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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
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COMMISSION FILE NUMBER: 000-21291
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INTROGEN THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 74-2704230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</Table>
301 CONGRESS AVENUE, SUITE 1850
AUSTIN, TEXAS 78701
(Address of principal executive offices, including zip code)
(512) 708-9310
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
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 the Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock (common stock) held by
non-affiliates of the Registrant, as of June 30, 2001, was approximately $42.6
million based upon the last sale price reported on the Nasdaq National Market
for June 29, 2001. For purposes of this disclosure, shares of common stock held
by persons who hold more than 5% of the outstanding shares of common stock and
shares held by executive officers and directors of the Registrant have been
excluded because such persons may be deemed to be affiliates. This determination
is not necessarily conclusive.
As of June 30, 2001, the Registrant had 21,391,125 shares of common stock,
$0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference to the Registrant's proxy statement ("2001 Proxy
Statement") for the 2001 Annual Stockholders' Meeting, which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended June 30, 2001.
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INTROGEN THERAPEUTICS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<Table>
PART I..................................................................... 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 21
ITEM 3. LEGAL PROCEEDINGS........................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 22
PART II.................................................................... 22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.... 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 38
PART III................................................................... 38
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 38
ITEM 11. EXECUTIVE COMPENSATION...................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 38
PART IV.................................................................... 39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 39
SIGNATURES............................................................ 43
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among others, statements
concerning our future operations, financial condition and prospects, and our
business strategies. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking statements. Investors in
our common stock are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are subject to
substantial risks and uncertainties that could cause our future business,
financial condition, or results of operations to differ materially from
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors Affecting Future
Operating Results" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in, or incorporated by
reference into, this report.
OVERVIEW
We are a leading developer of gene therapy products for the treatment of
cancer. We are capitalizing on the significant advances in the understanding of
the human genome and the role that genetic function plays in the development of
cancer and other diseases. Our drug discovery and development programs have
resulted in innovative approaches by which physicians use genes to treat cancer
and other diseases.
Our lead product candidate, INGN 201, combines the p53 gene, one of the
most potent members of a group of naturally occurring genes, the tumor
suppressor genes, that act to protect cells from becoming cancerous, with a gene
delivery system that we have developed and extensively tested. The gene delivery
system, or vector, uses a modified adenovirus, a common cold virus, to deliver
p53 and genes like it to cancer cells. We are conducting pivotal Phase III
clinical studies of INGN 201 in head and neck cancer. Pivotal Phase III trials
are typically the final phase required for FDA approval. We are completing a
Phase II clinical trial in non-small cell lung cancer, a category that includes
approximately 80% of the various types of lung cancer. Phase II trials are
safety and efficacy studies. We are also conducting several Phase I clinical
trials, or safety studies, of INGN 201 in additional cancer types, or
indications. To date, doctors at clinical sites in North America, Europe and
Japan have treated hundreds of patients with INGN 201, establishing a large
safety database.
We are developing additional gene therapy product candidates that we
believe may be effective in treating certain cancers, notably those based on the
mda-7 and PTEN genes, as well as associated vector technologies for delivering
the gene-based products into target cells. Our INGN 241 product candidate, which
combines the mda-7 gene with our gene delivery system, is undergoing safety
testing in a Phase I clinical study. We believe that our research and
development expertise gained in gene therapy treatment for cancer is also
applicable to other diseases which, like cancer, result from cellular
dysfunction and uncontrolled cell growth. As a result, we are conducting
research in collaboration with medical institutions to understand the safety and
effectiveness of our gene therapy product candidates in the treatment of
cardiovascular disease and rheumatoid arthritis. In addition, we have developed
a variety of technologies, which we refer to as enabling technologies, for
administering gene therapy products to patients and enhancing the effects of
these products. We also have specialized manufacturing expertise and a
manufacturing facility to support our continued product development and
commercialization efforts.
BACKGROUND
Gene Function and Genomics
A typical living cell in the body contains thousands of different proteins
essential to cellular structure, growth and function. The cell produces proteins
according to a set of genetic instructions encoded by DNA, which contains all
the information necessary to control the cell's biological processes. DNA is
organized into segments called genes, with each gene containing the information
required to produce one or more specific proteins. Production of a protein that
a particular gene encodes requires gene expression, or activity. Many of
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the proteins inside a cell interact to form pathways that enable a cell to
perform its various functions. The improper expression of one or more genes can
alter these pathways and affect a cell's normal function, frequently resulting
in disease.
In recent years, scientists have made significant progress toward
understanding the nature of the set of human genes, the human genome, and
evaluating the role that genes play in both normal and disease states. The Human
Genome Project and other commercial, academic and governmental initiatives have
sequenced all of the genes that comprise the human genome. As new genes are
discovered and decoded, scientists are identifying and understanding their
functions. These discoveries provide opportunities to develop therapeutic
applications for individual genes, including treatment and prevention of
disease.
Gene Therapy
Gene therapy uses genes to regulate cellular function or to correct
cellular dysfunction. These processes involve the introduction of genes into
cells to restore missing gene functions, correct aberrant gene functions,
augment normal gene activity, neutralize the activity of defective genes or
induce cell death. In order to do this, a gene for disease treatment, or
therapeutic gene, is often combined with a vector for gene delivery, which
enables the gene to enter the target cell and make its gene product. For in vivo
gene therapy, physicians typically inject the vector containing the therapeutic
gene directly into a patient's tissue, body cavity or bloodstream.
The genes used for disease treatment are typically the normal counterparts
of genes that are defective or inadequately expressed in the diseased cell. In
some cases the therapeutic gene will simply act to replace a missing protein or
to augment the level of a protein that is otherwise inadequate to prevent
disease. In other cases, the therapeutic gene will act to eliminate the diseased
cells through a process that scientists have named apoptosis. Apoptosis, or cell
death, is a normal process that the body uses to eliminate damaged cells and
cells that are no longer necessary.
The delivery system must be able to deliver a sufficient dose of genes for
disease treatment to the correct tissue in order to cause a therapeutic effect.
The most common delivery systems currently in use are modified versions of
viruses such as adenoviruses. Scientists often use viruses as delivery systems
because they have the ability to efficiently infect cells and carry their
genetic material, or genome, into the cell where it will initiate a program to
produce more virus. Scientists can modify these viruses by deleting pieces of
the viral genome that are necessary for viral reproduction and replacing the
deleted pieces with a therapeutic gene. The resulting "viral vector" retains the
ability of the virus to efficiently deliver its genes, which now include a gene,
or genes, for disease treatment, into cells, but has lost the ability to
reproduce itself and spread to other cells. Scientists have also developed
synthetic substances such as liposomes, which are structures made of fatty
materials that have no viral pieces. The synthetic systems that lack any viral
pieces, or non-viral systems, can also deliver genetic material to host cells.
Scientists have developed these systems to mimic the characteristics of viral
systems in order to expand the disease targets that can be treated with gene
therapy.
Many of the clinical trials currently ongoing that involve gene therapy use
adenoviral vectors. Scientists create adenoviral vectors using adenoviruses,
which are among several common cold viruses. These vectors have been modified so
that their ability to reproduce and spread will be inhibited in a human host.
The DNA of adenoviral vectors rarely becomes incorporated into the cell genome.
Instead, it remains as an independent genetic unit and eventually disintegrates.
This feature protects normal cells that might have taken up the viral vector.
For cancer treatment, where the goal is to rapidly kill or repair the cancer
cells, the relatively short life of the adenoviral vector and its ability to
carry sufficient genes for disease treatment makes its use particularly
appropriate.
Cancer, a Genetic Disease
Cancer is the second leading cause of death in the United States, surpassed
only by heart disease. In the United States, approximately 1.3 million people
are newly diagnosed with cancer and over 550,000 people die from the disease
each year. Although the prevalence of specific cancers varies among different
populations, we believe that the overall incidence of cancer worldwide is
similar to that experienced in the United States.
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According to the American Cancer Society, the annual direct costs of treating
cancer patients in the United States were estimated at $60.0 billion in 2000.
Cancer is a group of diseases in which the body's normal self-regulatory
mechanisms no longer control the growth of some kinds of cells. Cells are
frequently exposed to a variety of agents, from both external and internal
sources, that damage DNA. Even minor DNA damage can have profound effects,
causing certain genes to become overactive, to undergo partial or complete
inactivation, or to function abnormally. Genes control a number of protective
pathways in cells that prevent cells from becoming cancerous. For example,
pathways that transmit signals for a cell to divide have on/off switches that
allow control of cell division. Cells also have mechanisms that allow them to
determine if their DNA has been damaged, and they have pathways to repair that
damage or eliminate the cell.
The failure of any of these protective pathways can lead to the development
of cancer. Cancer is one of the more attractive initial applications for gene
therapy, because in contrast to more complex genetic disorders, which may
require long-term function of the transferred gene, the treatment for cancer
restores just those functions that will lead to the destruction of the cancer
cell. The introduction of normal tumor suppressor genes, such as p53, into
cancer cells is among the most promising of these approaches.
Tumor Suppressor Genes
Tumor suppressor genes are one class of genes that play a crucial role in
preventing cancer and its spread. This class of genes includes the p53, mda-7
and PTEN genes, among others.
The best known and most studied of the tumor suppressor genes is the p53
gene. Initially mislabeled an oncogene, or cancer-causing gene, p53 is now known
to be a powerful tumor suppressor gene that acts to block cancer development by
preventing the accumulation of DNA damage. The p53 gene is involved in multiple
cellular processes, including control of cell division, DNA repair, cell
differentiation, genome integrity, apoptosis, and inhibition of blood vessel
growth, or anti-angiogenesis. Angiogenesis refers to the process by which new
blood vessels are formed, such as those that supply blood and nutrients to
tumors to feed their growth. The p53 gene is capable of such wide-ranging
effects because it orchestrates the activity of a host of other genes and
proteins. If a cell suffers DNA damage, p53 responds to the damage by initiating
a cascade of protective processes to either repair the DNA damage or to destroy
the damaged cell through apoptosis. These p53-mediated processes prevent damaged
cells from multiplying and progressing towards cancer. Therefore, the presence
of a normally functioning p53 pathway allows the body to naturally suppress
tumor growth. Most cancers have found ways to block the normal function of the
p53 pathway; approximately 50% of human cancers have done this through mutation
of the p53 gene itself. Scientists describe tumors with that mutation as p53
mutant tumors.
Current Treatment of Cancer
Despite advances in cancer research in recent years, better treatments for
cancer are urgently needed. The conventional therapeutic approaches, including
surgery, chemotherapy and radiation therapy, are ineffective or only partially
effective in many cancer types. Surgery is inadequate for many patients because
the cancer is inaccessible or impossible to remove completely. Surgery, although
applicable to over half of all cancer cases, is also inadequate where the cancer
has spread, or metastasized. For certain cancers such as head and neck cancer,
surgery can be an effective treatment of the cancer but may result in severe
disfigurement of and disability to the patient. Radiation therapy and
chemotherapy are, by their nature, toxic procedures that damage normal as well
as cancerous tissue. Physicians must carefully control administration of these
treatments to avoid life-threatening side effects, and many patients are unable
to withstand the most effective doses due to toxicity. These conventional
therapies typically cause debilitating side effects such as bone marrow
suppression, nausea, vomiting and hair loss, often requiring additional and
costly medications to ameliorate such side effects. Further, the use of certain
chemotherapies may be limited in tumors that have developed mechanisms to evade
the action of the drugs, a phenomenon that scientists term multidrug resistance.
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Because of the limitations of current cancer therapies, the treatment of
cancer is complex. Physicians refer to the first treatment regimen for a newly
diagnosed cancer, usually surgery if possible, or radiation therapy, as primary
treatment. If the primary treatment is not successful, the cancer will regrow or
continue to grow; physicians call this recurrent disease. In most cases,
recurrent cancer is not curable, with secondary treatment regimens, usually
chemotherapy, only providing marginal benefits for a limited period of time.
Physicians consider recurrent cancer that has proven resistant to a secondary
treatment to be refractory. Most new cancer treatments are tested initially in
patients with either recurrent or refractory disease because the effects of the
new therapy are more quickly apparent.
Given that established cancer therapies often prove to be incomplete,
ineffective or toxic to the patient, there is a need for new treatment
modalities that will either complement established therapies or replace them by
offering better therapeutic outcomes. For example, for a limited number of
cancers, immunotherapy, which seeks to stimulate a patient's own immune system
to kill cancer cells, has rapidly become widely accepted by improving on the
shortcomings of existing therapy. However, for a broad range of cancers
additional approaches are needed to improve the toxicity and marginal benefits
common to current cancer treatments. Gene therapy directly addresses the
cellular dysfunction that causes cancer, compared with small molecule drugs or
immunotherapeutic agents, which may act indirectly.
THE INTROGEN APPROACH
We believe that the emerging field of gene therapy presents a new approach
for treating many cancers without the toxic side effects common to traditional
therapies. We have developed significant expertise in identifying therapeutic
genes, which are genes that may be used to treat disease, and in using what we
believe are safe and effective delivery systems to transport these genes to the
cancer cells. We believe that we are able to treat a number of cancers in a way
that kills cancer cells while not harming normal cells.
Because most cancers are amenable to local treatment, we generally
administer gene therapy directly into a patient's cancerous tumor using
adenoviral vectors. We have initially focused on advanced cancers that lack
effective treatments and where local tumor growth control, where the tumor stops
growing or shrinks, is likely to lead to measurable benefit. We believe our
clinical studies have shown that our gene therapy can be used alone and in
combination with conventional treatments such as surgery, radiation therapy and
chemotherapy. To date, doctors at clinical sites in North America, Europe and
Japan have treated hundreds of patients with our lead product candidate, INGN
201, establishing a large safety database.
We have developed INGN 201 by packaging the p53 gene into the adenoviral
delivery system we have developed and extensively tested. Evidence from
laboratory, preclinical and clinical studies suggests that the p53 tumor
suppressor gene may be sufficient to slow, stop or kill many cancer cell types.
We believe that INGN 201 holds promise as an effective anti-cancer therapeutic
that would restore or augment normal tumor suppressor functions, both in
combination with conventional cancer treatment and as a stand-alone treatment
for patients who are resistant to or unable to receive conventional therapies.
We have also developed INGN 241 by packaging the mda-7 gene into the adenoviral
delivery system we have developed and extensively tested and believe it also
holds promise as an effective anti-cancer therapeutic.
THE INTROGEN STRATEGY
Our objective is to be the leader in the development of gene therapy
products for the treatment of cancer and other diseases which, like cancer,
result from cellular dysfunction and uncontrolled cell growth. To accomplish
this objective, we are pursuing the following strategies:
- Develop and Commercialize INGN 201 and INGN 241 for Multiple Cancer
Indications. We plan to continue developing our INGN 201 product using
the p53 gene and our INGN 241 product using the mda-7 gene, in multiple
cancer indications. Using INGN 201, we are conducting a pivotal Phase III
clinical trial in head and neck cancer, a Phase II clinical trial in
non-small cell lung cancer and, in cooperation with the National Cancer
Institute, or NCI, six Phase I studies in other cancer types. Using INGN
241, we are conducting safety testing in a Phase I clinical study.
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- Develop Our Portfolio of Gene Therapy Drug Products. Utilizing our
significant research, clinical, and regulatory expertise, we are pursuing
additional gene therapy drug products for various cancers. We have
established an efficient process for evaluating new drug candidates and
rapidly progressing them from preclinical to clinical development. We
have identified and licensed multiple genes, including PTEN, which we
intend to combine with our adenoviral vector system and which we believe
are attractive development targets for the treatment of various cancers.
- Expand Our Delivery System Technologies. We believe that no single gene
delivery system will be applicable to all clinical needs. At present, we
have a broad portfolio of delivery technologies under development. We are
leveraging our experience gained with our existing adenoviral vector
systems to develop next generation vectors for both viral and non-viral
delivery systems. To augment our portfolio, we will continue to examine
new licensing opportunities and develop collaborations in the area of
novel delivery and targeting technologies.
- Leverage Our Manufacturing Capabilities to Produce Additional Gene
Therapy Drug Products. We have developed significant expertise and
infrastructure for process development and manufacturing of therapeutic
genes and delivery systems. We have built and validated a manufacturing
facility that we believe meets current Good Manufacturing Practice, or
cGMP regulations. We believe that this facility is capable of supporting
the market launch of INGN 201 and the clinical testing requirements of
INGN 241. We have also established a variety of process methodologies,
formulation strategies and quality release assays to produce clinical
grade materials at commercial scale. We intend to utilize these
processing and production capabilities to advance clinical development
and commercialization of our pipeline of gene therapy product candidates,
as well as capitalize on opportunities to produce other companies'
products for them.
- Establish Targeted Sales and Marketing Capabilities. Because the
oncology market is characterized by a concentration of specialists in
relatively few major cancer centers, it can be effectively addressed by a
small, focused sales force. We will address this market by building a
direct sales force as part of the INGN 201 commercialization process and
by pursuing marketing and distribution agreements with corporate partners
for INGN 201 as well as additional gene therapy products.
- Expand Our Market Focus to Non-Cancer Indications. Our long term
strategy is to leverage our scientific, research and process competencies
in gene function and vector development to pursue gene-based therapies
for a variety of other diseases and conditions. We believe that gene
therapy holds promise for diseases such as cardiovascular disease and
rheumatoid arthritis, which, like cancer, result from cellular
dysfunction or uncontrolled cell growth.
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PRODUCT DEVELOPMENT PROGRAMS
The following table summarizes the status of our gene therapy product
development programs.
<Table>
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PRODUCT (GENE) CANCER INDICATION DEVELOPMENT STATUS
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INGN 201 (p53) Head and Neck Phase III
Non-Small Cell Lung Phase II
Prostate Phase I
Ovarian Phase I*
Bladder Phase I*
Brain (glioblastoma) Phase I*
Breast Phase I*
Bronchoalveolar Phase I*
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INGN 241 (mda-7) Various (solid tumors) Preclinical
Breast Preclinical
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INGN 251 (PTEN)** Colorectal Preclinical
Brain (glioblastoma) Preclinical
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BAK Program Various Research
p16 Program Pancreatic Research
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</Table>
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* Conducted in conjunction with the National Cancer Institute.
** Assigned to Gendux AB, our indirect, wholly-owned subsidiary.
Indications for INGN 201 (p53)
Our INGN 201 product candidate combines the p53 gene with an adenoviral
vector for gene delivery. Physicians typically inject INGN 201 directly into the
tumor. The importance of the p53 gene in controlling tumor growth suggests that
INGN 201 is applicable to multiple cancers. Our initial development strategy for
INGN 201 is to obtain approval for cancer indications, like head and neck and
lung cancer, which have few or no treatment options available and have near-term
clinical endpoints.
We have conducted a number of Phase I and Phase II studies to establish the
safety and evaluate the efficacy of INGN 201 both alone and in combination with
radiation therapy, chemotherapy and/or surgery. We evaluated efficacy by
measuring tumors during each study to analyze whether tumors had regressed,
remained stable or progressed during treatment. We supplemented these analyses,
where possible, with microscopic tissue analysis, or biopsy, to determine the
presence of residual cancer cells within the treated area. We further evaluated
efficacy by measuring the survival time of the patients treated in all of these
studies.
Head and Neck Cancer
Head and neck cancer, encompassing cancers of the tongue, mouth, vocal
cords and tissues surrounding them, has a worldwide incidence of approximately
400,000 new cases per year. In the United States, the annual incidence of
squamous cell cancer, a cancer of cells that line the oral cavity, pharynx, and
larynx, is approximately 40,000 with annual deaths of approximately 11,800. This
cancer is frequently fatal, with most patients dying from local and regional
disease, rather than from metastasis to other organs. Primary treatments for
this cancer are surgery and radiation therapy. However, these treatments are
debilitating and have permanent side effects, including loss of teeth, loss of
voice or disfigurement. Moreover, a large number of patients with head and neck
cancer experience recurrence. Once the disease recurs, few patients survive
despite secondary treatment with conventional therapies, with median patient
survival of less than 12 months. Although often used as a secondary treatment,
there are no chemotherapy drugs available today which have been approved by the
FDA for treatment of patients with recurrent head and neck cancer.
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Because physicians can administer INGN 201 locally, we believe it is an
excellent candidate for treatment of head and neck cancer. Based on clinical
results from our Phase I and Phase II trials, we are currently enrolling
patients in and conducting two multinational pivotal Phase III studies that the
FDA has reviewed, and if successful, will be used to support regulatory
approval. We intend these studies to demonstrate the efficacy of INGN 201 for
treatment of patients with squamous cell carcinoma of the head and neck,
regardless of whether the p53 gene is mutant or non-mutated, in whom standard
treatment of surgery and radiation therapy have not been effective and who have
recurrent or refractory disease. The first study compares the efficacy of INGN
201 to a standard chemotherapy treatment in patients with refractory disease.
The second study compares the efficacy of INGN 201 when it is used in
combination with a standard chemotherapy treatment to that standard chemotherapy
treatment used alone in patients with recurrent disease.
The first Phase III study is planned for 240 patients with refractory
disease. Patients in the control group receive weekly methotrexate, a standard
chemotherapy treatment for this condition, while patients in the treatment group
receive twice weekly injections of INGN 201. The study's primary endpoint, or
result that we will evaluate principally, is survival. The investigators will
measure a possible survival advantage by comparing how long the p53 treatment
group patients live relative to how long the control group patients live. The
second Phase III study is planned for 288 patients with recurrent head and neck
cancer. These patients will not have previously been treated with chemotherapy.
