SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 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
Commission File Number: 0-23930
-------
TARGETED GENETICS CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1549568
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(206) 623-7612
--------------
(Registrant's telephone number, including area code)
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
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 44,202,282
- --------------------------------------- ---------------------------------
(Class) (Outstanding at October 31, 2001)
TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended September 30, 2001
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets at September 30, 2001
and December 31, 2000 3
b) Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 4
c) Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Qualitative and Quantitative Disclosure About Market Risk 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
INDEX TO EXHIBITS 24
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TARGETED GENETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
----------------- -----------------
ASSETS (Unaudited)
- ------
Current assets:
Cash and cash equivalents $ 28,186,739 $ 38,630,216
Accounts receivable 734,231 3,086,534
Receivable from joint venture 219,961 177,088
Prepaid expenses and other 720,390 291,435
----------------- -----------------
Total current assets 29,861,321 42,185,273
Property, plant and equipment, net 8,588,855 6,206,276
Goodwill and other purchased intangibles, net 33,269,018 37,821,059
Other assets 1,602,984 1,761,434
----------------- -----------------
$ 73,322,178 $ 87,974,042
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 2,048,966 $ 4,000,084
Accrued payroll and other liabilities 1,540,442 679,739
Deferred revenue 5,117,341 6,906,174
Payable to joint venture 270,919 261,743
Current portion of long-term obligations 1,381,064 838,245
----------------- -----------------
Total current liabilities 10,358,732 12,685,985
Long-term obligations, less current portion 2,136,397 947,508
Long-term notes payable 9,527,737 1,498,566
Deferred revenue 6,086,758 9,410,386
Shareholders' equity:
Series B convertible exchangeable preferred stock,
$.001 par value; 12,015 shares authorized, issued
and outstanding at September 30, 2001 and at
December 31, 2000 13,978,368 13,275,778
Common stock, $.01 par value, 80,000,000 shares
authorized, 44,141,848 and 42,608,943 shares
issued and outstanding at September 30, 2001 and
December 31, 2000, respectively 201,146,120 200,968,429
Accumulated deficit (169,911,934) (150,812,610)
----------------- -----------------
Total shareholders' equity 45,212,554 63,431,597
----------------- -----------------
$ 73,322,178 $ 87,974,042
================= =================
The accompanying notes are an integral part of this statement.
3
TARGETED GENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- -------------
(restated) (restated)
Revenue:
Collaborative agreements $ 4,854,180 $ 1,413,766 $ 11,591,409 $ 5,537,087
Collaborative agreements with affiliates 684,091 499,854 2,090,791 1,353,915
-------------- ------------- --------------- -------------
Total revenue 5,538,271 1,913,620 13,682,200 6,891,002
Operating expenses:
Research and development 8,899,102 4,498,131 21,930,026 12,753,931
Acquired in-process research
and development - 28,029,000 - 28,029,000
Amortization of intangibles 1,517,346 169,190 4,552,041 169,190
General and administrative 1,468,279 1,107,931 4,936,838 3,306,504
-------------- ------------- -------------- -------------
Total expenses 11,884,727 33,804,252 31,418,905 44,258,625
-------------- ------------- ---------- -------------
Loss from operations (6,346,456) (31,890,632) (17,736,705) (37,367,623)
Equity in loss of joint venture (946,426) (622,695) (2,813,365) (1,794,226)
Investment income 415,409 576,819 1,694,666 1,256,076
Interest expense (114,187) (67,957) (243,920) (196,422)
-------------- ------------- -------------- -------------
Loss before cumulative effect of change
in accounting principle (6,991,660) (32,004,465) (19,099,324) (38,102,195)
Cumulative effect of change in
accounting principle - - - (3,681,687)
-------------- ------------- -------------- -------------
Net loss (6,991,660) (32,004,465) (19,099,324) (41,783,882)
Accretion of dividend on preferred stock (241,436) (224,106) (702,590) (656,659)
-------------- ------------- -------------- -------------
Net loss applicable to common shareholders $ (7,233,096) $ (32,228,571) $ (19,801,914) $ (42,440,541)
============== ============= ============== =============
Basic and diluted net loss per share:
Loss before cumulative effect of change
in accounting principle $ (0.16) $ (0.86) $ (0.45) $ (1.07)
Cumulative effect of change in
accounting principle - - - (0.10)
-------------- ------------- -------------- -------------
Net loss applicable to common shareholders $ (0.16) $ (0.86) $ (0.45) $ (1.17)
============== ============= ============== =============
Shares used in computation of
basic and diluted net loss per share 44,118,513 37,301,598 43,873,179 36,182,094
============== ============= ============== =============
The accompanying notes are an integral part of this statement.
