are attached together to form a highly stable closed loop. The plasmids contain the gene encoding the protein of interest as well as short segments of DNA, or flanking sequences, that control the rate and location of protein expression.

In applications such as cancer therapy, the plasmids are slightly less naked, delivered in a lipid formulation. Naked DNA is most effective for intramuscular gene delivery.

Under the new agreement, Merck gained rights to use naked DNA technology to deliver genes encoding a "small number" of growth factors, at least one of which stimulates revascularization.

Potential indications for the revascularization application include coronary artery and peripheral vascular ischemias. Genes would be injected into tissues where disease has restricted blood flow; there the genes would stimulate production of angiogenic growth factors. Newly formed blood vessels would then restore blood flow to affected areas.

Unlike Vical's other agreement with Merck, the new collaboration is not indication-specific, but protein specific, allowing the big pharma company to use a given protein in any application in which it may play a therapeutic role.

"The agreement is very broad in terms of applications but very specific in terms of growth factors," said Alan Engbring, Vical's director of investor relations.

The Merck deal marks the first licensing of Vical's naked DNA technology for therapeutic protein delivery and is the first since the December 1996 issuance of related patents. Vical had previously licensed or optioned the technology to Merck and Pasteur Merieux Connaught, of Lyon, France, for use in vaccines against a total of 13 infectious diseases.

Vical's plasmid-based delivery system "could be used to deliver virtually any protein or any hormone," said Engbring. "There's a whole range of possibilities. But where naked DNA makes the most sense is when you need constant long-term expression of a protein."

First Alliance Focuses On Vaccines

Merck and Vical have collaborated on naked DNA in the vaccine field since 1991. A preventative influenza vaccine is now in a Phase I trial, and a herpes simplex vaccine could enter the clinic soon. Merck has a worldwide exclusive license to preventative vaccines using Vical's technology against seven infectious diseases: influenza, HIV, herpes simplex, hepatitis B, hepatitis C, human papilloma and tuberculosis.

The companies also signed a separate agreement in 1992 covering veterinary vaccines.

Vical and analysts who cover the company say the new deal confirms Merck's continuing interest in naked DNA.

"In addition to it being a great deal for Vical, it is also good news because it dispels any concerns that investors may have had about Merck not being pleased with their collaboration with Vical," said analyst Matthew Murray, of Lehman Brothers, in New York. "The concerns started earlier in the year with rumors about Merck not being happy with their collaboration with Vical and those concerns had been heightened recently when Margaret Liu left Merck for Chiron. Now that Merck is committing additional resources to Vical, they've put those concerns to rest."

Liu became vice president of vaccines research for Emeryville, Calif.-based Chiron Corp. earlier this month.

Analyst David Stone of Cowen & Co., in Boston, agreed that the new Merck deal reaffirms the pharma giant's enthusiasm for the program, while also noting that the new agreement is "a nice endorsement" of a third broad range of applications for gene-delivery systems.

Vical is unique among gene-delivery companies, said Stone, because it has a three-pronged potential to develop vaccines for infectious diseases, along with gene-based immunotherapies for oncology and gene-based protein therapies for metabolic disorders.

In the oncology arena, the company's Allovectin-7 is in Phase II trials for melanoma and for advanced or recurrent head and neck cancer. Vical's Leuvectin is in a Phase I/II trial for melanoma, renal cell carcinoma and sarcoma, and the product this summer entered a Phase I/II trial in prostate cancer. These two product candidates are unpartnered.

Vical reported a net loss of $4.27 million in the first half of 1997. As of June 30, the company had $42.36 million in cash, cash equivalents and marketable securities.

Vical's shares (NASDAQ:VICL) closed Monday at $13.75, up $0.438. *