The control group will receive a standard chemotherapy treatment with the drugs
cisplatin and 5-fluorouracil and the treatment group will receive the same drugs
and INGN 201. Each treatment will be repeated every three weeks, which is a
standard interval for chemotherapy. The primary endpoint will be the duration of
tumor growth control in the head and neck region as measured by a patient's
tumor growth beyond the patient's baseline, or tumor size at the beginning of
the study. These studies are complementary, with the primary endpoint in each
serving as a secondary endpoint, or result that we will evaluate secondarily, in
the other. An independent data safety monitoring board will oversee safety for
the studies and conduct a specified interim data analysis for each study. Both
of these Phase III studies are intended to be conducted at approximately 60
cancer centers in the United States, Canada, Europe and Asia.
We conducted a Phase II study of INGN 201 in 112 patients with either
recurrent or refractory head and neck cancers at 18 clinical centers in the
United States and Europe, using the highest dose of INGN 201 tested in the Phase
I study. This study did not have a treatment control arm and the main purpose of
the study was to evaluate the safety, side effects and efficacy of INGN 201
administered alone to tumors of various sizes. The primary measure of efficacy
was to assess patient response to INGN 201 by periodically measuring the size of
all tumors in the patient compared to their size at the start of treatment. A
positive response is defined as the disappearance of the tumor, shrinkage of the
tumor or the absence of additional tumor growth beyond 25% of pre-treatment
measurements, an accepted indicator of tumor growth control.
In order to design pivotal Phase III studies and to identify the patient
characteristics most amenable to INGN 201 treatment, we conducted a preliminary
analysis on the first 88 patients treated and evaluated in our Phase II study.
This analysis showed that approximately 25% of the patients that the
investigators injected and evaluated had a positive response to treatment. In
addition, because a subset of patients had multiple tumors treated, the
preliminary analysis also evaluated individual tumor response. The analysis
showed that 60% of the individual tumors that the investigators injected and
evaluated had a positive response. Tumors with non-mutated p53 genes and those
with mutant p53 genes both responded to INGN 201 treatment. The patients in this
Phase II study tolerated INGN 201 well, without the significant side effects
common to conventional cancer treatments. Side effects were consistent with
those experienced in the Phase I study discussed below.
This preliminary analysis also provided important data with regard to the
effect of INGN 201 on the median survival time of the patients. The data showed
a median patient survival time from the start of treatment of 7.5 months for a
subset of patients with refractory disease and tumors below a specified size.
Patients with these characteristics comprise the population for our first Phase
III study. Based on an historical expected survival time that our clinical
advisors estimate to be 4 months, this median survival time of 7.5 months
suggests an 88% increase in survival time for these patients.
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Previously, INGN 201 was tested in a Phase I safety study with patients
with recurrent head and neck cancer. In this study, 33 patients received a total
of 429 doses. We believe this study demonstrates that physicians can safely
inject INGN 201 into head and neck tumors repetitively over many months. Side
effects were minimal, consisting of pain at the site of the injection and
flu-like symptoms that could be readily treated without disrupting the
administration of the drug. No patient had treatment stopped or reduced because
of toxicity, even at the maximum dose. In 15 of these patients, we showed that
surgery could be safely combined with INGN 201 without increasing the risk of
wound infections or inhibiting healing.
Non-Small Cell Lung Cancer
Lung cancer is the most common cause of cancer-related death in the United
States, with an estimated 169,000 new cases diagnosed annually. An estimated
157,000 people will die from the disease in 2001. The five year survival rate
for patients diagnosed with lung cancer is 14%. Non-small cell, or NSC, lung
cancer comprises approximately 80% of all lung cancer cases. Surgery can be an
effective treatment, but only a minority of patients are eligible because early
stage diagnosis is uncommon. Only 30% of these patients will have a complete
surgical resection of their disease. The remaining patients typically undergo a
combination of surgery, radiation and chemotherapy. This combination treatment
is only effective in a small percentage of cases. Of patients who have
unresectable disease, 80% will again have active cancer cells three months after
completing a full course of radiation. Due to the ineffective treatment of NSC
lung cancer in many patients, a significant unmet need for better treatments
exists. The opportunity for a new treatment to show benefit is great,
particularly if it can be combined with existing treatments without increasing
the toxicity of those treatments.
We are completing a Phase II study of INGN 201 in combination with
radiotherapy as the primary treatment for patients who have newly diagnosed
inoperable NSC lung cancer and who cannot tolerate chemotherapy. Radiotherapy is
the standard treatment for patients in this condition. All patients in this
study receive three INGN 201 injections into the tumor during a six week course
of radiotherapy. These patients are being evaluated for the efficacy, safety and
side effects of the treatment to ascertain whether the combination of INGN 201
with radiation is well tolerated. Objectives of this study are to determine if
the addition of INGN 201 injected directly into the tumor with standard
radiotherapy improves the response rate of the injected tumor in patients with
inoperable NSC lung cancer, and to evaluate the tolerability of the combination
treatment. An evaluation is being performed three months after treatment is
completed, consisting of a radiograph to assess the size of the treated tumor
mass, supplemented by a biopsy to assess for living cancer cells within the
tumor at the site of treatment. The patients are then followed without further
treatment for clinical evidence of disease progression.
We conducted a preliminary analysis of the first 17 patients that the
investigators treated and evaluated in the Phase II study of INGN 201. This
preliminary analysis included both the radiographs and the tumor biopsies that
we refer to above. The results of this analysis established an acceptable safety
profile and showed evidence of local tumor control and reductions in tumor size.
Fourteen of 17 patients that the investigators treated, or 82%, had radiographic
evidence of local tumor growth control, including 11 complete or partial
responses of the tumor that the investigators injected. Furthermore, the
preliminary analysis showed that nine of these 11 patients had no living tumor
cells in the biopsy that the investigator took from the site of gene therapy
injection. Based on the preliminary results of this Phase II study using gene
therapy with radiation therapy, a larger Phase II study is being designed to
evaluate whether p53 enhances the effectiveness of radiation therapy and
chemotherapy when investigators use them together to treat NSC lung cancer.
We conducted a Phase I safety study of INGN 201 in 53 patients with
end-stage NSC lung cancer who had failed surgery, radiation and chemotherapy. In
one arm of the study, 29 patients received INGN 201 injected into a single tumor
site. In the other arm, 24 patients received INGN 201 in combination with
cisplatin, a commonly used chemotherapeutic agent. The patients in this study
tolerated the INGN 201 treatments well, and the most severe side effects noted
were consistent with those experienced with the use of cisplatin alone.
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Breast Cancer
Physicians will diagnose an estimated 193,000 new cases of breast cancer in
the United States in 2001, and more than 40,000 people are expected to die of
the disease during that time period. We and Aventis Pharma SA, or Aventis, under
an agreement separate from the restructured p53 collaboration agreement
discussed below, are commencing a Phase II study using INGN 201 administered
alone and in combination with chemotherapy in women who have locally advanced
breast cancers. Also, the NCI has initiated a Phase I clinical trial using INGN
201 in patients with locally recurrent breast cancer involving the chest wall.
Prostate Cancer
Prostate cancer is one of the most common forms of cancer. Approximately
198,000 new cases will occur in the United States in 2001, and more than 31,000
people are expected to die of the disease during that time period. Most prostate
cancer patients are treated with either surgery or radiation therapy. Because
newer and simpler methods of diagnosis that detect the disease at an earlier
stage exist today, a significant number of patients who are diagnosed with
prostate cancer before it has metastasized may benefit from local treatment
therapies such as INGN 201.
We plan to conduct a randomized, controlled Phase II study for patients who
have failed radiation therapy for prostate cancer. The study would enroll only
patients who have local recurrence in the pelvic region, thus excluding those
with metastases beyond the pelvic region. Patients in the study arm would be
treated with a combination of INGN 201 injections and additional radiation
therapy, while patients in the control arm would receive only radiation
treatment. The goal of this study is to demonstrate the safety and efficacy of
INGN 201 and radiation in reducing or eliminating further tumor growth in
patients with localized disease who are not candidates for surgery.
We have completed enrollment and treatment in a Phase I study of 30
patients where investigators injected INGN 201 into the prostate gland with a
subsequent surgical resection of the gland. The patients tolerated the INGN 201
injections well. In a preliminary analysis, 27% of the patients showed
measurable evidence of tumor shrinkage from the INGN 201 injections.
Other Cancers
There are several other cancer indications for which INGN 201 is in earlier
stages of clinical development. To evaluate the possible use of INGN 201 in
these indications, we and Aventis have entered into a Cooperative Research and
Development Agreement, or CRADA, with the NCI. Under this program the NCI has
initiated clinical trials with INGN 201 at leading cancer centers using clinical
protocols that we have developed in connection with the NCI. These protocols are
designed to demonstrate the safety of INGN 201 in these indications and by
various routes of administration.
Ovarian Cancer. There were an estimated 23,000 new cases of ovarian cancer
and 14,000 deaths in the United States in 2000. In approximately 80% of patients
with advanced disease, the cancer remains localized within the peritoneal, or
abdominal, cavity. This allows ready access to cancer cells for simple
intraperitoneal administration, that is, administration into the abdominal
cavity of gene therapeutic agents. The NCI has initiated Phase I clinical trials
of INGN 201 in this population. We anticipate that these trials will be expanded
to evaluate the use of INGN 201 in combination with surgery and/or chemotherapy.
Bladder Cancer. There were an estimated 53,000 new cases of bladder cancer
in 2000 in the United States. The annual number of deaths from this indication
in the United States is estimated to be 12,000. The anatomy of the bladder
allows uniform delivery of high concentrations of gene therapeutic agents via
catheter. The NCI has initiated a Phase I clinical trial using INGN 201 in this
indication.
Brain Cancer (Glioblastoma). An estimated 13,000 people die from cancers
of the brain and central nervous system in the United States each year.
Glioblastoma multiforme, or GBM, is a particularly deadly form of primary brain
cancer that afflicts children as well as adults. This condition occurs in
approximately 30% of all brain cancer patients in the United States. GBM is not
effectively treated with conventional
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therapies because the lesions are deep within the brain and are large and grow
rapidly. The NCI has initiated a Phase I clinical trial using INGN 201 in
recurrent GBM.
Bronchoalveolar Cancer. It is estimated that physicians diagnosed an
estimated 9,800 new cases of bronchoalveolar cancer in the United States in
2000. Bronchoalveolar cancer is a form of non-small cell lung cancer which
spreads throughout the lungs, but does not spread elsewhere in the body. Current
treatments are not effective for this condition. The NCI has initiated a Phase I
clinical trial in bronchoalveolar cancer with INGN 201 administered by directly
bathing the airway leading to the diseased lung segments.
Other p53 Product Development
We are also exploring additional therapeutic approaches of combining the
p53 gene with other vectors. We have studied the p53 gene in combination with
retroviral vectors, which are described below, in a Phase I clinical trial and
observed no significant side effects. In addition, we are studying the use of
the p53 gene in combination with non-viral delivery systems to evaluate the
benefits of systemic and other administration of the p53 gene to treat cancer.
Indications for INGN-241 (mda-7)
The mda-7 gene is a promising tumor suppressor gene which we believe, like
p53, has broad potential to induce apoptosis in many types of cancer. We have
combined the mda-7 gene with our adenoviral system to form INGN 241. Our
preclinical studies have determined that INGN 241 suppresses growth of many
cancer cells, including those of the breast, lung, colon, prostate and central
nervous system, while not affecting growth of normal cells. Because INGN 241
kills cancer cells, even if other tumor suppressor genes, including p53 or p16,
are not functioning properly, it appears that mda-7 functions via a novel
mechanism of tumor suppression. We have an exclusive license to the mda-7 gene
for gene therapy applications from Corixa Corporation. We are currently
conducting a Phase I study using INGN 241 testing safety and mechanism of action
in approximately 15 patients with solid tumors. Our preclinical program with
INGN 241 has included research at The University of Texas M.D. Anderson Cancer
Center, Columbia University and Corixa Corporation.
RESEARCH AND DEVELOPMENT PROGRAMS
In addition to our clinical programs underway with INGN 201 and INGN 241,
we are conducting a number of preclinical and research programs involving a
variety of therapeutic genes for the treatment of cancer. These programs involve
genes that act through diverse mechanisms to inhibit the growth of or kill
cancer cells.
We have combined the PTEN tumor suppressor gene with our adenoviral system
to form INGN 251. Researchers have linked mutations in the PTEN tumor suppressor
gene to a variety of common human cancers, including brain, prostate and breast
cancers. Preliminary studies have demonstrated that INGN 251 can inhibit the
growth of colorectal, prostate and brain cancer cells and promote apoptosis in
many of these cells. Our preclinical program with INGN 251 includes studies with
Imperial Cancer Research Technology Limited in London, or ICRT. We are also
conducting preclinical studies of PTEN's role in prohibiting advancement of
cardiovascular disease in a collaboration with the Texas Heart Institute. We
obtained an exclusive license to the PTEN gene from ICRT, which we have assigned
to Gendux AB.
In addition to our preclinical programs, we are conducting research on
additional genes, including CCAM, BAK, and p16, which hold promise as
therapeutic candidates. BAK is a pro-apoptotic gene which kills cancer cells. We
are working with our collaborators at M.D. Anderson Cancer Center to identify
and develop both viral and non-viral vectors containing this gene. We have
exclusive rights to use the BAK gene under a license with LXR Biotechnology,
Inc., the rights of which were subsequently sold to Tanox, Inc. We have licensed
the adenoviral vector containing the p16 gene, a widely known tumor suppressor
gene, from M.D. Anderson Cancer Center and have demonstrated that it inhibits
tumor growth in animal models. We have also licensed the CCAM gene from M.D.
Anderson Cancer Center. After evaluating the results of early
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stages of research with two other genes, DBCCR1 and rsk3, we notified ICRT in
July 2001 that we would not exercise our options to license these two genes.
INTROGEN ENABLING TECHNOLOGIES
We have a portfolio of technologies, referred to as enabling technologies,
for administering gene therapy products to patients and for enhancing the
effects of these products, which we plan to exploit to develop additional gene
therapy products to treat cancer and other diseases which, like cancer, result
from cellular dysfunction and uncontrolled cell growth.
Viral Delivery Systems
Adenoviral Systems. We have demonstrated that INGN 201 and INGN 241, which
use our adenoviral vector system, enter tumor cells and express their proteins
despite the body's natural immune response to the adenoviral vector. While the
adenoviral vector system used is appropriate for the treatment of cancer by
local administration, we have developed a number of additional systems that
utilize modified adenoviral vectors for gene delivery. These systems also may be
applicable to indications where activity of the gene for disease treatment is
required for longer periods of time or where systemic administration may be
necessary.
- Viral Gene Expression Modulation System. We are developing this
technology to block production of viral proteins in the patient to reduce
immune response to the vector, thus prolonging the activity of the
disease treatment gene.
- Expanded Payload Systems. We are developing these technologies to allow
the removal of very large pieces of the genome in order to increase the
amount of genetic material that can be carried to the cell, allowing
multiple genes to be incorporated into a single vector. Also, since many
viral genes are deleted, we expect that the immune response against these
vectors will be reduced.
Retroviral Systems. Retroviral vectors are based on a different type of
virus that has RNA rather than DNA as its genetic material. Retroviral vectors
may be advantageous for particular clinical applications where the gene for
disease treatment needs to be active for an extended period of time. We have
clinical experience combining retroviral vectors with p53 and have established
manufacturing capability for these delivery systems.
Non-Viral Delivery Systems
We have in-licensed and are developing a non-viral delivery platform as a
potential alternative to viral delivery for certain types of cancers, or
clinical indications, particularly those that require systemic administration.
Although we are not currently using non-viral vector technology in our clinical
programs, we have completed proof-of-concept studies in animal models which
suggest that this system may be a useful way to deliver tumor suppressor genes
for systemic cancer treatment.
Additional Enabling Technologies
We are also developing a number of additional technologies that expand our
capabilities.
- Multi-Gene Vector System. This technology is designed to combine
multiple genes with a vector. This has the potential to be used with both
viral and non-viral delivery systems to allow the activity of more than
one gene for disease treatment at a time.
- Pro-Apoptotic Gene Delivery System. This technology is designed to allow
the activity of pro-apoptotic, or apoptosis-inducing, genes during
treatment only, while temporarily suppressing the ability of the gene for
disease treatment to kill cells during production. This will facilitate
production of the gene therapeutic at higher volumes.
- Tissue-Specific Targeting Systems. This technology is designed to limit
the activity of the gene for disease treatment to particular cell types.
It is intended to be applied to both viral and non-viral vectors.
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- Selective Inhibition of Gene Expression. This technology is designed to
block the dysfunctional activity or expression of certain genes, like
cancer-promoting oncogenes.
- Gene Screen Vector System. This technology is designed to aid in the
rapid screening of genes for therapeutic potential. This system should
allow us to quickly evaluate genes of unknown function for their
potential as cancer treatments.
MANUFACTURING AND PROCESS DEVELOPMENT
Commercialization of a gene therapy product requires process methodologies,
formulations, and quality release assays in order to produce high quality
materials at a large scale. We believe that the expertise we have developed in
the areas of manufacturing and process development represents a competitive
advantage. We have developed scale-up methodologies for both upstream and
downstream production processes, formulations that are safe and stable, and
quality release assays that ensure product quality.
We own and operate a state of the art, validated manufacturing facility
that we believe complies with cGMP regulations, which replaces an earlier pilot
production facility. We produce INGN 201 in this facility for use in our Phase
III studies and INGN 241 for use in our Phase I studies. The design and
processes of this facility have been reviewed with the FDA. The validation of
our manufacturing processes is ongoing. We plan to use this facility for our
market launch of INGN 201. Our production and quality personnel team has been in
place for approximately four years. To date, we have produced approximately 20
batches of INGN 201 clinical material, including all clinical material used in
the Phase II and Phase III studies for this product candidate.
BUSINESS AND COLLABORATIVE ARRANGEMENTS
Aventis Pharma AG
In October 1994, we entered into two collaboration agreements with
Rhone-Poulenc Rorer Pharmaceuticals Inc. to develop therapeutics based on p53
and on K-ras pathway inhibition. In December 1999, Rhone-Poulenc S.A., the
ultimate parent company of Rhone-Poulenc Rorer Pharmaceuticals Inc., combined
with Hoechst AG, and the parties have combined Hoechst Marion Roussel, the
pharmaceutical business of Hoechst AG, with that of Rhone-Poulenc Rorer to form
Aventis Pharma, or Aventis. Rhone-Poulenc Rorer Pharmaceuticals Inc. is now
known as Aventis Pharmaceuticals Products Inc. Aventis Pharma, the parent
company of Aventis Pharmaceuticals Products Inc., is a multi-billion dollar,
global pharmaceutical company.
In June 2001, we restructured our collaborative relationship with Aventis.
Under this restructuring, we assumed responsibility for the worldwide
development of all p53 and K-ras products, and acquired all marketing and
commercialization rights with respect to those products. We assumed the control
and performance of ongoing clinical trials for p53- and K-ras-based products,
and are now fully responsible for all preclinical research and development and
clinical trials for new gene therapy products. In connection with this
restructuring and pursuant to a stock purchase agreement executed on June 30,
2001, Aventis purchased $25.0 million of non-voting preferred stock from us, the
payment for which was received on July 2, 2001.
In accordance with the restructured p53 and K-ras collaboration agreement,
Aventis licensed to us all of its patents covering the manufacture, sale,
offering for sale, importation or use of INGN 201 and other K-ras patents,
delivery patents and targeting technologies. Aventis also agreed, for a period
of seven years, not to conduct any activities directed to the development or
commercialization of any gene therapy products using the p53 or K-ras genes.
We now have the exclusive, worldwide right to market and manufacture the
products developed under each of the prior collaboration agreements, as well as
any new p53- or K-ras-based gene therapy products. Aventis agreed to transfer
and is in the process of transferring to us all trademarks and goodwill
associated with INGN 201.
Through June 30, 2001, Aventis provided us with approximately $57.2 million
in the form of funding for early stage development programs and purchases of
INGN 201 product for later stage clinical development
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and purchased over $14 million of preferred stock from us. These purchases of
preferred stock were made upon the achievement of the milestones contemplated in
our stock purchase agreement with Aventis.
Gendux, Inc. and Gendux AB
We established our wholly-owned subsidiary, Gendux, Inc., and its
wholly-owned subsidiary Gendux AB, which is based in Stockholm, Sweden, in order
to create a European presence with which to extend our technology and product
development opportunities and enhance our interactions with European academic
and commercial institutions. We have assigned to Gendux AB certain rights in the
PTEN technologies and licensed certain rights in the CCAM technologies, as well
as a nonexclusive license to use our vector technology in commercializing gene
therapy products.
Academic and Other Collaborations
Academic collaboration agreements have been a cost-effective way of
expanding our intellectual property portfolio, generating data necessary for
regulatory submissions, accessing industry expertise and finding new technology
in-license candidates, all without building a large internal scientific and
administrative infrastructure.
The University of Texas M.D. Anderson Cancer Center
Many of our core technologies were developed by scientists at M.D. Anderson
Cancer Center in Houston, Texas, one of the largest academic cancer centers in
the world. We sponsor research conducted at M.D. Anderson Cancer Center to
further the development of technologies that have potential commercial
viability. Through these sponsored research agreements, we have access to M.D.
Anderson Cancer Center's resources and expertise for the development of our
technology. In addition, we have the right to include certain patentable
inventions arising from these sponsored research agreements under our exclusive
license with M.D. Anderson Cancer Center.