4
TARGETED GENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
-----------------------------------
2001 2000
---------------- -----------------
Operating activities: (restated)
- ---------------------
Net loss $ (19,099,324) $ (41,783,882)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of change in accounting principle - 3,681,687
Acquired in-process research and development - 28,029,000
Amortization of intangibles 4,552,041 168,594
Equity in loss of unconsolidated joint venture 2,813,365 1,794,226
Depreciation and amortization 1,820,571 1,146,848
Stock based compensation 80,466 -
Changes in operating assets and liabilities:
Increase (decrease) in deferred revenue (5,112,461) 6,826,301
Increase (decrease) in accounts payable and accrued liabilities (1,140,415) 116,149
Decrease in accounts receivable 572,264 929,720
Increase in other assets (565,916) (486,908)
Decrease (increase) in accounts receivable from joint venture (42,873) 268,730
Decrease in accrued interest on securities available for sale - 44,026
---------------- -----------------
Net cash provided by (used in) operating activities (16,122,282) 734,491
Investing activities:
- ---------------------
Purchases of property, plant and equipment (3,905,728) (800,208)
Investment in unconsolidated joint venture (2,804,189) (2,177,653)
Maturities and sales of securities available for sale - 3,023,934
Cash acquired in acquisition - 358,892
---------------- -----------------
Net cash provided by (used in) investing activities (6,709,917) 404,965
Financing activities:
- ---------------------
Proceeds from long-term borrowings 8,000,000 -
Net proceeds from issuance of equity securities - 32,720,625
Net proceeds from stock option and warrant exercises 2,799,815 1,097,428
Proceeds from leasehold improvement and equipment financing 2,400,761 671,594
Payments under capital leases and installment loans (811,854) (898,673)
---------------- -----------------
Net cash provided by financing activities 12,388,722 33,590,974
---------------- -----------------
Net increase (decrease) in cash and cash equivalents (10,443,477) 34,730,430
Cash and cash equivalents, beginning of period 38,630,216 4,100,798
---------------- -----------------
Cash and cash equivalents, end of period $ 28,186,739 $ 38,831,228
================ =================
Supplemental disclosure of non-cash investing and financing activities:
Equity instruments issued to (recoverable from) former
Genovo shareholders $ (2,000,000) $ 66,129,733
Preferred stock dividend 702,590 656,659
Equipment financed through capital lease 142,801 105,451
The accompanying notes are an integral part of this statement.
5
TARGETED GENETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements included in
this quarterly report have been prepared by Targeted Genetics Corporation, or
Targeted Genetics, without audit, in accordance with the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all normal recurring adjustments necessary to
present fairly the financial position and results of operations as of and for
the periods indicated.
Operating results for the three months and nine months ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
full year. The unaudited consolidated financial statements included in this
report should be read in conjunction with the audited consolidated financial
statements and related footnotes thereto included in Targeted Genetics' Annual
Report filed on Form 10-K for the year ended December 31, 2000.
2. Change in Accounting Principle
------------------------------
In the fourth quarter of 2000, we adopted SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements," or SAB 101, effective
January 1, 2000. The adoption of SAB 101 resulted in a charge of $3.7 million
for the nine-month period ended September 30, 2000 and was reflected as a
cumulative effect of the change in accounting principle. Prior to the adoption
of SAB 101, we recognized nonrefundable, up-front license fees as revenue when
the technology was transferred and when all of the significant contractual
obligations relating to the fees had been fulfilled. The adoption of SAB 101
results in the deferral of these fees and subsequent recognition of these fees
as revenue over the remaining term of the research and development collaboration
agreements.