We entered into this license agreement on July 20, 1994, which terminates
on July 20, 2009. The agreement is also terminable upon our insolvency, either
party's breach, or upon our notice on a patent-by-patent basis. The technologies
we have licensed from M.D. Anderson Cancer Center under the exclusive license
agreement relate to p53 and CCAM, among others. Under the agreement, we have
agreed to pay M.D. Anderson Cancer Center royalties on sales of products
utilizing these technologies and we are obligated to reimburse any of M.D.
Anderson Cancer Center's costs that may be incurred in connection with obtaining
patents related to the licensed technologies. Our strategy for product
development is designed to take advantage of the significant multidisciplinary
resources available at M.D. Anderson Cancer Center. These efforts have resulted
in our becoming one of the largest corporate sponsors of activities at M.D.
Anderson Cancer Center in recent years and have yielded to us exclusive patent
and licensing rights to numerous technologies.
National Cancer Institute
We have entered into a cooperative research and development agreement, or
CRADA, with the NCI. The CRADA has a flexible duration, but is terminable upon
the mutual consent of the parties or upon 30 days notice of either party. NCI
will sponsor and conduct preclinical and human clinical trials to evaluate the
effectiveness and potential superiority to other treatments of INGN 201 against
a range of designated cancers including breast cancer, ovarian cancer, bladder
cancer, and brain (GBM) cancer. Under the CRADA, NCI will conduct five or more
Phase I clinical trials and will provide most of the funding for these
activities. We will supply NCI with INGN 201 product to be administered in these
trials. We have exclusive rights to all preclinical and clinical data
accumulated under the CRADA. The CRADA provides that NCI has certain rights to
continue development of INGN 201 on its own if we elect to terminate the CRADA.
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Corixa Corporation
We have entered into a research and license agreement with Corixa
Corporation pursuant to which we acquired an exclusive, worldwide license to
mda-7 for gene therapy applications. The agreement is effective until the
expiration of the subject patents. It is terminable upon the breach or
insolvency of either party, or upon our notice on a patent-by-patent or
product-by-product basis. Under the agreement, we paid Corixa an initial license
fee and have agreed to make additional payments upon the achievement of
development milestones, as well as royalty payments on product sales. We also
made research payments to Corixa, which performed research involving mda-7.
Imperial Cancer Research Technology Limited
We have entered into two option agreements with Imperial Cancer Research
Technology Limited, or ICRT. ICRT is the technology and licensing unit of the
Imperial Cancer Research Fund, which conducts over one-third of all cancer
research in the United Kingdom. The agreements are terminable upon either
party's breach or insolvency, or by ICRT upon our failure to make required
payments. Under the agreements, we have an option to obtain exclusive worldwide
licenses to PTEN, rsk3 and DBCCR1 genes, the first of which we have
assigned -- and the last two of which we have licensed -- to Gendux AB. In July
2001, Gendux notified ICRT of its intent not to exercise its options to license
the rsk3 and DBCCR1 genes. Gendux AB has exercised the option with respect to
the PTEN gene and entered into a license with ICRT for that gene. In addition,
we have an option to obtain an exclusive license to other patented subject
matter and technology arising out of the research collaborations between ICRT
and us dating to the PTEN, rsk3 and DBCCR1 genes, subject to certain rights
retained by ICRT and a non-exclusive license back to ICRT with certain
improvements we make to the technology.
MARKETING AND SALES
We are focusing our current product development and commercialization
efforts on the oncology market. This market is characterized by its
concentration of specialists in relatively few major cancer centers, which we
believe can be effectively addressed by a small, focused sales force. We will
likely address this market by building a direct sales force as part of the INGN
201 commercialization process and by pursuing marketing and distribution
arrangements with corporate partners for INGN 201 as well as additional gene
therapy products.
PATENTS AND INTELLECTUAL PROPERTY
Our Portfolio
Our success will depend in part on our ability to develop and maintain
proprietary aspects of our technology. To this end, we have an intellectual
property program directed at developing proprietary rights in technology that we
believe may be important to our success. We also rely on a licensing program to
ensure a continued strong technology development and technology transfer from
companies and research institutions with whom we work. In addition to our
intellectual property license with Aventis, we have entered into a number of
exclusive license agreements or options with such companies and institutions,
including M.D. Anderson Cancer Center, Sidney Kimmel Cancer Center, Corixa, the
Imperial Cancer Research Fund, and LXR Biotechnology, Inc. with the LXR rights
being subsequently sold to Tanox, Inc. In addition to patents, we rely on trade
secrets and proprietary know-how, which we seek to protect, in part, through
confidentiality and proprietary information agreements.
Patent applications in the United States, as well as their processing
through the Patent and Trademark Office, or PTO, are, in most cases, maintained
in secrecy until patent applications are published or patents issue.
Furthermore, publication of discoveries in the scientific or patent literature
frequently occurs significantly later than the date on which the underlying
discoveries were made. Many companies choose not to publish their scientific
discoveries at all. Consequently, we cannot be certain that our patent
applications lay claim to the first made inventions or that they were the first
filed patent applications for such inventions. Similarly, we are unable to
assess the United States patent applications of competitors and third parties or
to
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predict which, if any, of those patent applications might issue as patents, with
any degree of certainty. Moreover, the processing of patent applications
directed to technologies such as genes and gene therapies in the PTO and patent
offices in other jurisdictions will typically require a much longer period of
time than patent applications involving other technologies, leading to
additional uncertainty.
We currently own or have an exclusive license to 16 issued United States
patents and 43 pending United States patent applications. In addition, we own or
license 16 issued and 130 pending foreign patent applications that generally
parallel the United States portfolio. If we do not seek a patent term extension,
the currently issued United States patents that we own or have exclusively
licensed will expire between the years 2010 and 2017. The exclusive licenses
that give us rights in the patents and applications that such licenses cover
will expire no earlier than the life of any patent covered under the license.
Adenoviral p53 Compositions and Therapies
In developing our patent portfolio, we have focused our efforts in part on
protecting our potential products and how they will be used in the clinic.
Arising out of our work with M.D. Anderson Cancer Center, we currently have an
exclusive license to a number of United States and corresponding international
patent applications directed to adenoviruses that contain the p53 gene, referred
to as adenoviral p53, adenoviral p53 pharmaceutical compositions and the use of
adenoviral p53 compositions in various cancer therapies and protocols. One of
these applications, directed to the clinical use of adenoviral p53 to treat
cancer, has issued as a United States patent. We have also exclusively licensed
from Aventis a United States patent application, and corresponding international
applications, directed to adenoviral p53 and its clinical applications. We also
have an exclusive license to a United States patent application and
corresponding international applications directed to the use of the p53 gene in
the treatment of cancer patients whose tumors appear to express a normal p53
protein.
Combination Therapy with the p53 Gene
We have also focused our portfolio development on protecting clinical
therapeutic strategies that combine the use of the p53 gene with traditional
cancer therapies. In this regard, also arising out of our work with M.D.
Anderson Cancer Center, we have an exclusive license to two issued United States
patents, and one pending application with corresponding international
applications, directed to cancer therapy using the p53 gene in combination with
DNA damaging agents such as conventional chemotherapy or radiotherapy. This
patent and applications concern the therapeutic application of the p53 gene
either before, during or after chemotherapy or radiotherapy. We have also
exclusively licensed from Aventis a United States application and corresponding
international applications directed to therapy using the p53 gene together with
taxanes such as Taxol(R) or Taxotere(R). Furthermore, we have exclusively
licensed a United States patent application, and corresponding international
applications, directed to the use of the p53 gene in combination with surgical
intervention in cancer therapy.
Adenovirus Production, Purification and Formulation
Another focus of our research has involved the development of procedures
for the commercial scale production of our potential adenoviral-based gene
therapy products, including that of our potential adenoviral p53 product. In
this regard, we own an issued United States patent as well as a number of
pending United States applications, and corresponding international
applications, directed to commercial scale processes for producing adenoviral
gene therapy compositions having a high level of purity, as well as to
storage-stable formulations. These applications include procedures for preparing
commercial quantities of recombinant adenoviruses for gene therapy and include
procedures applicable to the p53 gene, as well as any of the other of our
potential gene therapy products. We have also licensed from Aventis a United
States application and corresponding international applications directed to
processes for the production of purified adenoviruses, useful for gene therapy
applications.
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Other Tumor Suppressor Genes
We either own or have exclusively licensed rights in a number of other
patents and applications directed to the clinical application of various tumor
suppressor genes other than the p53 gene, including the p16, PTEN, mda-7, CCAM,
BAK, FHIT, and antisense K-ras genes. We have exclusively licensed or optioned
rights in two issued United States patents covering the use of the BAK and mda-7
genes, and have received a formal notice of allowance from the PTO in a patent
application relating to the PTEN gene and a United States patent has issued that
is directed to the use of the adenoviral p16 in cancer therapy.
Other Therapeutic, Composition and Process Technologies
We also own or have exclusively licensed a number of United States and
international patent applications on a range of additional technologies. These
include various applications relating to the p53 gene, combination therapy with
2-methoxyestradiol, antiproliferative factor technologies, retroviral delivery
systems, stimulation of anti-p53, screening and product assurance technologies,
as well as second generation p53 gene molecules. We have exclusively licensed a
number of United States and international applications directed to various
improved gene therapy vectors for use in gene therapy protocols, gene therapy
employing more than one gene for disease treatment, as well as applications
directed to the delivery of genes for disease treatment without the use of a
vector, or "non-viral" therapy. We also have exclusive rights in an issued
United States patent and corresponding international applications directed to a
low toxicity analogue of IL-2, also called F42K.
Trade Secrets
We rely on trade secrets law to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. In addition, we generally require employees, academic
collaborators and consultants to enter into confidentiality agreements. Despite
these measures, we may not be able to adequately protect our trade secrets or
other proprietary information. We are a party to various license agreements that
give us rights to use specified technologies in our research and development
processes. If we are not able to continue to license this technology on
commercially reasonable terms, our product development and research may be
delayed. In addition, in the case of technologies that we have licensed, we do
not have the ability to make the final decisions on how the patent application
process is managed, and accordingly are unable to exercise the same degree of
control over this intellectual property as we exercise over our internally
developed technology. Our research collaborators and scientific advisors have
rights to publish data and information in which we have rights. If we cannot
maintain the confidentiality of our technology and other confidential
information in connection with our collaborations, then our ability to receive
patent protection or protect our proprietary information will be diminished.
Competitive Environment
We are aware of a number of issued patents and patent applications that
relate to gene therapy, the treatment of cancer and the use of the p53 and other
tumor suppressor genes. Schering-Plough, or its subsidiary Canji, controls
various United States patent applications and a European patent directed to
therapy using the p53 gene, to adenoviruses that contain the p53 gene, referred
to as adenoviral p53, and to methods for carrying out therapy using adenoviral
p53. In addition, Canji controls an issued United States patent and its
international counterparts, including a European patent, involving a method of
treating mammalian cancer cells lacking normal p53 protein by introducing a p53
gene into the cancer cell. Canji also controls a European patent that is
directed to the use of tumor suppressor genes in cancer therapy, but which does
not mention p53.
While we believe that our potential products do not infringe any valid
claim of the Canji p53 patents, Canji or Schering Plough could assert a claim
against us. Furthermore, we may become subject to other patent infringement
claims or litigation arising out of pending applications, should they issue, or
become involved in potentially protracted interference proceedings declared by
the PTO, or become involved in similar proceedings in foreign patent offices, to
determine the priority of inventions or validity of an issued patent.
In another area, Canji controls a United States patent and corresponding
international applications, including a European counterpart, relating to the
purification of viral or adenoviral compositions. We believe
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that our manufacturing process does not infringe any valid claims of this
patent. Genzyme controls a United States application and corresponding
international applications, including a European counterpart application,
directed to the purification of adenoviral compositions. The relevance of this
application to our activities is unclear due to the fact that prosecution of the
United States application remains secret.
GOVERNMENT REGULATION
The production and marketing of our proposed products and our research and
development activities are subject to regulation for safety, effectiveness and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs and research personnel are subject to
rigorous FDA and National Institutes of Health, or NIH, regulations. The Federal
Food, Drug and Cosmetic Act (the FDC Act), as amended, the regulations
promulgated under the FDC Act, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, advertising and promotion of
our products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
The Drug Approval Process
The steps required before our proposed products may be marketed in the
United States include preclinical testing, the submission to the FDA of an
investigational new drug, or IND, application for clinical trials, clinical
trials to establish the safety and effectiveness of the drug, the submission to
the FDA of a BLA (for a biologic) or an NDA (for a drug) and the FDA approval of
the BLA or NDA prior to any commercial sale of the drug. Our products will be
regulated as biologics. In addition to obtaining FDA approval for each product,
each domestic manufacturing establishment must be registered with, and approved
by, the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with cGMP regulations. To supply products
for use in the United States, foreign manufacturing establishments, including
third party facilities, must comply with cGMP regulations and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies in such
countries under reciprocal agreements with the FDA.
Preclinical Testing
Preclinical testing includes laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the potential safety and
effectiveness of the product. Compounds must be adequately manufactured and
preclinical safety tests must be conducted in compliance with FDA Good
Laboratory Practices, or GLP regulations. The results of the preclinical tests
are submitted to the FDA as part of an IND application to be reviewed by the FDA
prior to the commencement of human clinical trials. Submission of an IND
application may not result in FDA authorization to commence clinical trials, but
the IND becomes effective if not rejected by the FDA within 30 days. The IND
application must indicate the results of previous testing, how, where and by
whom the clinical studies will be conducted, the chemical structure of the
compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the compound
is manufactured.
Clinical Trials
Clinical trials involve the administration of the IND to healthy volunteers
or to patients, under the supervision of qualified principal investigators. All
clinical trials must be conducted in accordance with Good Clinical Practices, or
GCP, regulations, under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA for review as part of the
IND application prior to commencing the study. Further, each clinical trial must
be conducted under the auspices of an independent review panel, the
Institutional Review Board, or IRB, at the institution at which the trial will
be conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects, informed consent and the possible liability of the
institution. Progress reports detailing the results of the clinical trials must
be submitted at least annually to the FDA.
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Clinical trials are typically conducted in three sequential phases, but the
phases often overlap. In Phase I, the initial introduction of the drug into
healthy volunteers or patients, the drug is tested for safety or adverse
effects, dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology. Phase II involves studies in a limited patient population
to determine the effectiveness of the drug for specific, targeted indications,
determine dosage tolerance and optional dosage and identify possible adverse
effects and safety risks. When a compound is found to be effective and to have
an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further evaluate clinical effectiveness and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. Phase III studies conducted to seek marketing approval by
the FDA are called pivotal studies.
National Institutes of Health
The NIH publishes guidelines concerning gene therapy products. The NIH
guidelines require that human gene therapy protocols subject to the guidelines
that involve a novel product, disease indication, route of administration or
other component be discussed at the quarterly meetings of the NIH Recombinant
DNA Advisory Committee, or RAC. Companies involved in clinical trials as
sponsors are expected to report all serious adverse events to the NIH.
Following routine procedure, we report to the FDA and the NIH serious
adverse events, whether treatment-related or not, that occur in our clinical
trials, including deaths. In one of our Phase I studies conducted from 1995 to
1997, we reported two deaths for which the clinical investigator involved could
not unequivocally rule out the possibility that the deaths were related to our
gene therapy treatment; however, there was no evidence that our gene therapy was
responsible for the deaths. Often, gene therapy clinical trials include cancer
patients who have failed all conventional treatments available to them, and who
therefore have short life expectancies and who sometimes die before completion
of their clinical trials. We have not received any correspondence from any
regulatory body or experienced any increased scrutiny of our clinical or other
activities as a result of these deaths.
Marketing Applications
After the completion of all three clinical trial phases, if the data
indicate that the drug is safe and effective, a BLA or an NDA is filed with the
FDA for approval of the marketing and commercial shipment of the drug. This
marketing application must contain all of the information on the drug gathered
to that date, including data from the clinical trials. It is often over 100,000
pages in length.
The FDA reviews all marketing applications submitted to it before it
accepts them for filing and may request additional information rather than
accepting one for filing. In such event, the application must be resubmitted
with the additional information and is again subject to review before filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the BLA or NDA. Under the FDC Act, the FDA has 180 days in which to review it
and respond to the applicant. The review process is often significantly extended
by FDA requests for additional information or clarification of information
already provided in the submission. The FDA may refer the application to an
appropriate advisory committee, typically a panel of clinicians, for review,
evaluation and a recommendation as to whether the application should be
approved. However, the FDA is not bound by the recommendation of an advisory
committee. If FDA evaluations of the marketing application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter. An approvable letter usually contains a number of conditions
that must be met in order to secure final approval of the application. When and
if those conditions have been met to the FDA's satisfaction, the FDA will issue
an approval letter, authorizing commercial marketing of the drug for certain
indications. Approvals may be withdrawn if compliance with regulatory standards
is not maintained or if problems occur following initial marketing. If the FDA's
evaluation of the submission or manufacturing facilities is not favorable, the
FDA may refuse to approve the BLA or NDA or issue a not approvable letter.
If the FDA approves the BLA or NDA, the drug becomes available for
physicians to prescribe. Periodic reports must be submitted to the FDA,
including descriptions of any adverse reactions reported. The FDA
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may request additional studies, referred to as Phase IV studies, to evaluate
long-term effects. Phase IV clinical trials and post marketing studies may also
be conducted to explore new indications and to broaden the application and use
of the drug and its acceptance in the medical community.
"Off-Label" Use
Physicians may prescribe drugs for uses that are not described in the
product's labeling for uses that differ from those tested by us and approved by
the FDA. Such "off-label" uses are common across medical specialties and may
constitute the best treatment for many patients in various circumstances. The
FDA does not regulate the behavior of physicians in their choice of treatments.
The FDA does, however, restrict manufacturer's communications on the subject of
off-label use. Companies cannot actively promote FDA-approved drugs for
off-label uses. However, new regulations, if followed, provide a safe harbor
from FDA enforcement action that would allow us to disseminate to physicians
articles published in peer-reviewed journals, like the New England Journal of
Medicine, that discuss off-label uses of approved products. We cannot
disseminate articles concerning drugs that have not been approved for any
indication.
Orphan Drug Act
The Orphan Drug Act provides incentives to manufacturers to develop and
market drugs for rare diseases and conditions affecting fewer than 200,000
people in the United States. The first developer to receive FDA marketing
approval for an orphan drug is entitled to a seven-year exclusive marketing
period in the United States following approval for that product. However, the
FDA will allow the sale of a drug clinically superior to or different from
another approved orphan drug, although for the same indication, during the
seven-year exclusive marketing period.
We believe that certain of our potential products may qualify for orphan
drug designation. We cannot be sure that any of our potential products will
ultimately receive orphan drug designation, or that the benefits currently
provided by such a designation will not subsequently be amended or eliminated.
The Orphan Drug Act has been controversial, and legislative proposals have from
time to time been introduced in Congress to modify various aspects of the Orphan
Drug Act, particularly the market exclusivity provisions. New legislation may be
introduced in the future that could adversely affect the availability or
attractiveness of orphan drug status for our potential products. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process.
FDAMA
The Food and Drug Administration Modernization Act of 1997, the FDAMA, was
enacted, in part, to ensure the timely availability of safe and effective drugs,
biologics, and medical devices by expediting the FDA review process for new
products. FDAMA established a statutory program for the approval of "fast track
products." The fast track provisions essentially codify FDA's Accelerated
Approval regulations for drugs and biologics. A "fast track product" is defined
as a new drug or biologic intended for the treatment of a serious or
life-threatening condition that demonstrates the potential to address unmet
medical needs for such a condition. Under the new fast track program, the
sponsor of a new drug or biologic may request the FDA to designate the drug or
biologic as a "fast track product" at any time during the clinical development
of the product. FDAMA specifies that the FDA must determine if the product
qualifies for fast track designation within 60 days of receipt of the sponsor's
request. Approval of an NDA for a fast track product can be based on a clinical
endpoint or on a surrogate endpoint that is reasonably likely to predict
clinical benefit. Approval of a fast track product may be subject to (1)
post-approval studies to validate the surrogate endpoint or confirm the effect
on the clinical endpoint and (2) prior review of copies of all promotional
material. If a preliminary review of the clinical data suggests efficacy, the
FDA may initiate review of sections of an application for a "fast track product"
before the application is complete. This "rolling review" is available if the
applicant provides a schedule for submission of remaining information and pays
applicable user fees.
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We may seek fast track designation to secure expedited review of
appropriate products. It is uncertain whether we will obtain fast track
designation. We cannot predict the ultimate effect, if any, of the new fast
track process on the timing or likelihood of FDA approval of any of our
potential products.
International
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any such
product can be commercialized in those countries. The approval procedure and the
time required for approval vary from country to country and may involve
additional testing. We cannot be sure that approvals will be granted on a timely
basis, or at all. In addition, regulatory approval of prices is required in most
countries other than the United States. There can be no assurance that the
resulting prices would be sufficient to generate an acceptable return to us.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
intense technological change. We face, and will continue to face, competition in
the development and marketing of our product candidates from academic
institutions, government agencies, research institutions and biotechnology and
pharmaceutical companies. Competition may arise from other drug development
technologies, methods of preventing or reducing the incidence of disease,
including vaccines, and new small molecule or other classes of therapeutic
agents. Developments by others may render our product candidates or technologies
obsolete or noncompetitive.
There are many companies, both publicly and privately held, including
well-known pharmaceutical companies, as well as academic and other research
institutions, engaged in developing products for human therapeutic applications.
We are aware that Canji, Inc., a subsidiary of Schering-Plough Corporation, is
currently conducting clinical trials with p53 related gene therapy products.
Various small molecule drug and antisense approaches are being investigated by
other companies in earlier stages of research and development. We are also aware
that Onyx Pharmaceuticals, Inc. has conducted clinical studies of an
adenovirus-based therapy for head and neck cancer. We also compete with
universities and other research institutions in the development of products,
technologies and processes. In many instances, we compete with other commercial
entities in acquiring products or technologies from universities and other
research institutions.
We expect that competition among products approved for sale will be based,
among other things, on product efficacy, safety, reliability, availability,
price, patent position and sales, marketing and distribution capabilities. Our
competitive position also depends upon our ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes and secure sufficient capital resources for the often
substantial period between technological conception and commercial sales.
HUMAN RESOURCES
As of June 30, 2001, we employed approximately 53 persons engaged in
research and development, regulatory affairs, clinical affairs, manufacturing
and quality, finance, and corporate development activities. Our employees
include 11 holders of a Ph.D. or M.D. degree. Many of our employees have
extensive experience in the pharmaceutical and biotechnology industries.
In addition to our full-time staff, we provide financial support through
sponsored research agreements for approximately 20 research scientists and
technicians at M.D. Anderson Cancer Center and other institutions who serve as
investigators for Introgen on clinical and preclinical research projects. We
have also entered into part-time consulting arrangements with several M.D.
Anderson Cancer Center scientists and clinicians.
Our sponsored research projects with M.D. Anderson Cancer Center involve
investigators in a wide range of specialties, including thoracic and
cardiovascular surgery, neurology, gynecology, urology, and gastrointestinal
medicine. The human resources devoted to development of our technology and
products is further augmented by our collaborators at the numerous other
institutions where sponsored research work is performed.
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SCIENTIFIC ADVISORY BOARD
We receive guidance on a broad range of scientific, clinical and technical
issues from our Scientific Advisory Board. Members of our Scientific Advisory
Board are recognized experts in their respective fields of research and clinical
medicine related to molecular oncology. The members of the Scientific Advisory
Board are:
Jack A. Roth, M.D., Chairman of the Scientific Advisory Board, is Chairman,
Department of Thoracic and Cardiovascular Surgery at M.D. Anderson Cancer
Center. Dr. Roth was one of our founders and is our Chief Medical Advisor. Dr.
Roth is a widely recognized pioneer in the application of gene therapy to the
treatment of cancer. He is the primary inventor of the technology upon which our
gene therapy products are based. He received his M.D. from The Johns Hopkins
University School of Medicine.
Carol L. Prives, Ph.D., is a professor of biology at Columbia University.
She is the Chair of the NIH Experimental Virology Study Section, a member of the
NCI Intramural Scientific Advisory Board, and a member of the Advisory Board of
the Dana-Farber Cancer Center in Boston. She is an editor of the Journal of
Virology and serves on the editorial boards of three other prominent journals.
She received her Ph.D. in biochemistry from McGill University.
Daniel D. Von Hoff, M.D., is the Director of the Arizona Cancer Center in
Tucson, Arizona, and a professor of medicine in the Department of Medicine of
the University of Arizona. Dr. Von Hoff is the President of the American
Association for Cancer Research. Dr. Von Hoff is certified in medical oncology
by the American Board of Internal Medicine.
Elizabeth Grimm, Ph.D., is a professor of tumor biology at M.D. Anderson
Cancer Center. Dr. Grimm has served as Cancer Expert, Surgical Branch of the
NCI. She received her Ph.D. degree in microbiology from the University of
California, Los Angeles School of Medicine.
Michael J. Imperiale, Ph.D., is the Director of Cancer Biology Training
Programs at the University of Michigan Cancer Center and holds a concurrent
position in the Department of Microbiology and Immunology at the University of
Michigan. Dr. Imperiale earned his Ph.D. degree in biological sciences from
Columbia University and received postdoctoral training at the Rockefeller
University Laboratory of Molecular Cell Biology where he studied the regulation
of early adenovirus gene expression.
ITEM 2. PROPERTIES
We lease from TMX Realty Corporation, our wholly-owned subsidiary,
facilities in Houston, Texas, totaling approximately 42,000 square feet in two
buildings. These buildings consist of a 12,000 square foot cGMP production
facility designed to support INGN 201 product launch, as well as support
multiple vector manufacturing, and a 30,000 square foot building which contains
our research and development laboratories and administrative offices. We
sublease to M.D. Anderson Cancer Center approximately 10,000 square feet of
space in our Houston research and development facility under an eight year lease
at prevailing market rates. Our corporate offices are located in Austin, Texas.
We expect our current facilities to satisfy our requirements for at least the
next four years.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in legal proceedings relating to claims
arising out of our operation in the ordinary course of business, including
actions relating to intellectual property rights.
On January 12, 2001, we received notice that we had been named as a
defendant in a first amended complaint filed on January 11, 2001 by Canji, Inc.
in an action entitled Canji, Inc. v. Sidney Kimmel Cancer Center, Introgen
Therapeutics, Inc., and Does 2 through 25 (Case No. GIC745643, in the California
Superior Court for the County of San Diego, Central District). Canji, Inc. filed
the original complaint against the Sidney Kimmel Cancer Center (SKCC) on March
24, 2000. On February 9, 2001, the action was removed to the United States
District Court for the Southern District of California. In its first amended
complaint, which for the first time named us as a defendant in the litigation,
Canji alleges that certain gene therapy patents and
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technology relating to the treatment of cancer using gene therapy in combination
with a class of chemotherapeutic agents known as DNA repair inhibitors,
developed by SKCC under a sponsored research agreement between SKCC and us and
exclusively licensed to us from SKCC (the SKCC IP), were developed in part using
materials provided by Canji to SKCC under a Material Transfer Agreement (MTA).
Canji further alleges that under the MTA, Canji had the right of first refusal
to a license to any patent rights arising out of the technology developed by
SKCC using the materials. Canji further alleges that we wrongfully obtained
rights in intellectual property derived from SKCC's use of Canji's materials. As
relief against us, Canji seeks: a declaratory judgment that we are not entitled
to the intellectual property rights conveyed by SKCC to us, and that instead
those rights belong to Canji; the imposition of a constructive trust on the
patent rights granted to us; and injunctive relief to restore Canji to the
position that it was in prior to the SKCC's grant of intellectual property
rights to us. We believe that Canji's allegations are without merit and intend
to vigorously defend the action. The SKCC IP is not material to our business.
We do not believe that the outcome of any present, or all litigation in the
aggregate, other than our opposition of three European patents owned by Canji
discussed under "Factors Affecting Future Operating Results" will have a
material effect on our business. You can read the discussion of our opposition
of the patents under "Factors Affecting Future Operating Results."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No stockholder votes took place during the fourth quarter of our fiscal
year ended June 30, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND EQUITYHOLDER INFORMATION
Our common stock has been traded on the Nasdaq National Market under the
symbol "INGN" since our initial public offering in October 2000. Prior to
October 2000, there was no established public trading market for our common
stock. The following table sets forth for the periods indicated, the high and
low closing prices reported on the Nasdaq National Market.
<Table>
<Caption>
HIGH LOW
------ -----
Fiscal Year Ended June 30, 2001:
First Fiscal Quarter...................................... N/A N/A
Second Fiscal Quarter..................................... $15.50 $5.25
Third Fiscal Quarter...................................... 8.25 3.31
Fourth Fiscal Quarter..................................... 7.80 3.20
</Table>
At June 30, 2001, there were 21,391,125 shares of our common stock issued
and outstanding held by 234 stockholders of record. We estimate that there are
approximately 3,740 beneficial stockholders.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain all of our future earnings, if any, to support the
development of our business and do not anticipate paying any cash dividends in
the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to a stock purchase agreement with Aventis executed on June 30,
2001, we issued 100,000 shares of Series A Non-Voting Convertible Preferred
Stock to Aventis in exchange for $25.0 million, the payment for which was
received on July 2, 2001. We relied on Rule 506 promulgated under Section 4(2)
of the Securities Act of 1933, as amended, as the exemption from registration,
as the sale was to a single accredited investor. Under the terms of the
certificate of designations filed in connection with the sale, the
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Series A Non-Voting Convertible Preferred Stock is convertible into 2,343,721
shares of our common stock at any time upon either party's election. We expect
to use the proceeds from this sale to conduct research and development,
including clinical trials, advance our process development and manufacturing
capabilities, initiate product marketing and commercialization programs, and for
general corporate purposes, including working capital.
USE OF PROCEEDS FROM REGISTERED SECURITIES
We closed our initial public offering on October 17, 2000, pursuant to a
Registration Statement on Form S-1 (File No. 333-30582), which was declared
effective by the Securities and Exchange Commission on October 11, 2000. In the
initial public offering, we sold an aggregate of 4,000,000 shares of common
stock at $8.00 per share, with the underwriters' over-allotment option of
600,000 shares of common stock being exercised on October 18, 2000, at $8.00 per
share. The sale of the shares of common stock generated aggregate net proceeds
of approximately $32.2 million. We expect to continue to use the net proceeds
from our initial public offering to conduct research and development, including
clinical trials, advance our process development and manufacturing capabilities,
initiate product marketing and commercialization programs, and for general
corporate purposes, including working capital. Pending these uses, the net
proceeds of the offering are invested in interest bearing, investment grade
securities.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data is presented below for, and as of
the end of, each of the years in the five year period ended June 30, 2001, and
is derived from the consolidated financial statements of Introgen Therapeutics,
Inc. and its subsidiaries, which financial statements have been audited by
Arthur Andersen LLP, independent public accountants. The consolidated financial
statements as of June 30, 2000 and 2001 and for each of the years ended June 30,
1999, 2000 and 2001, and the report of independent public accountants thereon,
are included elsewhere in this report. The selected consolidated financial data
set forth below is qualified in its entirety by, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
<Table>
<Caption>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue from collaborations..... $ 12,052 $ 8,606 $ 6,714 $ 6,204 $ 3,016
---------- ---------- ---------- ---------- -----------
Revenue from product sales to
affiliate..................... -- 2,505 1,475 2,184 1,500
Cost of product sales........... -- 1,729 994 1,476 2,488
---------- ---------- ---------- ---------- -----------
Gross margin on product sales... -- 776 481 708 (988)
---------- ---------- ---------- ---------- -----------
Other revenue................... -- -- -- -- 684
Operating costs and expenses:
Research and development...... 12,954 10,361 7,539 10,075 15,014
General and administrative.... 2,635 1,825 2,977 4,701 4,875
---------- ---------- ---------- ---------- -----------
Total operating costs
and expenses........ 15,589 12,186 10,516 14,776 19,889
---------- ---------- ---------- ---------- -----------
Loss from operations............ (3,537) (2,804) (3,321) (7,864) (17,177)
Interest income, net............ 421 789 675 140 381
Other income.................... -- -- -- -- 354
---------- ---------- ---------- ---------- -----------
Net loss........................ $ (3,116) $ (2,015) $ (2,646) $ (7,724) $ (16,442)
========== ========== ========== ========== ===========
Basic and diluted net loss per
share......................... $ (0.80) $ (0.51) $ (0.66) $ (1.89) $ (1.02)
========== ========== ========== ========== ===========
Shares used in computing basic
and diluted net loss per
share......................... 3,909,376 3,922,768 4,005,893 4,095,623 16,163,027
========== ========== ========== ========== ===========
</Table>
<Table>
<Caption>
JUNE 30,
---------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents, and
short-term investments........ $ 9,411 $ 16,848 $ 15,761 $ 11,765 $ 34,977
Working capital................. 7,780 15,944 14,226 10,263 54,296
Total assets.................... 9,990 17,766 25,741 24,855 72,347
Long term debt obligations, net
of current portion............ -- -- 3,388 8,021 9,798
Accumulated deficit............. (6,359) (8,375) (11,021) (18,744) (35,186)
Stockholders' equity............ 8,359 16,322 19,187 13,592 56,069
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and the related notes thereto
included in this report on Form 10-K. The discussion and analysis contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements include the statements below under "Factors Affecting Future
Operating Results." These forward-looking statements are based on our current
expectations and entail various risks and uncertainties. Our actual results
could differ materially from those projected in the forward-looking statements
as a result of various factors, including those set forth below under "Factors
Affecting Future Operating Results."
OVERVIEW
We are a leading developer of gene therapy products for the treatment of
cancer. Our drug discovery and development programs have resulted in innovative
approaches by which physicians use genes to treat cancer and other diseases. Our
lead product candidate, INGN 201, combines the p53 gene, one of the most potent
members of a group of naturally occurring genes, the tumor suppressor genes,
that act to protect cells from becoming cancerous, with a gene delivery system
that we have developed and extensively tested. We are conducting pivotal Phase
III clinical studies of INGN 201 in head and neck cancer. Pivotal Phase III
trials are typically the final phase required for FDA approval. We are also
completing a Phase II clinical trial in non-small cell lung cancer, a category
that includes approximately 80% of the various types of lung cancer. Phase II
trials are efficacy studies. We are also conducting several Phase I clinical
trials, or safety studies, of INGN 201 in additional cancer types, or
indications. To date, doctors at clinical sites in North America, Europe and
Japan have treated hundreds of patients with INGN 201, establishing a large
safety database.
We are developing additional gene therapy product candidates that we
believe may be effective in treating certain cancers, notably those based on the
mda-7 and PTEN genes, as well as associated vector technologies for delivering
the gene-based products into target cells. Our INGN 241 product candidate, which
combines the mda-7 gene with our gene delivery system, is undergoing safety
testing in a Phase I clinical study.
Since our inception in 1993, we have used our resources primarily to
conduct research and development activities, primarily for INGN 201 and, to a
lesser extent, for other product candidates. At June 30, 2001, we had an
accumulated deficit of approximately $35.2 million. We anticipate that we will
incur losses in the future that are likely to be greater than cumulative losses
incurred in prior years. We expect that cash needed for operating activities
will increase as we continue to expand our research and development of various
gene therapy technologies. Since inception, our only significant revenues have
been payments from Aventis under collaborative research and development
agreements for our early stage development work on INGN 201 and Aventis'
purchases of INGN 201 product we manufactured for its use in later stage
clinical trials it previously performed. We have also earned interest income on
cash placed in short-term investments.
In October 1994, we entered into two collaboration agreements with
Rhone-Poulenc Rorer Pharmaceuticals Inc. to develop therapeutics based on p53
and on K-ras pathway inhibition. In December 1999, Rhone-Poulenc S.A., the
ultimate parent company of Rhone-Poulenc Rorer Pharmaceuticals Inc., combined
with Hoechst AG, and the parties have combined Hoechst Marion Roussel, the
pharmaceutical business of Hoechst AG, with that of Rhone-Poulenc Rorer to form
Aventis Pharma, or Aventis. Rhone-Poulenc Rorer Pharmaceuticals Inc. is now
known as Aventis Pharmaceuticals Products Inc. Aventis Pharma, the parent
company of Aventis Pharmaceuticals Products Inc., is a multi-billion dollar,
global pharmaceutical company.
In June 2001, we restructured our collaborative relationship with Aventis.
Under this restructuring, we assumed responsibility for the worldwide
development of all p53 and K-ras products, and acquired all marketing and
commercialization rights with respect to those products. We assumed the control
and performance of ongoing clinical trials for p53- and K-ras-based products,
and are now fully responsible for all preclinical research and development and
clinical trials for new gene therapy products. In connection with this
restructuring and pursuant to a stock purchase agreement executed on June 30,
2001, Aventis purchased $25.0 million of non-voting preferred stock from us, the
payment for which was received on July 2, 2001.
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In accordance with the restructured p53 and K-ras collaboration agreement,
Aventis licensed to us all of its patents covering the manufacture, sale,
offering for sale, importation or use of INGN 201 and other K-ras patents,
delivery patents and targeting technologies. Aventis also agreed, for a period
of seven years, not to conduct any activities directed to the development or
commercialization of any gene therapy products using the p53 or K-ras genes.
We now have the exclusive, worldwide right to market and manufacture the
products developed under each of the prior collaboration agreements, as well as
any new p53- or K-ras-based gene therapy products. Aventis agreed to transfer
and is in the process of transferring to us all trademarks and goodwill
associated with INGN 201.
Under the prior collaboration agreements, we generally received payments
from Aventis for early stage development activities quarterly in advance. We
recorded these payments as revenue as we performed the collaboration work and
incurred the related expenses. We recorded as deferred revenue collaborative
research and development payments which we received but for which the related
expenses had not yet been incurred. Under the restructured collaboration,
Aventis will no longer fund any of our research and development.
Through June 30, 2001, Aventis provided us with approximately $57.2 million
in the form of funding for early stage development programs and purchases of
INGN 201 product for later stage clinical development and purchased over $14.0
million of preferred stock from us. These purchases of preferred stock were made
upon the achievement of the milestones contemplated in our stock purchase
agreement with Aventis.
Under the prior collaboration agreements, we manufactured and sold INGN 201
to Aventis for use in later stage clinical trials under the terms of the
collaboration agreements. We recorded revenue from these product sales upon
completion of production and delivery and Aventis' acceptance of the product.
From inception of these agreements through June 30, 2001, we have recorded $7.5
million in revenues from these product sales. Under the restructured
collaboration, we will no longer sell INGN 201 to Aventis for use in clinical
trials.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
REVENUES
Revenue from Collaborations. Collaborative research and development
revenues from Aventis were $3.0 million in 2001, $6.2 million in 2000 and $6.7
million in 1999. The 51% decrease in 2001 compared to 2000 was primarily due to
the restructuring of our collaboration with Aventis, which resulted in our not
receiving payments from Aventis subsequent to December 31, 2000, for early stage
research and development related to p53-based gene therapy based products. As a
result of the restructuring, we will not have any collaborative research and
development revenues from Aventis in the future. Prior to this restructuring, we
earned revenue for the early stage research and development we performed under
our collaboration agreements with Aventis. The 7.6% decrease in 2000 compared to
1999 was due primarily to a decrease in early stage development program funding
in 2000 under the Aventis collaboration that was in effect at that time as INGN
201 continued to progress from early stage development activities we performed
to later stage clinical development activities performed at that time by
Aventis.
Revenue from Product Sales to Affiliate. Revenues from product sales to
Aventis were $1.5 million in 2001, compared to $2.2 in 2000 and $1.5 million in
1999. The 31% decrease in 2001 compared to 2000 occurred because there were no
product sales subsequent to December 31, 2000, due to the restructuring of our
collaboration with Aventis. The restructuring eliminated our need to sell
product to Aventis since we are using the product internally for the future
development of INGN 201. As a result of the restructuring, we will not have any
revenues from product sales to Aventis in the future. The 48% increase in 2000
compared to 1999 was primarily due to increased sales of INGN 201 product to
Aventis for their use in later stage clinical trials they were performing at
that time prior to the restructuring of our collaboration agreement with them.
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Other Revenue. Other revenue was $684,000 in 2001, compared to zero in
2000 and 1999. This increase was due to funding received under research grants
from U.S. Government agencies and contract manufacturing work for third parties.
COSTS AND EXPENSES
Cost of Product Sales. Cost of product sales was $2.5 million in 2001,
compared to $1.5 million in 2000 and $994,000 in 1999. The 67% increase in 2001
was due to a reduction in the number of batches of clinical material in
production during the quarter ended December 31, 2000, which resulted in an
increase in the amount of the costs of our manufacturing operations that were
expensed as incurred instead of capitalized as part of inventory. This situation
did not continue subsequent to December 31, 2000, due to the restructuring of
the Aventis collaboration that ended sales of clinical materials to Aventis,
thereby eliminating our cost of product sales. The 49% increase between 2000 and
1999 reflects costs associated with our increased sales of INGN 201 product to
Aventis for their use in later stage clinical trials they were performing at
that time prior to the restructuring of our collaboration agreement with them.
Research and Development. Research and development expenses, excluding
amortization of deferred stock compensation of $442,000 in 2001 and zero in 2000
and 1999, were $14.6 million in 2001, compared to $10.1 million in 2000 and $7.5
million in 1999. The 45% increase in 2001 compared to 2000 was primarily due to
(1) increased activity related to the development of INGN 241 and (2) expenses
associated with the restructuring of the Aventis collaboration, including (a)
$826,000 related to the write-off of accounts receivable, inventory and deferred
revenue, (b) $2.2 million related to the assumption of responsibility for Phase
II and III clinical trials for INGN 201 and (c) no costs being capitalized as
inventory subsequent to December 31, 2000, as a result of the Aventis
collaboration restructuring, which eliminated future inventory sales to Aventis.
These increases were offset by a decreased level of early stage research and
development performed by us prior to the restructuring of the Aventis agreement
relative to products based on the p53 gene, as such products had evolved into
later stage development, which Aventis performed at that time prior to
restructuring of that collaboration. The 34% increase between 2000 and 1999 was
due to the increase in research and development activities for our pipeline of
gene therapy product candidates. Under our restructured collaboration with
Aventis, we assumed responsibility for the worldwide development of all p53
products. As a result, we expect our research and development expenses to
increase in the future. In addition, we believe that continued investment in
research and development is critical to attaining our strategic objectives, and
we expect these expenses to continue to increase in the future.