6
As provided in SAB 101, our results for the three-month and nine-month
periods ended September 30, 2000 were restated to reflect the effects of the
accounting change. The effects of our adoption of SAB 101 on the accompanying
results of operations are as follows:
Three-months ended September 30, 2001
------------------------------------------------------------------
2001 2000
---------------------------------- --------------------------
Amount Per Share Amount Per Share
---------------------------------- --------------------------
Reversal of previously
recognized revenue $ - $ - $ (4,954,000) $ (0.13)
Amortized revenue from
cumulative effect adjustment 537,000 0.01 525,000 0.01
Amortization of deferred revenue
from upfront payments 1,120,000 0.03 - -
---------------------------------- --------------------------
Total $ 1,657,000 $ 0.04 $ (4,429,000) $ (0.12)
================================== ==========================
Nine-months ended September 30, 2001
------------------------------------------------------------------
2001 2000
---------------------------------- --------------------------
Amount Per Share Amount Per Share
---------------------------------- --------------------------
Reversal of previously
recognized revenue $ - $ - $ (4,954,000) $ (0.14)
Cumulative effect adjustment - - (3,682,000) (0.10)
Amortized revenue from
cumulative effect adjustment 1,582,000 0.04 1,575,000 0.04
Amortization of deferred revenue
from upfront payments 3,324,000 0.07 - -
---------------------------------- --------------------------
Total $ 4,906,000 $ 0.11 $ (7,061,000) $ (0.20)
================================== ==========================
The reversal of previously recognized revenue relates to license payments of
$5.0 million received from Biogen, Inc. (Biogen) in 2000. The cumulative effect
adjustment relates to $6.0 million, less amortization of $2.3 million of revenue
recognized in 1998 and 1999, in milestone and license payments received from
Celltech Group plc (Celltech) in 1998.
3. Notes Payable
-------------
During the quarter ended September 30, 2001, we drew $5.0 million against a
$10.0 million loan agreement from Biogen. Under the agreement, the remaining
$5.0 million is available at our discretion until the termination of the
agreement. Outstanding borrowings under this loan are due in August 2006.
7
Under a funding agreement with Celltech, we drew $1.0 million against a
$2.0 million facility during the third quarter of 2001, bringing the total
outstanding loan amount to $2.0 million. Principal on this loan is due and
payable in November 2003. We have the option, subject to Celltech's consent, to
repay the loan with Targeted Genetics common stock at any time during the loan
term, at a conversion price equal to the average closing prices of our common
stock over a twenty day period preceding the repayment date.
In connection with the formation of our Emerald Gene Systems (Emerald)
joint venture with Elan Services, Ltd. (Elan), a wholly owned subsidiary of Elan
Corporation plc, Elan made a loan facility available to us for up to $12.0
million to support our share of Emerald's research and development costs. During
the quarter ended September 30, 2001, we drew $2.0 million against this
facility. Principal and accrued interest are convertible, at Elan's option, into
our common stock at 150% of the average closing price of our common stock for a
specified period of time before the date of each draw on the note. If the loan
was converted at Elan's option, the conversion price would be $5.96 for the
currently outstanding amount. We also have the option to convert the note into
that number of shares of our common stock equal to the outstanding principal
amount borrowed under the note plus accrued but unpaid interest divided by the
lesser of the then-current market price and the Elan conversion price. Draws on
this note mature in July 2005.
Interest rates on our outstanding loans currently range from 4% to 12%.
Interest on each of the above loans is accrued and due annually and payable in
cash, with the exception of our loan facility with Elan, which is compounded
semi-annually and due at the end of the loan term.
4. Net Loss Per Common Share
-------------------------
Basic net loss per common share is computed based on the weighted average
number of common shares outstanding during the period. Targeted Genetics'
diluted net loss per share is the same as its basic net loss per share because
all stock options, warrants and other potentially dilutive securities are
antidilutive and are therefore excluded from the calculation of diluted net loss
per share. The computation of net loss per share includes dividends on
outstanding preferred stock that affects only the computation of net loss
applicable to common shareholders and are not included in the computation of net
loss for the period.