General and Administrative. General and administrative expenses, excluding
amortization of deferred stock compensation of $1.1 million in 2001, $2.1
million in 2000 and $387,000 in 1999, were $3.7 million in 2001, $2.6 in 2000
and $2.6 in 1999. The 42% increase between 2001 and 2000 was due primarily to
the additional, ongoing costs associated with operating as a public company
subsequent to our initial public offering in October 2000 and costs associated
with the Aventis collaboration restructuring. These expenses were unchanged
between 2000 and 1999 because our general and administrative activities and
resources in place in 1999 were adequate to meet the general and administrative
needs of our operations in 2000, both of which were years during which we
operated as a private company.
Amortization of Deferred Compensation. Amortization of deferred stock
compensation was $1.6 million in 2001, $2.1 million in 2000 and $387,000 in
1999. The 23% decrease between 2001 and 2000 was due primarily to 2000 including
a one-time compensation charge related to the accelerated vesting of options
held by a board member concurrent with the individual's resignation from our
board. The increase between 2000 and 1999 was due to pre-initial public offering
fiscal 2000 grants of additional options to purchase our common stock at
exercise prices below the deemed fair value of the common stock. For options
currently outstanding, we expect to record amortization expense for deferred
compensation of $1.6 million during fiscal 2002, $1.3 million during fiscal
2003, $428,000 during fiscal 2004 and $4,100 during fiscal 2005. The amount of
deferred compensation expense to be recorded in future periods may decrease if
unvested options for which deferred compensation has been recorded are
subsequently forfeited or may increase if additional options are issued at
prices below the deemed fair value of the common stock.
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Interest Income and Interest Expense. Interest income was $1.2 million for
fiscal 2001, $722,000 for fiscal 2000, and $681,000 for 1999. The 70% increase
in 2001 compared to 2000 was primarily due to higher average cash and investment
balances in 2001 on which interest was earned as a result of our initial public
offering in October 2000. The 6% increase in 2000 compared to 1999 was primarily
due to interest rate fluctuations between years. Interest expense was $849,000
for fiscal 2001, $582,000 for fiscal 2000 and $5,000 for fiscal 1999. The 46%
increase in 2001 compared to 2000 was primarily due to balances under notes
payable to finance our new facilities and equipment being outstanding for all of
2001 as compared to being outstanding for only a portion of 2000. The increase
between 2000 and 1999 was primarily due to there being substantially no debt
outstanding during 1999 as compared to there being debt outstanding related to
our new facilities during a portion of 2000.
Other Income. Other income was $354,000 in 2001 compared to zero in 2000
and 1999 due to 2001 being the first year in which we earned rental income
related to our sublease of research laboratories in our facilities to M.D.
Anderson Cancer Center.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred annual operating losses since our inception, and at June
30, 2001, we had an accumulated deficit of $35.2 million. Since inception
through June 30, 2001, we have financed our operations using $49.7 million of
collaborative research and development payments from Aventis, $32.2 million of
net proceeds from our initial public offering in October 2000, $14.4 million of
private equity sales to Aventis, $14.6 million of private equity sales, net of
offering costs, to others, $7.5 million of sales of INGN 201 product to Aventis
for use in later stage clinical trials, $9.2 million in mortgage financing from
a bank for our facilities, $4.3 million in leases from commercial leasing
companies to acquire equipment pledged as collateral for those leases and $4.2
million from interest income earned on cash and short- and long-term
investments.
From our inception through June 30, 2001, we have acquired buildings in the
aggregate amount of $11.6 million and capital equipment in the aggregate amount
of $5.3 million through a combination of cash purchases and financings under
notes payable and lease arrangements. We have debt obligations under notes
payable and capital leases totaling approximately $11.2 million at June 30,
2001. These notes payable and capital leases finance the facilities we occupy,
tenant improvements for laboratory space we lease to M.D. Anderson Cancer Center
and a significant portion of the equipment we use, all of which are pledged as
collateral for this debt. We make monthly principal and interest payments on
this debt. Our buildings and a portion of the related debt are owned and held by
TMX Realty Corporation, our wholly-owned subsidiary.
We expect that we will fund our capital expenditures and operations over at
least the next two years with our current working capital. However, changes in
our research and development plans and other changes affecting our company may
result in the expenditure of these funds in less than two years. In addition,
these resources may not be sufficient to fund our operations to the point of
commercial introduction of any of our product candidates. We may require
substantial funds in the future to conduct additional research and development
programs, preclinical studies and clinical trials for potential products. To
meet our future capital requirements, we expect to seek additional funding
through collaborative agreements, public or private sales of our equity
securities, debt financing or various combinations thereof.
At June 30, 2001, we had cash and short term investments of approximately
$35.0 million, compared with $11.8 million at June 30, 2000. Net cash used by
operating activities was $8.8 million, $5.6 million and $2.0 million for the
years ended June 30, 2001, 2000 and 1999. The increase in cash used by operating
activities between 2001 and 2000 was primarily due to a higher net loss from
operations and a decrease in deferred revenue, offset partially by an increase
in accrued liabilities. The increase in 2000 compared to 1999 was primarily due
to higher net loss from operations, and a decrease in accounts payable, offset
partially by an increase in deferred revenue and non-cash depreciation and stock
option compensation.
Net cash provided by investing activities was $14.4 million for the year
ended June 30, 2001, and $2.6 million for the year ended June 30, 2000, and net
cash used in investing activities was $5.4 million for the year ended June 30,
1999. The change is 2001 compared to 2000 is primarily due to a higher level of
purchases of short-term investments due to the availability of funds from our
initial public offering in October 2000. The
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change in 2000 compared to 1999 is primarily due to a reduction in property and
equipment additions during 2000.
Net cash provided by financing activities was $35.5 million, $2.6 million
and $8.3 million for the years ended June 30, 2001, 2000, and 1999. The increase
in 2001 compared to 2000 was primarily due to the receipt of proceeds from our
initial public offering of common stock in October 2000 offset by a decline in
the amount of new notes payable and capital lease borrowings since our new
facilities and related equipment were complete, outfitted and initially financed
in 2000. The decrease in 2000 compared to 1999 was primarily due to the sale of
Series B preferred stock in 1999. At June 30, 2001, we had $9.1 million
outstanding under notes payable for our facilities and $2.1 million outstanding
under capital leases to finance the purchase of equipment.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended June 30, 2000 and 2001. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto. Historical quarterly
financial results and trends may not be indicative of future results.
<Table>
<Caption>
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 2000 2000
------------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
Revenue from
collaborations...... $ 1,379 $ 2,537 $ 1,298 $ 990
---------- ---------- ---------- ----------
Revenue from product
sales to
affiliate........... 1,289 432 12 354
Cost of product
sales............... 865 288 -- 323
---------- ---------- ---------- ----------
Gross margin on
product sales....... 424 144 12 31
---------- ---------- ---------- ----------
Other revenue......... -- 65 -- 32
Operating costs and
expenses............
Research and
development......... 1,617 4,487 2,306 1,665
General and
administrative...... 853 1,546 1,292 1,010
---------- ---------- ---------- ----------
Loss from
operations.......... (667) (3,287) (2,288) (1,622)
Interest income
(expense), net...... 173 36 (34) (34)
Other income.......... -- -- -- --
---------- ---------- ---------- ----------
Net loss.............. $ (493) $ (3,253) (2,322) $ (1,656)
========== ========== ========== ==========
Basic and diluted net
loss per share...... $ (0.12) $ (0.82) $ (0.57) $ (0.41)
========== ========== ========== ==========
Shares used in
computing basic and
diluted net loss per
share............... 3,955,423 3,972,630 4,060,586 4,060,586
========== ========== ========== ==========
<Caption>
QUARTER ENDED
--------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2000 2000 2001 2001
------------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF
OPERATIONS DATA:
Revenue from
collaborations...... $ 1,506 $ 1,509 $ -- $ --
---------- ----------- ----------- -----------
Revenue from product
sales to
affiliate........... -- 1,500 -- --
Cost of product
sales............... 116 2,372 -- --
---------- ----------- ----------- -----------
Gross margin on
product sales....... (116) (872) -- --
---------- ----------- ----------- -----------
Other revenue......... 138 253 24 269
Operating costs and
expenses............
Research and
development......... 2,333 2,821 3,784 6,077
General and
administrative...... 1,111 929 1,204 1,631
---------- ----------- ----------- -----------
Loss from
operations.......... (1,914) (2,860) (4,964) (7,439)
Interest income
(expense), net...... (28) 431 (116) 95
Other income.......... -- -- 162 191
---------- ----------- ----------- -----------
Net loss.............. $ (1,943) $ (2,429) $ (4,918) $ (7,153)
========== =========== =========== ===========
Basic and diluted net
loss per share...... $ (0.47) $ (0.13) $ (0.23) $ (0.34)
========== =========== =========== ===========
Shares used in
computing basic and
diluted net loss per
share............... 4,165,985 18,092,257 21,268,187 21,335,576
========== =========== =========== ===========
</Table>
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FACTORS AFFECTING FUTURE OPERATING RESULTS
WE MAY ENCOUNTER DELAYS OR DIFFICULTIES IN CLINICAL TRIALS FOR OUR PRODUCT
CANDIDATES, WHICH MAY DELAY OR PRECLUDE REGULATORY APPROVAL OF SOME OR ALL OF
OUR PRODUCT CANDIDATES.
In order to commercialize our product candidates, we must obtain regulatory
approvals. Satisfaction of regulatory requirements typically takes many years,
and involves compliance with requirements covering research and development,
testing, manufacturing, quality control, labeling and promotion of drugs for
human use. To obtain regulatory approvals, we must, among other requirements,
complete clinical trials demonstrating that our product candidates are safe and
effective for a particular cancer indication or other disease.
We are conducting Phase III clinical trials of INGN 201, our lead product
candidate, for the treatment of head and neck cancer, and are conducting a Phase
II clinical trial of INGN 201 for the treatment of non-small cell lung cancer
and six Phase I clinical trials of INGN 201 for other cancer indications. We are
conducting a Phase I clinical trial of INGN 241, our product candidate based on
the mda-7 gene. We do not have significant clinical trial experience with other
product candidates. Current or future clinical trials may demonstrate that INGN
201, INGN 241 and our other product candidates are neither safe nor effective.
Any delays or difficulties we encounter in our clinical trials, in
particular the Phase III clinical trials of INGN 201 for the treatment of head
and neck cancer, may delay or preclude regulatory approval. Any delay or
preclusion could also delay or preclude the commercialization of INGN 201 or any
other product candidates. In addition, we or the FDA might delay or halt any of
our clinical trials of a product candidate at any time for various reasons,
including:
- failure of the product candidate to be more effective than current
therapies;
- presence of unforeseen adverse side effects of a product candidate,
including its delivery system;
- longer than expected time required to determine whether or not a product
candidate is effective;
- death of patients during a clinical trial, even though the product
candidate may not have caused those deaths;
- failure to enroll a sufficient number of patients in our clinical trials;
or
- our inability to produce sufficient quantities of a product candidate to
complete the trials.
We may encounter delays or rejections in the regulatory approval process
because of additional government regulation from future legislation or
administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against our product candidates or us.
Outside the United States, our ability to market a product is contingent
upon receiving clearances from the appropriate regulatory authorities. This
foreign regulatory approval process includes all of the risks associated with
FDA clearance described above.
WE MAY ENCOUNTER FAILURES OR DELAYS IN PERFORMING CLINICAL TRIALS FOR INGN 241
AND OUR OTHER NON-INGN 201 PRODUCT CANDIDATES, WHICH WOULD INCREASE OUR PRODUCT
DEVELOPMENT COSTS.
While we are conducting a Phase I clinical trial with INGN 241, a product
candidate based on the mda-7 gene, our most significant clinical trial activity
and experience has been with INGN 201. We will need to continue conducting
significant research and animal testing, referred to as preclinical testing, to
support performing clinical trials for our other non-INGN 201 and non-INGN 241
product candidates. It will take us many years to complete preclinical testing
and clinical trials, and failure could occur at any stage of testing. Acceptable
results in early testing or trials may not be repeated later. Moreover, not all
product candidates in preclinical testing or early stage clinical trials will
receive timely, or any, regulatory approval. Our product development costs will
increase if we experience delays in testing or regulatory approvals or if we
need to
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perform more or larger clinical trials than planned. If the delays are
significant, the increased development costs will negatively affect our
financial results, and these delays could delay our commercialization efforts.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR SIGNIFICANT
ADDITIONAL OPERATING LOSSES.
We have generated operating losses since we began operations in June 1993.
As of June 30, 2001, we had an accumulated deficit of approximately $35.2
million. We expect to incur substantial additional operating expenses and losses
over the next several years as our research, development, preclinical testing
and clinical trial activities increase. We have no products that have generated
any commercial revenue, and our only revenues to date have been payments from
Aventis under collaborative agreements for research and development and sales to
Aventis of INGN 201 for use in clinical trials, neither of which revenues we
will receive in the future under our restructured agreements with Aventis. We do
not expect to generate revenues from the commercial sale of products in the
foreseeable future, and we may never generate revenues from the sale of
products.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN WE
ANTICIPATE AND FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE
WILL BE UNABLE TO ADVANCE OUR DEVELOPMENT PROGRAM AND COMPLETE OUR CLINICAL
TRIALS.
Developing a new drug and conducting clinical trials for multiple disease
indications is expensive. We expect that we will fund our capital expenditures
and operations over at least the next two years with our current working capital
and the net proceeds from our initial public offering in October 2000, the sale
of Series A Non-Voting Convertible Preferred Stock to Aventis in July 2001, and
income from mortgage financing and investment activities. We may need to raise
additional capital sooner, however, due to a number of factors, including:
- an acceleration of the number, size or complexity of our clinical trials;
- slower than expected progress in developing INGN 201, INGN 241 and other
product candidates;
- higher than expected costs to obtain regulatory approvals;
- higher than expected costs to pursue our intellectual property strategy;
- higher than expected costs to further develop our manufacturing
capability; and
- higher than expected costs to develop our sales and marketing capability.
We do not know whether additional financing will be available when needed,
or on terms favorable to us or our stockholders. We may raise any necessary
funds through public or private equity offerings, debt financings or additional
corporate collaboration and licensing arrangements. To the extent we raise
additional capital by issuing equity securities, our stockholders will
experience dilution. If we raise funds through debt financings, we may become
subject to restrictive covenants. To the extent that we raise additional funds
through collaboration and licensing arrangements, we may be required to
relinquish some rights to our technologies or product candidates, or grant
licenses on terms that are not favorable to us.
AS A RESULT OF THE RESTRUCTURING OF OUR COLLABORATIVE RELATIONSHIP WITH
AVENTIS, OUR PRODUCT DEVELOPMENT MAY BE DELAYED.
In the past, we relied to a significant extent on Aventis to fund and
support the development of products based on the p53 and K-ras genes, including
INGN 201. In July 2001, we restructured our collaborative relationship with
Aventis. Under this restructuring, we assumed responsibility for the worldwide
development of all p53 and K-ras products. Our development or commercialization
efforts for these products could be delayed if we are unable to commit the
necessary resources to fund the development of the p53 and K-ras programs.
Historically, Aventis agreed on an annual basis whether and to what extent
it would continue to fund our early stage development in North America of
products based on the p53 or K-ras genes, which includes
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preclinical research and development and Phase I clinical trials. Since we
assumed responsibility for the development of all p53 and K-ras products under
the terms of the restructuring, if we decide to continue this development, we
would have to fund this development ourselves or obtain funding from other
sources. If we are unable to commit the necessary resources to fund this
development, then our development and commercialization effort could be delayed.
Under the terms of the prior collaboration agreements with Aventis, once we
had completed Phase I clinical trials of a product candidate based on the p53
and K-ras genes, Aventis could have elected to pursue later stage clinical
development of that product candidate, which includes conducting Phase II and
III clinical trials, commercializing the product, making all further submissions
to existing IND, applications and preparing all product license applications.
However, under the terms of the restructuring, we are responsible for later
stage clinical development. If we are unable to commit the necessary resources
to fund this development, then our development and commercialization effort
could be delayed.
IF WE CANNOT MAINTAIN OUR OTHER CORPORATE AND ACADEMIC ARRANGEMENTS AND ENTER
INTO NEW ARRANGEMENTS, PRODUCT DEVELOPMENT COULD BE DELAYED.
Our strategy for the research, development and commercialization of our
product candidates may require us to enter into contractual arrangements with
corporate collaborators, academic institutions and others. We have entered into
sponsored research and/or collaborative arrangements with several entities,
including M.D. Anderson Cancer Center, ICRT, the National Cancer Institute and
Corixa Corporation. Our success depends upon our collaborative partners
performing their responsibilities under these arrangements. We cannot control
the amount and timing of resources our collaborative partners devote to our
research and testing programs or product candidates, which can vary because of
factors unrelated to such programs or product candidates. These relationships
may in some cases be terminated at the discretion of our collaborative partners
with only limited notice to us. We may not be able to maintain our existing
arrangements or enter into new arrangements or negotiate current or new
arrangements on acceptable terms, if at all. Some of our collaborative partners
may also be researching competing technologies independently from us to treat
the diseases targeted by our collaborative programs.
IF WE ARE NOT ABLE TO CREATE EFFECTIVE COLLABORATIVE MARKETING RELATIONSHIPS,
WE MAY BE UNABLE TO MARKET INGN 201 SUCCESSFULLY OR IN A COST-EFFECTIVE MANNER.
To effectively market our products, we will need to develop sales,
marketing and distribution capabilities. In order to develop or otherwise obtain
these capabilities, we may have to enter into marketing, distribution or other
similar arrangements with third parties in order to successfully sell, market
and distribute our products. To the extent that we enter into any such
arrangements with third parties, our product revenues are likely to be lower
than if we directly marketed and sold our products, and any revenues we receive
will depend upon the efforts of such third parties. We have no experience in
marketing or selling pharmaceutical products and we currently have no sales,
marketing or distribution capability. We may be unable to develop sufficient
sales, marketing and distribution capabilities to successfully commercialize our
products.
SERIOUS UNWANTED SIDE EFFECTS ATTRIBUTABLE TO GENE THERAPY MAY RESULT IN
GOVERNMENTAL AUTHORITIES IMPOSING ADDITIONAL REGULATORY REQUIREMENTS OR A
NEGATIVE PUBLIC PERCEPTION OF OUR PRODUCTS.
Serious unwanted side effects attributable to treatment, which physicians
classify as treatment-related adverse events, occurring in the field of gene
therapy may result in greater governmental regulation of our product candidates
and potential regulatory delays relating to the testing or approval of our
product candidates. The death in 1999 of a patient undergoing gene therapy using
an adenoviral vector to deliver a gene for disease treatment in a clinical trial
which was unrelated to our clinical trials, was widely publicized. As a result
of this death, the United States Senate held hearings concerning the adequacy of
regulatory oversight of gene therapy clinical trials and to determine whether
additional legislation is required to protect volunteers and patients who
participate in such clinical trials. The Recombinant DNA Advisory Committee, or
RAC, which acts as an advisory body to the National Institutes of Health, or
NIH, evaluated and continues to evaluate the use of adenoviral vectors in gene
therapy clinical trials. The RAC has made recommendations
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to the NIH director concerning prospective review of study designs and adverse
event reporting procedures, and the FDA has requested that sponsors of clinical
trials provide detailed procedures for supervising clinical investigators and
clinical study conduct. In addition, the FDA has recently begun to conduct more
frequent inspections at clinical trial sites. Implementation of any additional
review and reporting procedures or other additional regulatory measures could
increase the costs of or prolong our product development efforts or clinical
trials.
Following routine procedure, we report to the FDA and the NIH serious
adverse events, whether treatment-related or not, that occur in our clinical
trials, including deaths. In one of our Phase I studies conducted from 1995 to
1997, we reported two deaths for which the clinical investigator involved could
not unequivocally rule out the possibility that the deaths were related to our
gene therapy treatment; however, there was no evidence that our gene therapy was
responsible for the deaths. We have not received any correspondence from any
regulatory body or experienced any increased scrutiny of our clinical or other
activities as a result of these deaths. However, reporting of serious adverse
events that are determined to be treatment-related in gene therapy clinical
trials conducted by us or by others could result in additional regulatory review
or measures, which could increase the cost of or prolong our clinical trials.
To date no governmental authority has approved any gene therapy product for
sale in the United States or internationally. The commercial success of our
products will depend in part on public acceptance of the use of gene therapies,
which are a new type of disease treatment for the prevention or treatment of
human diseases. Public attitudes may be influenced by claims that gene therapy
is unsafe, and gene therapy may not gain the acceptance of the public or the
medical community. Negative public reaction to gene therapy could also result in
greater government regulation and stricter clinical trial oversight.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
COMPETITORS MAY BE ABLE TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT
EFFORTS TO DEVELOP COMPETING DRUGS.
Our commercial success will depend in part on obtaining patent protection
for our products and other technologies and successfully defending these patents
against third party challenges. Our patent position, like that of other
biotechnology and pharmaceutical companies, is highly uncertain. One uncertainty
is that the United States Patent and Trademark Office, or PTO, or the courts,
may deny or significantly narrow claims made under patents or patent
applications. This is particularly true for patent applications or patents that
concern biotechnology and pharmaceutical technologies, such as ours, since the
PTO and the courts often consider these technologies to involve unpredictable
sciences. Another uncertainty is that any patents that may be issued or licensed
to us may not provide any competitive advantage to us and they may be
successfully challenged, invalidated or circumvented in the future. In addition,
our competitors, many of which have substantial resources and have made
significant investments in competing technologies, may seek to apply for and
obtain patents that will prevent, limit or interfere with our ability to make,
use and sell our potential products either in the United States or in
international markets.
Our ability to develop and protect a competitive position based on our
biotechnological innovations, innovations involving genes, gene therapy, viruses
for delivering the genes to cells, formulations, gene therapy delivery systems
that do not involve viruses, and the like, is particularly uncertain. Due to the
unpredictability of the biotechnological sciences, the PTO, as well as patent
offices in other jurisdictions, has often required that patent applications
concerning biotechnology-related inventions be limited or narrowed substantially
to cover only the specific innovations exemplified in the patent application,
thereby limiting their scope of protection against competitive challenges.
Similarly, courts have invalidated or significantly narrowed many key patents in
the biotechnology industry. Thus, even if we are able obtain patents that cover
commercially significant innovations, our patents may not be upheld or our
patents may be substantially narrowed.
Through our exclusive license from The University of Texas System for
technology developed at M.D. Anderson Cancer Center, we are currently seeking
patent protection for adenoviral p53, including INGN 201, and its use in cancer
therapy. Further, in February 2001, we were issued a United States patent for
our adenovirus production technology. We also control, through licensing
arrangements, two issued United States patents for combination therapy involving
the p53 gene and conventional chemotherapy or radiation and one
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36
issued United States patent covering the use of adenoviral p53 in cancer
therapy. Our competitors may challenge the validity of one or more of our
combination therapy, our adenoviral process technology or our adenoviral p53
therapy patents in the courts or through an administrative procedure known as an
interference. The courts or the PTO may not uphold the validity of our patents,
we may not prevail in such interference proceedings regarding our patents and
none of our patents may give us a competitive advantage.
The PTO has notified us that one of our patent applications, which involves
the use of retrovirus, not adenovirus (which retroviral technologies do not
relate to any of our current product candidates) has been allowed, but that its
issuance is being suspended for the possible institution of interference
proceedings. An interference proceeding is instituted by the PTO to determine,
as between two or more parties claiming the same patentable invention, which
party has the right to the patent. If any of these or other patent applications
become involved in an interference proceeding, there is a likelihood that it
will take many years to resolve. Resolution of any such interference will
require that we expend time, effort and money. Only the application directed to
the adenoviral p53 technology is relevant to our current potential products. If
an interference is declared with respect to the adenoviral p53 application, and
if the opponent ultimately prevails in the interference, the opponent will have
a patent that could cover our potential INGN 201 product or its clinical use.
The patent application that is currently involved in an ongoing interference
proceeding does not relate to any of our product candidates. While the
resolution of this interference will require that we expend time, effort and
money, its outcome is not expected to affect any of our current
commercialization efforts.
THIRD PARTY CLAIMS OF INFRINGEMENT OF INTELLECTUAL PROPERTY COULD REQUIRE US
TO SPEND TIME AND MONEY TO ADDRESS THE CLAIMS AND COULD LIMIT OUR INTELLECTUAL
PROPERTY RIGHTS.
The biotechnology and pharmaceutical industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies have employed intellectual property litigation to gain a
competitive advantage. We are aware of a number of issued patents and patent
applications that relate to gene therapy, the treatment of cancer and the use of
the p53 and other tumor suppressor genes. Schering-Plough Corporation, or its
subsidiary Canji, Inc., controls various United States patent applications and a
European patent and applications, some of which are directed to therapy using
the p53 gene, and others to adenoviruses that contain the p53 gene, or
adenoviral p53, and to methods for carrying out therapy using adenoviral p53. In
addition, Canji controls an issued United States patent and its international
counterparts, including a European patent, involving a method of treating
mammalian cancer cells lacking normal p53 protein by introducing a p53 gene into
the cancer cell.
While we believe that our potential products do not infringe any valid
claim of the Canji p53 patents, Canji or Schering-Plough could assert a claim
against us. We may also become subject to infringement claims or litigation
arising out of other patents and pending applications of our competitors, if
they issue, or additional interference proceedings declared by the PTO to
determine the priority of inventions. The defense and prosecution of
intellectual property suits, PTO interference proceedings and related legal and
administrative proceedings are costly and time-consuming to pursue, and their
outcome is uncertain. Litigation may be necessary to enforce our issued patents,
to protect our trade secrets and know-how or to determine the enforceability,
scope and validity of the proprietary rights of others. An adverse determination
in litigation or interference proceedings to which we may become a party could
subject us to significant liabilities, require us to obtain licenses from third
parties, or restrict or prevent us from selling our products in certain markets.
Although patent and intellectual property disputes are often settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Furthermore, the necessary
licenses may not be available to us on satisfactory terms, if at all. In
particular, if we were found to infringe a valid claim of the Canji p53 issued
United States patent, our business could be materially harmed.
We are currently involved in three opposition proceedings before the
European Patent Office, or EPO, in which we are seeking to have the EPO revoke
three different European patents owned or controlled by Canji. These European
patents relate to the use of a p53 gene, or the use of tumor suppressor genes,
in the preparation of therapeutic products. In one opposition involving the use
of a p53 gene, the European patent at issue was upheld following an initial
hearing. A second hearing to determine whether this patent should be
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revoked will be upcoming. The other two oppositions are in earlier stages. If we
do not ultimately prevail in one or more of these oppositions, our competitors
could seek to assert by means of litigation any patent surviving opposition
against European commercial activities involving our potential products. If our
competitors are successful in any such litigation, it could have a significant
detrimental effect on our or our collaborators' ability to commercialize our
potential commercial products in Europe.
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCT CANDIDATES AND
TECHNOLOGIES LESS ATTRACTIVE OR OBSOLETE.
We compete with pharmaceutical and biotechnology companies, including Canji
and Onyx Pharmaceuticals, Inc., which are pursuing other forms of treatment for
the diseases INGN 201 and our other product candidates target. We also may face
competition from companies that may develop internally or acquire competing
technology from universities and other research institutions. As these companies
develop their technologies, they may develop competitive positions which may
prevent or limit our product commercialization efforts.
Some of our competitors are established companies with greater financial
and other resources than we have. Other companies may succeed in developing
products earlier than we do, obtaining FDA approval for products more rapidly
than we do or developing products that are more effective than our product
candidates. While we will seek to expand our technological capabilities to
remain competitive, research and development by others may render our technology
or product candidates obsolete or noncompetitive or result in treatments or
cures superior to any therapy developed by us.
EVEN IF WE RECEIVE REGULATORY APPROVAL TO MARKET INGN 201, INGN 241 OR OTHER
PRODUCT CANDIDATES, WE MAY NOT BE ABLE TO COMMERCIALIZE THEM PROFITABLY.
Our profitability will depend on the market's acceptance of INGN 201, INGN
241 and our other product candidates. The commercial success of our product
candidates will depend on whether:
- they are more effective than alternative treatments;
- their side effects are acceptable to patients and doctors;
- we produce and sell them at a profit; and
- we market INGN 201, INGN 241 and other product candidates effectively.
IF WE ARE UNABLE TO MANUFACTURE OUR PRODUCTS IN SUFFICIENT QUANTITIES OR ARE
UNABLE TO OBTAIN REGULATORY APPROVALS FOR OUR MANUFACTURING FACILITY, WE MAY BE
UNABLE TO MEET DEMAND FOR OUR PRODUCTS AND LOSE POTENTIAL REVENUES.
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We use a manufacturing facility in
Houston, Texas, which we constructed and own, to manufacture INGN 201 for our
currently planned clinical trials and eventually for the initial commercial
launch of INGN 201. We manufacture INGN 241 and other product candidates in a
separate, leased facility. We have no experience manufacturing INGN 201, INGN
241 or any other product candidates in the volumes that will be necessary to
support commercial sales. If we are unable to manufacture our product candidates
in clinical or, when necessary, commercial quantities, then we will need to rely
on third party manufacturers to manufacture compounds for clinical and
commercial purposes. These third party manufacturers must receive FDA approval
before they can produce clinical material or commercial product. Our products
may be in competition with other products for access to these facilities and may
be subject to delays in manufacture if third parties give other products greater
priority than ours. In addition, we may not be able to enter into any necessary
third-party manufacturing arrangements on acceptable terms. There are very few
contract manufacturers who currently have the capability to produce INGN 201,
INGN 241 or our other product candidates, and the inability of any of these
contract manufacturers to deliver our required quantities of product candidates
timely and at commercially reasonable prices would negatively affect our
operations.
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38
Before we can begin commercially manufacturing INGN 201, INGN 241 or any
other product candidate, we must obtain regulatory approval of our manufacturing
facility and process. Manufacturing of our product candidates for clinical and
commercial purposes must comply with the FDA's current Good Manufacturing
Practices requirements, commonly known as cGMP, and foreign regulatory
requirements. The cGMP requirements govern quality control and documentation
policies and procedures. In complying with cGMP and foreign regulatory
requirements, we will be obligated to expend time, money and effort in
production, recordkeeping and quality control to assure that the product meets
applicable specifications and other requirements. We must also pass a
pre-approval inspection prior to FDA approval. Our manufacturing facilities have
not yet been subject to an FDA or other regulatory inspection. Failure to pass a
preapproval inspection may significantly delay FDA approval of our products. If
we fail to comply with these requirements, we would be subject to possible
regulatory action and may be limited in the jurisdictions in which we are
permitted to sell our products. Further, the FDA and foreign regulatory
authorities have the authority to perform unannounced periodic inspections of
our manufacturing facility to ensure compliance with cGMP and foreign regulatory
requirements. Our facilities in Houston, Texas are our only manufacturing
facilities. If these facilities were to incur significant damage or destruction,
then our ability to manufacture INGN 201 or any other product candidates would
be significantly hampered. This, in turn, could result in delays in our
preclinical testing, clinical trials or commercialization efforts.
WE RELY ON ONLY ONE SUPPLIER FOR SOME OF OUR MANUFACTURING MATERIALS. ANY
PROBLEMS EXPERIENCED BY ANY SUCH SUPPLIER COULD NEGATIVELY AFFECT OUR
OPERATIONS.
We rely on third party suppliers for some of the materials used in the
manufacturing of INGN 201, INGN 241 and our other product candidates. Some of
these materials are available from only one supplier or vendor. Any significant
problem that one of our sole source suppliers experiences could result in a
delay or interruption in the supply of materials to us until that supplier cures
the problem or until we locate an alternative source of supply. Any delay or
interruption would likely lead to a delay or interruption in our manufacturing
operations, which could negatively affect our operations.
The CellCube(TM) Module 100 bioreactor, which Corning (Acton, MA)
manufactures, and Benzonase(R), which EM Industries (Hawthorne, NY)
manufactures, are currently available only from these suppliers. Any significant
interruption in the supply of either of these items would require a material
change in our manufacturing process. We maintain inventories of these items, but
we do not have a supply agreement with either manufacturer.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY
INCUR SUBSTANTIAL DAMAGES AND DEMAND FOR THE PRODUCTS MAY BE REDUCED.
The testing and marketing of medical products is subject to an inherent
risk of product liability claims. Regardless of their merit or eventual outcome,
product liability claims may result in:
- decreased demand for our product candidates;
- injury to our reputation and significant media attention;
- withdrawal of clinical trial volunteers;
- costs of litigation; and
- substantial monetary awards to plaintiffs.
We currently maintain product liability insurance with coverage of $5.0
million per occurrence with a $15.0 million annual limit. This coverage may not
be sufficient to protect us fully against product liability claims. We intend to
expand our product liability insurance coverage to include the sale of
commercial products if we obtain marketing approval for any of our product
candidates. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against product liability claims could prevent or
limit the commercialization of our products.
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WE USE HAZARDOUS MATERIALS IN OUR BUSINESS, AND ANY CLAIMS RELATING TO
IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD HARM OUR
BUSINESS.
Our business involves the use of a broad range of hazardous chemicals and
materials. Environmental laws impose stringent civil and criminal penalties for
improper handling, disposal and storage of these materials. In addition, in the
event of an improper or unauthorized release of, or exposure of individuals to,
hazardous materials, we could be subject to civil damages due to personal injury
or property damage caused by the release or exposure. A failure to comply with
environmental laws could result in fines and the revocation of environmental
permits, which could prevent us from conducting our business.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY.
The market price for our common stock will be affected by a number of
factors, including:
- the announcement of new products or services by us or our competitors;
- quarterly variations in our or our competitors' results of operations;
- failure to achieve operating results projected by securities analysts;
- changes in earnings estimates or recommendations by securities analysts;
- developments in our industry; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance of such companies. Many factors may have a
significant adverse effect on the market price of our common stock, including:
- results of our preclinical and clinical trials;
- announcement of technological innovations or new commercial products by
us or our competitors;
- developments concerning proprietary rights, including patent and
litigation matters;
- publicity regarding actual or potential results with respect to products
under development by us or by our competitors;
- regulatory developments; and
- quarterly fluctuations in our revenues and other financial results.
ANY ACQUISITION WE MIGHT MAKE MAY BE COSTLY AND DIFFICULT TO INTEGRATE, MAY
DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE.
As part of our business strategy, we may acquire assets and businesses
principally relating to or complementary to our current operations, and we have
in the past evaluated and discussed such opportunities with interested parties.
Any acquisitions that we undertake will be accompanied by the risks commonly
encountered in business acquisitions. These risks include, among other things:
- potential exposure to unknown liabilities of acquired companies;
- the difficulty and expense of assimilating the operations and personnel
of acquired businesses;
- diversion of management time and attention and other resources;
- loss of key employees and customers as a result of changes in management;
- the incurrence of amortization expenses; and
- possible dilution to our stockholders.
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In addition, geographic distances may make the integration of businesses
more difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our fixed rate long-term debt and short-term investments in investment grade
securities, which consist primarily of federal and state government obligations,
commercial paper and corporate bonds. Investments are classified as
held-to-maturity and are carried at amortized costs. We do not hedge interest
rate exposure or invest in derivative securities.
At June 30, 2001, the fair value of our fixed-rate debt approximated its
carrying value based upon discounted future cash flows using current market
prices.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in our Financial
Statements and Notes thereto beginning at page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information under the sections captioned "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" contained in the 2001 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the section captioned "Executive Compensation" contained in
the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the sections captioned "Security Ownership" contained in the
2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the sections captioned "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation"
contained in the 2001 Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
<Table>
<Caption>
PAGE
----
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Stockholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</Table>
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. EXHIBITS
(a) EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1(1) -- Certificate of Incorporation as currently in effect
3.2(4) -- Bylaws of Introgen as currently in effect
4.1(2) -- Specimen Common Stock Certificate
4.2 -- Certificate of Designations of Series A Non-Voting
Convertible Preferred Stock
10.1(1) -- Form of Indemnification Agreement between Introgen and
each of its directors and officers
10.2(1) -- 1995 Stock Plan and form of stock option agreement
thereunder
10.3(3) -- 2000 Stock Option Plan and forms of stock option
agreements thereunder
10.4(3) -- 2000 Employee Stock Purchase Plan and forms of agreements
thereunder
10.5(1) -- Form of Series C Preferred Stock Purchase Agreement among
Introgen and certain investors
10.6(1) -- Registration Rights Agreement, dated October 31, 1997
10.7(a)(1) -- Assignment of Leases, dated November 23, 1998, by TMX
Realty Corporation and Riverway Bank, and other related
agreements
10.7(b)(1) -- Lease Agreement, dated June 7, 1996, by and between
Introgen and Plaza del Oro Business Center
10.7(c)(2) -- Amendment No. 1 to Lease Agreement, effective as of May
9, 1997
10.7(d)(2) -- Amendment No. 2 to Lease Agreement, effective as of July
31, 1998
10.7(e)(2) -- Amendment No. 3 to Lease Agreement, effective as of June
29, 2000
10.8(a)+(1) -- Patent and Technology License Agreement, effective as of
July 20, 1994, by and between the Board of Regents of The
University of Texas System, M.D. Anderson and Introgen
10.8(b)+(1) -- Amendment No. 1 to Patent License Agreement, effective as
of September 1, 1996
</Table>
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42
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.8(c)+(1) -- Amendment No. 2 to Patent License Agreement, effective as
of August 8, 1997
10.9+(3) -- Sponsored Research Agreement for Clinical Study, No. CS
93-27, dated February 11, 1993, between Introgen and M.D.
Anderson, as amended
10.10 -- [Reserved]
10.11+(3) -- Sponsored Research Agreement No. SR 93-04, dated February
11, 1993 between M.D. Anderson and Introgen, as amended
10.12 -- [Reserved]
10.13+(3) -- Sponsored Research Agreement No. SR 96-004 between
Introgen and M.D. Anderson, dated January 17, 1996
10.14 -- [Reserved]
10.15+(3) -- License Agreement, dated March 29, 1996 between Introgen
and SKCC
10.16(1) -- Consulting Agreement between Introgen and Jack A. Roth,
M.D., effective as of October 1, 1994
10.17(1) -- Consulting Agreement between EJ Financial Enterprises,
Inc. and Introgen, effective as of July 1, 1994
10.18(a)(1) -- Employment Agreement dated as of August 1, 1996 between
Introgen and David G. Nance
10.18(b)(1) -- Amendment No. 1 to Employment Agreement, effective as of
August 1, 1998
10.18(c)(1) -- Amendment No. 2 to Employment Agreement, effective as of
February 15, 2000
10.19(1) -- Service Agreement, effective as of July 1, 1994, between
Introgen and Domecq Technologies, Inc.
10.20(a)+(1) -- Collaboration Agreement (p53 Products), effective as of
October 7, 1994, between Introgen and RPR, as amended
10.20(b)+(3) -- Addendum No. 1 to Collaboration Agreement (p53 Products),
dated January 23, 1996, between Introgen and RPR
10.20(c)+(1) -- 1997 Agreement Memorandum, effective as of July 22, 1997,
between Introgen and RPR
10.20(d)+(3) -- Letter Agreement, dated April 19, 1999, from Introgen to
RPR regarding manufacturing process for INGN 201
10.21(a)+(1) -- Collaboration Agreement (K-ras Products), effective as of
October 7, 1994, between Introgen and RPR, as amended
10.21(b)(1) -- Amendment No. 1 to Collaboration Agreement (K-ras
Products), effective as of September 27, 1995, between
Introgen and RPR
10.22+(3) -- Collaborative Research and Development Agreement dated
October 30, 1998 between Introgen, RPR and NCI
10.23+(1) -- Non-exclusive license agreement, effective as of April
16, 1997, by Introgen and Iowa Research Foundation
10.24+(3) -- Option Agreement, effective as of June 1, 1998, by
Introgen and Imperial Cancer Research Technology Limited
("ICRT")
10.25+(3) -- Option Agreement, effective as of January 1, 1999, by
Introgen and ICRT
10.26+(3) -- Exclusive License Agreement, effective as of July 19,
1999, by Introgen and Corixa Corporation
10.27(a) -- [Reserved]
</Table>
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<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.27(b)(1) -- Letter dated January 28, 2000, from Introgen to LXR
Biotechnology ("LXR"), notifying LXR of its exercise of
its option
10.27(c)+(2) -- Exclusive License Agreement, effective as of May 16,
2000, by and between Introgen and LXR
10.28+(3) -- Administrative Services and Management Agreement,
effective as of January 1, 1999, by and between Introgen
and Gendux, Inc.
10.29+(3) -- Research and Development Agreement, effective as of
January 1, 1999, by and between Introgen and Gendux, Inc.
10.30+(3) -- Delivery Technology License Agreement, effective as of
January 1, 1999, by and between Introgen and Gendux, Inc.
10.31+(3) -- Target Gene License Agreement, effective as of January 1,
1999, by and between Introgen and Gendux, Inc.
10.32+(1) -- Nonexclusive License Agreement, effective as of August
17, 1998, by and between Introgen and National Institutes
of Health
10.33(1) -- [Reserved]
10.34(2) -- Master Lease Agreement, effective as of August 4, 1999,
by and between Introgen and Finova Capital Corporation
10.35(2) -- Construction Loan Agreement, effective as of July 24,
2000, by and between Introgen and Compass Bank
10.36++ -- Restated p53 and K-ras Agreement, effective as of June
30, 2001, by and among Introgen, Aventis Pharmaceuticals
Products Inc. ("APPI") and Aventis Pharma S.A.
("Aventis")
10.37 -- p53 Assignment Agreement, effective as of June 30, 2001,
by and among Introgen, APPI and Aventis
10.38 -- K-ras Assignment Agreement, effective as of June 30,
2001, by and among Introgen, APPI and Aventis
10.39 -- Registration Rights Agreement, effective as of June 30,
2001, by and among Introgen, APPI and RPR
10.40 -- Voting Agreement, effective as of June 30, 2001, by and
among Introgen, APPI and RPR
21.1(1) -- List of subsidiaries of Introgen
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants
24.1 -- Power of Attorney (See page 44)
</Table>
---------------
(1) Incorporated by reference to the same-numbered exhibit filed with Introgen's
Registration Statement on Form S-1 (No. 333-30582) filed with the Securities
and Exchange Commission on February 17, 2000.
(2) Incorporated by reference to the same-numbered exhibit filed with Amendment
No. 2 to Introgen's Registration Statement on Form S-1 (No. 333-30582) filed
with the Securities and Exchange Commission on September 8, 2000.
(3) Incorporated by reference to the same-numbered exhibit filed with Amendment
No. 3 to Introgen's Registration Statement on Form S-1 (No. 333-30582) filed
with the Securities and Exchange Commission on October 4, 2000.
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44
(4) Incorporated by reference to the same-numbered exhibit filed with Introgen's
Quarterly Report on Form 10-Q, for the quarter ended December 31, 2000,
(File No. 000-21291), filed with the Securities and Exchange Commission on
February 14, 2001.
+ Confidential treatment has been granted for portions of this exhibit.
++ Confidential treatment has been requested for portions of this exhibit.
(B) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K on April 3, 2001 in connection with
the restructuring of our collaboration with Aventis Pharmaceuticals Products
Inc.
(C) EXHIBITS
See Item 14(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(2) above.
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45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this annual report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized in the City of
Austin, Texas, this September 19, 2001.
INTROGEN THERAPEUTICS, INC.
By: /s/ DAVID G. NANCE
----------------------------------
David G. Nance
President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ JAMES W. ALBRECHT, JR.
----------------------------------
James W. Albrecht, Jr.
Chief Financial Officer
(Principal Financial Officer)
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46
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David G. Nance and James W.
Albrecht, Jr. and each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed on behalf of the Registrant by
the following persons in the capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. NANCE President, Chief Executive September 19, 2001
----------------------------------------------------- Officer, and Director
(David G. Nance) (Principal Executive
Officer)
/s/ JAMES W. ALBRECHT, JR. Chief Financial Officer September 19, 2001
----------------------------------------------------- (Principal Financial
(James W. Albrecht, Jr.) Officer)
/s/ JOHN N. KAPOOR, PH.D. Chairman of the Board and September 19, 2001
----------------------------------------------------- Director
(John N. Kapoor, Ph.D.)
/s/ WILLIAM H. CUNNINGHAM, PH.D. Director September 19, 2001
-----------------------------------------------------
(William H. Cunningham, Ph.D.)
/s/ CHARLES E. LONG Director September 19, 2001
-----------------------------------------------------
(Charles E. Long)
/s/ MAHENDRA G. SHAH, PH.D. Director September 19, 2001
-----------------------------------------------------
(Mahendra G. Shah, Ph.D.)
/s/ ELISE T. WANG Director September 19, 2001
-----------------------------------------------------
(Elise T. Wang)
</Table>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Introgen Therapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of Introgen
Therapeutics, Inc. (a Delaware corporation), and subsidiaries as of June 30,
2000 and 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2001. These financial statements are the responsibility of
Introgen Therapeutics, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Introgen Therapeutics, Inc.,
and subsidiaries as of June 30, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Austin, Texas
July 24, 2001
F-1
48
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30,
-------------------------
2000 2001
----------- -----------
ASSETS
Current Assets:
Cash...................................................... $ 1,788,612 $14,199,948
Receivable from sale of preferred stock................... -- 25,000,000
Short-term investments.................................... 9,976,469 20,776,581
Other current assets...................................... 4,808 511,640
Inventory................................................. 1,734,329 --
----------- -----------
Total current assets.............................. 13,504,218 60,488,169
----------- -----------
Property and equipment, net of accumulated depreciation of
$2,988,387 and $5,214,554, respectively................... 10,152,572 11,507,385
Other assets................................................ 1,197,733 351,719
----------- -----------
Total assets...................................... $24,854,523 $72,347,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 262,977 $ 376,187
Accrued liabilities....................................... 1,026,330 4,402,121
Deferred revenues from affiliate.......................... 1,205,655 --
Current portions of capital lease obligations and notes
payable................................................ 746,192 1,413,635
----------- -----------
Total current liabilities......................... 3,241,154 6,191,943
Capital lease obligations, net of current portion........... 2,149,281 1,370,221
Notes payable, net of current portion....................... 5,871,750 8,427,900
Deferred revenue, long term................................. -- 288,000
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 8,308,523
shares authorized, 6,419,896 and no shares issued and
outstanding, respectively.............................. 6,419 --
Series A non-voting convertible preferred stock, $.001 par
value; 100,000 shares authorized, no shares and 100,000
shares issued and outstanding, respectively............ -- 100
Common stock, $.001 par value; 50,000,000 shares
authorized; 4,134,180 and 21,391,125 shares issued and
outstanding, respectively.............................. 4,134 21,391
Additional paid-in capital................................ 36,536,575 94,574,836
Deferred compensation..................................... (4,210,412) (3,340,939)
Accumulated deficit....................................... (18,744,378) (35,186,179)
----------- -----------
Total stockholders' equity........................ 13,592,338 56,069,209
----------- -----------
Total liabilities and stockholders' equity........ $24,854,523 $72,347,273
=========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
49
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED JUNE 30,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Collaborative research and development revenues from
affiliate.......................................... $ 6,713,653 $ 6,204,061 $ 3,015,655
----------- ----------- ------------
Product sales to affiliate........................... 1,475,282 2,086,600 1,500,000
Cost of product sales................................ 993,748 1,475,790 2,487,783
----------- ----------- ------------
Gross margin on product sales.............. 481,534 610,810 (987,783)
----------- ----------- ------------
Other revenue........................................ -- 97,000 684,344
Costs and expenses:
Research and development........................... 7,539,514 10,074,755 15,013,840
General and administrative......................... 2,976,955 4,700,841 4,875,086
----------- ----------- ------------
Loss from operations....................... (3,321,282) (7,863,725) (17,176,710)
Interest income...................................... 680,748 722,352 1,229,944
Interest expense..................................... (5,363) (582,453) (848,605)
Other income......................................... -- -- 353,570
----------- ----------- ------------
Net loss................................... $(2,645,897) $(7,723,826) $(16,441,801)
=========== =========== ============
Net loss per share, basic and diluted................ $ (0.66) $ (1.89) $ (1.02)
=========== =========== ============
Shares used in computing basic and diluted net loss
per share.......................................... 4,005,893 4,095,623 16,163,027
=========== =========== ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
50
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
SERIES A, B, C AND D SERIES A NON-VOTING
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------- --------- -------- ---------- ------- -----------
BALANCE, JUNE 30, 1998..................... 5,941,662 $5,941 -- $ -- 3,954,906 $ 3,955 $25,083,813
Issuance of Series B preferred stock in
June 1999 in accordance with stock
purchase agreement with affiliate........ 478,234 478 -- -- -- -- 5,102,279
Issuance of common stock in connection with
exercise of outstanding stock options.... -- -- -- -- 51,329 51 21,203
Deferred compensation relating to issuance
of certain stock options................. -- -- -- -- -- -- 1,767,864
Amortization of deferred compensation...... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- -- --
---------- ------ ------- ---- ---------- ------- -----------
BALANCE, JUNE 30, 1999..................... 6,419,896 6,419 -- -- 4,006,235 4,006 31,975,159
Issuance of common stock in connection with
exercise of outstanding stock options and
warrants................................. -- -- -- -- 127,945 128 58,398
Deferred compensation relating to issuance
of certain stock options................. -- -- -- -- -- -- 3,929,018
Amortization of deferred compensation and
stock-based compensation................. -- -- -- -- -- -- 574,000
Net loss................................... -- -- -- -- -- -- --
---------- ------ ------- ---- ---------- ------- -----------
BALANCE, JUNE 30, 2000..................... 6,419,896 6,419 -- -- 4,134,180 4,134 36,536,575
Issuance of common stock in connection with
initial public offering, net of offering
costs of $4,574,538...................... -- -- -- -- 4,600,000 4,600 32,220,862
Conversion of preferred stock to common
stock.................................... (6,419,896) (6,419) -- -- 12,326,173 12,326 (5,907)
Issuance of common stock in connection with
exercise of outstanding stock options and
warrants................................. -- -- -- -- 330,772 331 203,804
Issuance of preferred stock in June 2001 in
accordance stock purchase agreement with
affiliate, net of offering costs of
$100,000................................. -- -- 100,000 100 -- -- 24,899,900
Deferred compensation relating to issuance
of certain stock options................. -- -- -- -- -- -- 719,602
Amortization of deferred compensation and
stock-based compensation................. -- -- -- -- -- -- --
Net Loss................................... -- -- -- -- -- -- --
---------- ------ ------- ---- ---------- ------- -----------
BALANCE JUNE 30, 2001...................... -- $ -- 100,000 $100 21,391,125 $21,391 $94,574,836
========== ====== ======= ==== ========== ======= ===========
<Caption>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ------------ ------------
BALANCE, JUNE 30, 1998..................... $ (397,338) $ (8,374,655) $ 16,321,716
Issuance of Series B preferred stock in
June 1999 in accordance with stock
purchase agreement with affiliate........ -- -- 5,102,757
Issuance of common stock in connection with
exercise of outstanding stock options.... -- -- 21,254
Deferred compensation relating to issuance
of certain stock options................. (1,767,864) -- --
Amortization of deferred compensation...... 387,041 -- 387,041
Net loss................................... -- (2,645,897) (2,645,897)
------------ ------------ ------------
BALANCE, JUNE 30, 1999..................... (1,778,161) (11,020,552) 19,186,871
Issuance of common stock in connection with
exercise of outstanding stock options and
warrants................................. -- -- 58,526
Deferred compensation relating to issuance
of certain stock options................. (3,929,018) -- --
Amortization of deferred compensation and
stock-based compensation................. 1,496,767 2,070,767
Net loss................................... -- (7,723,826) (7,723,826)
------------ ------------ ------------
BALANCE, JUNE 30, 2000..................... (4,210,412) (18,744,378) 13,592,338
Issuance of common stock in connection with
initial public offering, net of offering
costs of $4,574,538...................... -- -- 32,225,462
Conversion of preferred stock to common
stock.................................... -- -- --
Issuance of common stock in connection with
exercise of outstanding stock options and
warrants................................. -- -- 204,135
Issuance of preferred stock in June 2001 in
accordance stock purchase agreement with
affiliate, net of offering costs of
$100,000................................. -- -- 24,900,000
Deferred compensation relating to issuance
of certain stock options................. (719,602) -- --
Amortization of deferred compensation and
stock-based compensation................. 1,589,075 -- 1,589,075
Net Loss................................... -- (16,441,801) (16,441,801)
------------ ------------ ------------
BALANCE JUNE 30, 2001...................... $ (3,340,939) $(35,186,179) $(56,069,209)
============ ============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
51
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED JUNE 30,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Cash flows from operating activities:
Net loss............................................ $(2,645,897) $(7,723,826) $(16,441,801)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 14,167 1,710,559 2,226,167
Compensation related to issuance of certain stock
options........................................ 387,041 2,070,767 1,589,075
Changes in assets and liabilities:
Decrease (increase) in receivable from
affiliate................................... 66,468 -- --
Decrease (increase) in inventory............... (1,158,642) (109,718) 1,734,329
Decrease (increase) in other assets............ (246,311) (908,000) (436,629)
Increase (decrease) in accounts payable........ 1,757,701 (1,751,836) 113,210
Increase (decrease) in accrued liabilities..... 51,037 762,542 3,375,791
Increase (decrease) in deferred revenue........ (176,181) 407,468 (917,655)
----------- ----------- ------------
Net cash used in operating activities....... (1,950,617) (5,542,044) (8,757,513)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment................. (7,441,013) (1,021,904) (3,580,980)
Purchases of short-term investments................. (24,644,122) (21,585,141) (83,142,612)
Maturities of short-term investments................ 26,691,096 25,224,000 72,342,500
----------- ----------- ------------
Net cash provided by (used in) investing
activities................................ (5,394,039) 2,616,955 (14,381,092)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from sale of convertible preferred stock... 5,102,757 -- --
Offering costs associated with sale of preferred
stock............................................ -- -- (100,000)
Proceeds from sale of common stock.................. 21,254 58,526 33,205,408
Proceeds from issuance of note payable.............. 3,185,993 2,814,007 3,262,833
Principal payments under capital lease obligations
and notes payable................................ (5,162) (304,508) (818,300)
----------- ----------- ------------
Net cash provided by financing activities... 8,304,842 2,568,025 35,549,941
----------- ----------- ------------
Net increase (decrease) in cash............. 960,186 (357,064) 12,411,336
Cash, beginning of year............................... 1,185,490 2,145,676 1,788,612
----------- ----------- ------------
Cash, end of year..................................... $ 2,145,676 $ 1,788,612 $ 14,199,948
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest...................... $ 45,555 $ 607,959 $ 917,481
=========== =========== ============
Supplemental disclosure of noncash investing and
financing activity:
Purchases of equipment under capital lease
obligations...................................... $ 296,411 $ 2,780,482 $ --
=========== =========== ============
Retirement of fully depreciated assets.............. $ -- $ 483,678 $ --
=========== =========== ============
Receivable for issuance of preferred stock.......... $ -- $ -- $ 25,000,000
=========== =========== ============
Offering costs deferred in 2000, netted against
initial public offering proceeds in 2001......... $ -- $ -- $ 775,811
=========== =========== ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
52
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. FORMATION AND BUSINESS OF THE COMPANY
Introgen Therapeutics, Inc., a Delaware corporation, and its subsidiaries
(Introgen) develops gene therapy products for the treatment of cancer.
Introgen's lead product candidate, INGN 201, combines the naturally occurring
p53 tumor suppressor gene with its adenoviral delivery system. Introgen is
conducting Phase III clinical studies of INGN 201 in head and neck cancer, is
completing a Phase II clinical trial in non-small cell lung cancer and is
conducting several Phase I clinical trials in additional cancer indications.
Introgen is developing additional cancer gene therapy product candidates,
notably those based on the mda-7 and PTEN genes, as well as associated vector
technologies for delivering the gene-based products into target cells.
Introgen's INGN 241 product candidate, which combines the mda-7 gene with
Introgen's gene delivery system, is undergoing safety testing in a Phase I
clinical study. Introgen is developing therapies for cancer and other diseases
based on restoring normal cellular function through gene therapy, which may
offer safer and more effective treatments than are currently available.
Introgen manufactures its own gene therapy-based products for use in
clinical trials. Introgen has not yet generated any significant revenues from
unaffiliated third parties, nor is there any assurance of future product
revenues. Introgen's research and development activities involve a high degree
of risk and uncertainty, and its ability to successfully develop, manufacture
and market its proprietary products is dependent upon many factors. These
factors include, but are not limited to, the need for additional financing, the
reliance on collaborative research and development arrangements with corporate
and academic affiliates, and the ability to develop manufacturing, sales and
marketing experience. Additional factors include uncertainties as to patents and
proprietary technologies, competitive technologies, technological change and
risk of obsolescence, development of products, competition, government
regulations and regulatory approval, and product liability exposure. As a result
of the aforementioned factors and the related uncertainties, there can be no
assurance of Introgen's future success.
Since its inception in 1993, Introgen has used its resources primarily to
conduct research and development activities, primarily for INGN 201 and, to a
lesser extent, for other product candidates. At June 30, 2001, Introgen had an
accumulated deficit of approximately $35.2 million. Introgen anticipates that it
will incur losses in the future that are likely to be greater than cumulative
losses incurred in prior years. Introgen expects that cash needed for operating
activities will increase as it continues to expand its research and development
of various gene therapy technologies. Since inception, Introgen's only
significant revenues have been payments from Aventis Pharma (Aventis) under
collaborative research and development agreements for its early stage
development work on INGN 201 and Aventis' purchases of INGN 201 product Introgen
manufactured for its use in later stage clinical trials it previously performed.
Introgen has also earned interest income on cash placed in short-term
investments.
Prior to June 30, 2001, Introgen developed therapeutics based on p53 and on
K-ras pathway inhibition under two collaboration agreements originally entered
into in October 1994 with Rhone-Poulenc Rorer Pharmaceuticals Inc., which
ultimately became part of Aventis. In June 2001, Introgen and Aventis
restructured this collaborative relationship. Under this restructuring, Introgen
assumed responsibility for the worldwide development of all p53 and K-ras
products, and acquired additional marketing and commercialization rights with
respect to those products. Introgen assumed the control and performance of
ongoing clinical trials for p53- and K-ras-based products and is now fully
responsible for all preclinical research and development and clinical trials for
new gene therapy products. In connection with this restructuring, Aventis
purchased $25.0 million of non-voting preferred stock from Introgen.
Under the restructured p53 and K-ras collaboration agreement, Introgen is
primarily responsible for the further development and commercialization of gene
therapy products for the delivery of the p53 and K-ras inhibitor genes. Aventis
licensed to Introgen all p53 and K-ras patents and delivery patents, as well as
all proprietary Aventis targeting technologies, and agreed, for a period of
seven years, not to conduct any activities
F-6
53
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directed to the development or commercialization of any gene therapy products
using the p53 or K-ras genes. Introgen now has the exclusive, worldwide right to
market and manufacture the products developed under each of the prior
collaboration agreements, as well as any new p53- or K-ras-based gene therapy
products. Aventis transferred to Introgen all trademarks and goodwill associated
with the developed p53-based gene therapy products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Introgen and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Short-Term Investments
At June 30, 2000 and 2001, short-term investments consisted of investments
in short-term investment-grade securities, which consist primarily of federal
and state government obligations, commercial paper and corporate bonds with
various maturity dates not exceeding one year. All short-term investments have
been classified as held-to-maturity and are carried at amortized cost, which
approximates fair value.
Inventory
Inventory at June 30, 2000 consisted of vials of gene therapy-based product
manufactured for sale to Aventis and for their use in clinical trials under the
terms of Introgen's original collaboration agreements with them. This inventory
is stated at the lower of cost or market. Cost is determined based upon direct
materials used and an allocation of direct and indirect labor and overhead.
Under the restructured collaboration agreements, Introgen no longer sells
clinical materials to Aventis. Accordingly, all inventory on hand at June 30,
2001 has been expensed.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation.
Maintenance, repairs and minor replacements are charged to expense as incurred.
Significant renewals and betterments are capitalized. Depreciation is provided
generally using accelerated methods based on useful lives of fifteen years for
research, manufacturing and administrative facilities and five to seven years
for equipment. Interest incurred during construction of facilities is
capitalized as a cost of those facilities.
F-7
54
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment consisted of the following as of June 30, 2000 and
2001:
<Table>
<Caption>
JUNE 30,
-------------------------
2000 2001
----------- -----------
Facility................................................... $ 8,431,389 $11,597,922
Laboratory equipment....................................... 4,709,570 5,124,017
----------- -----------
Total property and equipment..................... 13,140,959 16,721,939
Less accumulated depreciation.............................. (2,988,387) (5,214,554)
----------- -----------
Net property and equipment....................... $10,152,572 $11,507,385
=========== ===========
</Table>
As of June 30, 2000 and 2001, $3,076,893 of equipment is held under capital
lease obligations and is being depreciated over the applicable lease term (see
Note 7).
Revenue Recognition
Collaborative research payments received prior to the restructuring of the
Aventis collaboration were recognized as revenue as Introgen performed its
obligations related to such research agreements. Deferred revenue was recorded
for cash received for which the related expenses had not been incurred. Introgen
has not received such payments subsequent to December 31, 2000.
Prior to the restructuring of the Aventis collaboration, Introgen sold
gene-therapy based product to Aventis at specified prices and payment terms with
no rights to return delivered and accepted product. Revenue from product sales
to the affiliate was recognized upon completion of production and delivery
requirements and acceptance by Aventis and when collection was reasonably
assured. Deferred revenue was recorded for cash received for product which had
not been delivered to and accepted by Aventis. Introgen has not sold product to
Aventis subsequent to December 31, 2000.
Rent income from the sublease of laboratory space to third parties under
leases that have variable monthly rent amounts over the term of the lease is
recognized in equal amounts per month over the term of the lease. Any cash
payments received in excess of rental income recognized is recorded as deferred
revenue. Rental income is included in other income in the accompanying
consolidated statement of operations.
Research and Development Costs
Research and development costs include the costs of conducting basic
research, developing product applications, conducting preclinical investigations
and performing clinical trials to obtain data for regulatory filings for product
approvals. Research and development costs are expensed as incurred.
Reclassifications
The accompanying consolidated financial statements for 1999 and 2000
contain certain classifications to conform with the 2001 presentation.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Due to losses incurred in all periods presented,
the shares associated with stock options, warrants and the convertible preferred
stock are not included because they are antidilutive.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of outstanding preferred stock into
F-8
55
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Introgen's common stock effective upon the closing of Introgen's
initial public offering as if such conversion occurred on the dates of original
issuance (See Note 3).
The following table sets forth the computation of basic and dilutive, and
pro forma basic and dilutive, net loss per share:
<Table>
<Caption>
YEAR ENDED JUNE 30,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Numerator:
Net loss........................................... $(2,645,897) $(7,723,826) $(16,441,801)
=========== =========== ============
Denominator:
Weighted average common shares..................... 4,005,893 4,095,623 16,163,027
----------- ----------- ------------
Denominator for basic and diluted calculation........ 4,005,893 4,095,623 16,163,027
Weighted average effect of pro forma securities
Series A convertible preferred stock............... 5,781,925 5,781,925 1,726,659
Series B convertible preferred stock............... 2,455,352 3,373,560 1,007,447
Series C convertible preferred stock............... 1,058,689 1,058,689 316,162
Series D convertible preferred stock............... 2,111,999 2,111,999 630,707
----------- ----------- ------------
Denominator for pro forma basic and diluted
calculation........................................ 15,413,858 16,421,796 19,844,002
=========== =========== ============
Net loss per share:
Basic and diluted.................................. $ (0.66) $ (1.89) $ (1.02)
=========== =========== ============
Pro forma basic and diluted........................ $ (0.17) $ (0.47) $ (0.83)
=========== =========== ============
</Table>
3. STOCKHOLDERS' EQUITY:
Stock Split
In August 2000, Introgen's Board of Directors approved a stock dividend to
effect a stock split of 1.6 shares for every 1 share of common stock
outstanding. An amount equal to the increased par value of the common shares has
been reflected as a transfer from additional paid-in capital to common stock.
Retroactive effect has been given to the stock split in stockholders' equity and
in all share and per share data as of the earliest date presented in the
accompanying consolidated financial statements.
Initial Public Offering
In October 2000, Introgen completed an initial public offering of 4,600,000
newly-issued shares of its common stock at a price of $8.00 per share. Introgen
received $32.2 million in cash proceeds from the initial public offering, net of
underwriting discounts, commissions and other offering costs.
Convertible Preferred Stock
Simultaneous with the closing of the initial public offering, Introgen's
convertible preferred stock then outstanding, consisting of 3,011,423 shares of
Series A Convertible Preferred Stock, 1,757,063 shares of Series B Convertible
Preferred Stock, 551,410 shares of Series C Convertible Preferred Stock and
1,100,000 shares of Series D Convertible Preferred Stock, was automatically
converted into 12,326,173 shares of common stock.
Series A Non-Voting Convertible Preferred Stock
In connection with the restructuring of the Aventis collaboration and
pursuant to a stock purchase agreement with Aventis executed on June 30, 2001,
Introgen issued 100,000 unregistered shares of a new class
F-9
56
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $.001 par value, Series A Non-Voting Convertible Preferred Stock in exchange
for $25.0 million. Introgen received the cash payment for these shares in July
2001 and as of June 30, 2001, Introgen had a receivable due from Aventis of
$25.0 million reflected in Introgen's consolidated financial statements. These
shares are convertible at any time, at the option of either Introgen or Aventis,
into 2,343,721 shares of common stock. Under a voting agreement, Aventis must
vote these shares in the same manner as the shares voted by a majority of the
other shareholders on any corporate action put to a vote of Introgen's
shareholders. This voting requirement terminates at the earliest of the tenth
anniversary of the voting agreement, registration of these shares with the
Securities and Exchange Commission or the sale of these shares to an Aventis
non-affiliate, as defined in the voting agreement.
Employee Stock Purchase Plan
Under Introgen's 2000 Employee Stock Purchase Plan (the Stock Purchase
Plan), 779,806 shares of common stock are reserved for purchase by eligible
employees, at 85 percent of the appropriate market price. The Stock Purchase
Plan provides for an increase on each July 1 in the number of shares available
for issuance, in an amount equal to the lesser of 480,000 shares, 1.5 percent of
the outstanding shares of common stock on the date of the annual increase or
such lesser amount as may be determined by the board of directors. The Stock
Purchase Plan provides that eligible employees may authorize payroll deductions
of up to 10 percent of their qualified compensation. The maximum number of
shares that an employee may purchase in a single offering period is 10,000
shares. The Stock Purchase Plan will terminate in 2010 and may be amended or
terminated by the board of directors. During the year ended June 30, 2001,
22,561 shares of common stock were purchased by employees under this plan.
Stock Option Plans
The 2000 Stock Option Plan (the Stock Option Plan) was initiated in October
2000 and all stock option grants since that time have been under this plan. The
Stock Option Plan provides for the granting of options, either incentive or
nonstatutory, or stock purchase rights to employees, directors and consultants
of Introgen to purchase shares of Introgen's common stock. At June 30, 2001,
there were 5,170,058 shares of common stock reserved for option grants under
this plan. This plan provides for annual increases in the number of shares
available for issuance beginning in fiscal 2001, equal to the lesser of
1,600,000 shares, 5 percent of the outstanding shares on the date of the annual
increase, or a lesser amount determined by the board of directors. The exercise
price for all option grants shall be no less than the fair value of Introgen's
common stock at the date of grant, with the exception of incentive stock options
granted to holders of shares representing more than 10 percent of Introgen's
voting power, in which case the exercise price shall be no less than 110 percent
of the fair value. In the event of a merger, reorganization or change in
controlling ownership of Introgen, all options outstanding under the Stock
Option Plan become fully vested and immediately exercisable, unless the
successor corporation assumes or substitutes other options in their place. The
2000 Stock Option Plan will terminate in 2010 and may be amended or terminated
by the board of directors.
Prior to October 2000, stock options were granted under the Introgen 1995
Stock Plan. Introgen no longer issues options under this plan. The terms of this
plan are substantially the same as the 2000 Stock Option Plan. At June 30, 2000
and 2001, there were 397,242 and zero, respectively, shares of common stock
reserved for option grants under this plan.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows companies to adopt one of two methods for
accounting for stock options. Introgen has elected the method that requires
disclosure only of stock-based compensation. Because of this election, Introgen
continues to account for its employee stock-based compensation plans under
Accounting Principles Board (APB) Opinion No. 25 and the related
interpretations. Accordingly, deferred compensation is recorded for stock-based
compensation grants based on the excess of the fair market value of the common
stock on the
F-10
57
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measurement date over the exercise price. The deferred compensation is amortized
over the vesting period of each unit of stock-based compensation grant,
generally four years. If the exercise price of the stock-based compensation
grants is equal to the estimated fair value of Introgen's stock on the date of
grant, no compensation expense is recorded.
Introgen records the fair value of options issued to non-employee
consultants at the fair value of the options issued. Introgen has not incurred
significant compensation expense relating to non-employee consultant grants. Any
expense is recognized over the service period or at the date of issuance if the
options are fully vested and no performance obligation exists.
During the years ended June 30, 1999, 2000 and 2001, Introgen recorded
aggregate deferred compensation of $1,919,358, $4,177,281 and $792,392,
respectively related to the issuance of stock options. Introgen amortized
$387,041, $1,496,767 and $1,589,075 of deferred compensation to expense during
the years ended June 30, 1999, 2000 and 2001, respectively. During the years
ended June 30, 1999, 2000 and 2001, Introgen reversed $151,494, $248,263 and
$72,790, respectively, of deferred compensation and additional paid in capital
for unamortized deferred compensation related to the forfeiture of nonvested
options by terminated employees. For each respective year, total amortization
expense was revised to the extent amortization had previously been recorded for
nonvested options.
In December 1999, Introgen accelerated the vesting of options held by a
board member concurrent with the individual's resignation from Introgen's board.
Introgen accelerated these options in recognition of the individual's
contributions to the board and recognized approximately $574,000 of compensation
expense for the fair value of the previously unvested options as of the
remeasurement date.
The fair value of options granted during fiscal years 1999, 2000 and 2001
was estimated on the applicable grant dates using the Black-Scholes option
pricing model. Significant weighted average assumptions used to estimate fair
value for all years include: risk-free interest rates ranging from 4.8 percent
to 6.7 percent; expected lives of seven to ten years; no expected dividends; and
volatility factors ranging from 58.0 percent to 110.8 percent. Had compensation
expense been determined consistent with the provisions of SFAS No. 123,
Introgen's net loss would have been increased to the following pro forma
amounts:
<Table>
<Caption>
YEAR ENDED JUNE 30,
-------------------------------------
1999 2000 2001
---------- ---------- -----------
Net loss --
As reported................................... $2,645,897 $7,723,826 $16,441,801
========== ========== ===========
Pro forma..................................... $2,714,932 $7,781,545 $16,736,027
========== ========== ===========
Basic and diluted EPS --
As reported................................... $ (0.66) $ (1.89) $ (1.02)
========== ========== ===========
Pro forma..................................... $ (0.68) $ (1.90) $ (1.04)
========== ========== ===========
</Table>
Because SFAS No. 123 does not apply to options granted prior to July 1,
1995, the resulting pro forma compensation costs may not be representative of
the costs to be expected in future years.
F-11
58
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of option activity under these plans:
<Table>
<Caption>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- ---------------
BALANCE, JUNE 30, 1998..................................... 1,363,819 $0.42
Granted.................................................. 1,351,440 0.52
Exercised................................................ (51,329) 0.41
Canceled................................................. (232,819) 0.51
---------
BALANCE, JUNE 30, 1999..................................... 2,431,111 0.47
Granted.................................................. 399,306 0.94
Exercised................................................ (108,745) 0.46
Canceled................................................. (124,517) 0.51
---------
BALANCE, JUNE 30, 2000..................................... 2,597,155 0.55
Granted.................................................. 704,498 4.30
Exercised................................................ (308,212) 0.42
Canceled................................................. (17,357) 0.74
---------
BALANCE, JUNE 30, 2001..................................... 2,976,084 1.27
=========
Exercisable at June 30, 2001............................... 1,505,355 0.51
=========
</Table>
The weighted average fair values of options granted during the years ended
June 30, 1999, 2000 and 2001 were $1.80, $11.18 and $5.61, respectively.
The following table summarizes information about stock options outstanding
as of June 30, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------- ----------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AS OF CONTRACTUAL AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICE JUNE 30, 2001 LIFE (IN YEARS) EXERCISE PRICE JUNE 30, 2001 EXERCISE PRICE
-------------- ----------------- ---------------- -------------- ----------------- --------------
$0.39 - $1.25 2,317,486 6.35 $0.57 1,492,855 $0.50
2.00 - 3.50 200,000 9.70 3.13 12,500 2.00
5.00 - 5.88 458,598 9.67 5.13 -- --
--------- ----- --------- -----
2,976,084 1.27 1,505,355 0.51
========= =========
</Table>
Warrants
In connection with the issuance of the Series C Preferred Stock, Introgen
issued warrants to purchase 163,600 shares of common stock at a weighted average
exercise price of $4.96 per share to third parties who assisted in the sale of
the Series C Preferred Stock. The warrants expired in March 2001.
In connection with the issuance of the Series D Preferred Stock, Introgen
issued warrants to purchase 132,000 shares of common stock at exercise prices
ranging from $6.25 per share to $7.81 per share to third parties who assisted in
the sale of the Series D Preferred Stock. The warrants expired in October 1999.
4. FEDERAL INCOME TAXES
Introgen recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently between
the financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of liabilities and assets
using enacted tax rates and laws in effect in the years in
F-12
59
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which the differences are expected to reverse. Deferred tax assets are evaluated
for realization based on a more-likely-than-not criteria in determining if a
valuation should be provided.
The reconciliation of the statutory federal income tax rate to Introgen's
effective income tax rate for the years ended June 30, 1999, 2000 and 2001, is
as follows:
<Table>
<Caption>
YEAR ENDED JUNE 30,
---------------------
1999 2000 2001
----- ----- -----
Statutory rate.............................................. (34.0)% (34.0)% (34.0)%
Increase in deferred tax valuation allowance................ 29.8 24.8 30.6
Stock option compensation not deductible.................... 5.0 9.1 3.3
Research and development tax credits........................ (1.4) -- --
Other....................................................... 0.6 0.1 0.1
----- ----- -----
--% --% --%
===== ===== =====
</Table>
The components of Introgen's deferred tax assets are as follows:
<Table>
<Caption>
JUNE 30,
--------------------------
2000 2001
----------- ------------
Net operating loss carryforwards.......................... $ 3,702,400 $ 7,932,000
Research and development tax credits...................... 49,200 49,200
Technology license........................................ 58,000 52,800
Tax basis of property and equipment in excess of book
basis................................................... 1,158,000 1,366,400
Accrued liabilities....................................... 29,500 656,000
Capital leases............................................ 137,900 137,900
Inventory................................................. 60,200 --
Other..................................................... 51,100 89,800
----------- ------------
Total deferred tax assets....................... 5,246,300 10,284,100
Less -- Valuation allowance............................... (5,246,300) (10,284,100)
----------- ------------
Net deferred tax assets......................... $ -- $ --
=========== ============
</Table>
As of June 30, 2001, Introgen has generated net operating loss (NOL)
carryforwards of approximately $23.3 million and research and development
credits of approximately $49,200 available to reduce future income taxes. These
carryforwards begin to expire in 2008. A change in ownership, as defined by
federal income tax regulations, could significantly limit Introgen's ability to
utilize its carryforwards. Introgen's ability to utilize its current and future
NOLs to reduce future taxable income and tax liabilities may be limited.
Additionally, because United States tax laws limit the time during which these
carryforwards may be applied against future taxes, Introgen may not be able to
take full advantage of these attributes for federal income tax purposes. As
Introgen has had cumulative losses and there is no assurance of future taxable
income, a valuation allowance has been established to fully offset the deferred
tax asset at June 30, 2000 and 2001. The valuation allowance increased $788,300,
$1.9 million and $5.0 million for the years ended June 30, 1999, 2000 and 2001,
respectively, primarily due to losses from operations.
5. NOTE PAYABLE
Introgen has notes payable with banks to finance its facilities, which are
pledged as security for these notes. There are two notes with the following
terms:
- Note payable with an original principal balance of $6,000,000 and an
outstanding balance of $5,958,769 and $5,872,300 at June 30, 2000 and
2001, respectively. Interest is fixed at 7.5 percent until November 2004,
at which time it is subject to a one-time adjustment to a rate equal to
the then-current
F-13
60
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate of the five-year United States Treasury bond note plus 2 percent,
with such adjusted interest rate not to exceed 8.5 percent. Interest plus
principal based on a 25-year amortization period are payable monthly
until November 2009, at which time the remaining outstanding principal is
due and payable.
- Note payable with an original principal balance of $3,262,833 and an
outstanding balance of zero and $3,217,231 at June 30, 2000 and 2001,
respectively. Interest is at prime, adjustable annually. Interest and
principal, fully amortized over a five year period, are payable monthly
through June 2006.
Interest was capitalized as a cost of facilities during the time those
facilities to which these notes relate were under construction. Interest
capitalized was $103,119 and $83,690 during the years ended June 30, 2000 and
2001, respectively.
Aggregate annual maturities on the notes payable as of June 30, 2001, are
as follows:
<Table>
Year ending June 30,
2002.................................................. $ 612,811
2003.................................................. 706,877
2004.................................................. 757,441
2005.................................................. 814,085
2006.................................................. 1,157,167
Thereafter............................................ 5,041,150
----------
Total......................................... $9,089,531
==========
</Table>
Introgen believes the fair market value of its fixed rate debt approximates
its carrying value as of June 30, 2000 and 2001.
6. LICENSE AND RESEARCH AGREEMENTS
Patent and Technology License Agreement With The University of Texas System
Introgen has a license agreement with the Board of Regents of The
University of Texas System (the System) and The University of Texas M.D.
Anderson Cancer Center (UTMDACC), a component institution of the System, whereby
Introgen has an exclusive, worldwide license to use certain technology.
Beginning with the first commercial sale of a product incorporating the licensed
technologies, Introgen will pay UTMDACC, for the longer of 15 years or the life
of the patent, a royalty based on net sales by Introgen or its affiliates or by
sublicense agreement of products incorporating any of such technologies.
Introgen is obligated by the agreement to reimburse any of UTMDACC's costs that
may be incurred in connection with obtaining patents related to the licensed
technologies.
Other Technology Option and License Agreements
Introgen has technology option and license agreements with various other
third parties and, in particular, agreements related to the mda-7 and PTEN
genes. These agreements require Introgen to make milestone and license payments
to these parties if and when Introgen achieves certain prescribed clinical study
and product development milestones. Introgen has technology option and license
agreements with two additional third parties covering certain enabling
technologies, both of which require annual payments of $20,000 until cancelled
at Introgen's option.
Sponsored Research
Introgen funds certain research performed by UTMDACC to further the
development of technologies that could have potential commercial viability. By
sponsoring and funding this research, Introgen has the right to include certain
patentable inventions arising therefrom under its patent and technology license
agreement
F-14
61
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the University of Texas System. During the years ended June 30, 1999, 2000
and 2001, Introgen paid approximately $820,000, $815,600 and $634,200,
respectively, for this research.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Introgen is obligated under various capital and operating leases for land,
office and laboratory space and equipment which expire at various dates through
September 2026. The amounts payable under capital leases were drawn under two
lease lines of credit with commercial leasing companies which were used to
finance equipment acquisitions. Amounts drawn under both lines are payable
monthly over 48 months from the time of the draw. The lines of credit bear
interest at fixed interest rates ranging from 11.3% to 13.25% at June 30, 2001.
The lease lines of credit are secured by the equipment being financed.
Operating leases consist primarily of a ground lease for the land on which
Introgen's new facility is located. Annual rent under this lease is $136,188.
The primary term of this lease continues through September, 2026.
During the years ended June 30, 1999, 2000 and 2001, Introgen incurred
lease expenses of $688,300, $380,200 and $314,900, respectively. Future minimum
lease payments under noncancelable operating leases and the present value of
future minimum capital lease payments as of June 30, 2001, are as follows:
<Table>
<Caption>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
Year ending June 30 --
2002...................................................... $ 254,813 $ 975,012
2003...................................................... 136,188 970,984
2004...................................................... 136,188 585,488
2005...................................................... 136,188 --
2006...................................................... 136,188 --
Thereafter................................................ 2,746,458 --
---------- ----------
Total minimum lease payments...................... $3,546,023 2,531,484
----------
Less -- Amount representing interest........................ (409,259)
----------
Capital lease obligations......................... $2,122,225
==========
</Table>
Insurance and Litigation
On January 12, 2001, Introgen received notice that it had been named as a
defendant in a first amended complaint filed on January 11, 2001 by Canji, Inc.
in an action entitled Canji, Inc. v. Sidney Kimmel Cancer Center, Introgen
Therapeutics, Inc., and Does 2 through 25 (Case No. GIC745643, in the California
Superior Court for the County of San Diego, Central District). Canji, Inc. filed
the original complaint against the Sidney Kimmel Cancer Center (SKCC) on March
24, 2000. On February 9, 2001, the action was removed to the United States
District Court for the Southern District of California. In its first amended
complaint, which for the first time named Introgen as a defendant in the
litigation, Canji alleges that certain gene therapy patents and technology
relating to the treatment of cancer using gene therapy in combination with a
class of chemotherapeutic agents known as DNA repair inhibitors, developed by
SKCC under a sponsored research agreement between SKCC and Introgen and
exclusively licensed to Introgen from SKCC (the SKCC IP), were developed in part
using materials provided by Canji to SKCC under a Material Transfer Agreement
(MTA). Canji further alleges that under the MTA, Canji had the right of first
refusal to a license to any patent rights arising out of the technology
developed by SKCC using the materials. Canji further alleges that Introgen
wrongfully obtained rights in intellectual property derived from SKCC's use of
Canji's materials. As
F-15
62
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relief against Introgen, Canji seeks: a declaratory judgment that Introgen is
not entitled to the intellectual property rights conveyed by SKCC to Introgen,
and that instead those rights belong to Canji; the imposition of a constructive
trust on the patent rights granted to Introgen; and injunctive relief to restore
Canji to the position that it was in prior to the SKCC's grant of intellectual
property rights to Introgen. Introgen believes that Canji's allegations are
without merit and intends to vigorously defend the action. Management believes
the SKCC IP is not material to Introgen's business.
Introgen is also subject to numerous risks and uncertainties because of the
nature and status of its operations and is subject to claims and legal actions
arising in the normal course of business. Introgen maintains insurance coverage
for events and in amounts that it deems appropriate. Management believes that
uninsured losses, if any, would not be materially adverse to Introgen's
financial position or results of operations.
Employment Agreement
Introgen has an employment agreement with its president and chief executive
officer that provides for a base salary and bonuses through July 31, 2003. The
agreement also provides for the grant of an option on August 1, 2001 and 2002 to
purchase an aggregate of 160,000 shares of common stock.
8. RELATED PARTIES:
Introgen's chairman, its president and chief executive officer and another
officer are owners in or otherwise associated with other companies that are or
were previously stockholders of Introgen. Introgen paid the companies, with
which these officers are associated, consulting fees of approximately $175,000
per year during the years ended June 30, 1999, 2000 and 2001, and is obligated
to pay one of the companies $175,000 per year until such time as Introgen, at
its option, terminates the services of that company. As of June 30, 2001, these
officers hold options to purchase up to 794,528 shares of Introgen's common
stock.
Introgen has a consulting agreement with an individual primarily
responsible for the creation of one of its technologies, who is also a
stockholder of Introgen. Under this consulting agreement, Introgen paid this
individual fees of $145,800, $150,000 and $150,000 during the years ended June
30, 1999, 2000 and 2001, respectively, and is obligated to pay the individual
fees of at the rate of $150,000 per year, with such compensation increasing
annually starting October 1, 2001 in varying increments until it reaches
$200,000 per year, subject to adjustment for inflation. The agreement continues
to September 2009, but Introgen may terminate the agreement upon one year's
advance notice.
Introgen subleases a portion of its facilities to UTMDACC under a lease
with a non-cancelable term that expires in 2009. UTMDACC will pay Introgen rent
of approximately $76,000 per month until February 2006 and $13,053 per month
thereafter. During 2001, Introgen recognized income for rent related to this
agreement as other revenue.
F-16
63
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
4.2 -- Certificate of Designations of Series A Non-Voting
Convertible Preferred Stock
10.36+ -- Restated p53 and K-ras Agreement, effective as of June
30, 2001, by and among Introgen, Aventis Pharmaceuticals
Products Inc. ("APPI") and Aventis Pharma S.A.
("Aventis")
10.37 -- p53 Assignment Agreement, effective as of June 30, 2001,
by and among Introgen, APPI and Aventis
10.38 -- K-ras Assignment Agreement, effective as of June 30,
2001, by and among Introgen, APPI and Aventis
10.39 -- Registration Rights Agreement, effective as of June 30,
2001, by and among Introgen, APPI and RPR
10.40 -- Voting Agreement, effective as of June 30, 2001, by and
among Introgen, APPI and RPR
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants
24.1 -- Power of Attorney (See page 44)
</Table>
---------------
+ Confidential treatment has been requested for portions of this exhibit.