8
5. New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS 141 no longer allows the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
This standard requires that business combinations with an acquisition date after
June 30, 2001, be accounted for using the purchase method of accounting only. We
do not believe that the adoption of SFAS 141 will have a material impact on our
consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," effective for our fiscal year ending December 31, 2002. SFAS 142
includes the requirements to test goodwill and indefinite lived intangible
assets for impairment rather than amortize them. SFAS 142 also includes
provisions for the reclassification of certain existing recognized intangibles
to goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 requires the completion of a
transitional goodwill impairment test six months from the date of adoption. We
will apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. During 2002, we will perform the first
of the required impairment tests of goodwill and indefinite lived assets as of
January 1, 2002. We have not yet determined the effect these rules will have on
our net loss or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill, which is specifically addressed by SFAS 142. SFAS
144 maintains the requirement that an impairment loss be recognized for a
long-lived asset to be held and used if its carrying value is not recoverable
from its undiscounted cash flows, with the recognized impairment being the
difference between the carrying amount and fair value of the asset. The
provisions of this Statement are effective January 1, 2002. We are currently
assessing, but have not yet determined, the effect of SFAS 144 on our net loss
or financial position.
6. Matters Associated with Genovo, Inc. Acquisition
------------------------------------------------
In connection with our acquisition of Genovo, Inc. (Genovo), we established
an escrow of 550,872 shares of Targeted Genetics common stock held for the
benefit of former Genovo stockholders, pending resolution of certain
pre-acquisition contingencies related to Genovo. During the quarter ended June
30, 2001, the party associated with a pre-acquisition contractual matter
communicated its intent to dispute reimbursing Genovo $2.0 million for a
settlement payment made by Genovo. Based upon our review of the facts and advice
from legal counsel, we have determined that the $2.0 million receivable recorded
in anticipation of reimbursement is not collectable. As a result, in accordance
with the terms of the merger agreement, shares in escrow valued pursuant to the
terms of the merger agreement at $2.0 million will be cancelled. This amount has
been reflected as a reduction of equity during the quarter ended September 30,
2001.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
- --------------------------
This quarterly report on Form 10-Q contains forward-looking statements,
which involve current expectations, forecasts of future events and other
statements that are not historical facts. Inaccurate assumptions and known and
unknown risks and uncertainties can affect the accuracy of forward-looking
statements. Our actual results could differ materially from our expectations for
a number of reasons, including the risks described in the section below entitled
"Factors Affecting Our Operating Results, Our Business and Our Stock Price." You
should not unduly rely on these forward-looking statements, which speak only as
of the date of this report. We undertake no duty to update any forward-looking
statements to reflect new information, circumstances or events after the date of
this report.
Business Overview
- -----------------
Targeted Genetics Corporation develops gene therapy products and
technologies for treating both acquired and inherited diseases. We have
assembled a broad base of core technologies that we believe has the potential to
address a significant number of these diseases and we believe that we have
expertise that will enable us to develop products based on these technologies.
We have two lead products under development for treating cystic fibrosis and
cancer and a promising pipeline of product candidates focused on hemophilia,
arthritis, cancer, lysosomal storage diseases and AIDS prophylaxis. We believe
that our success to date in developing these potential products demonstrates the
value of our core technologies and their potential to treat numerous other
diseases.
We are developing both viral vector and synthetic vector technologies.
Vectors are used to insert genetic material into target cells for gene therapy
applications. Our viral vector development activities focus primarily on
adeno-associated viral (AAV) vectors and our synthetic vectors are based on
lipids. Our product development infrastructure focuses on establishing expertise
in the areas of preclinical biology, process development, manufacturing, quality
control, quality assurance, regulatory affairs and clinical trial design and
implementation. We believe that this focus provides advantages in our corporate
partnering efforts and increases our probability of reaching the market. We have
six collaborative programs underway with pharmaceutical companies, biotechnology
companies and a public health organization. In all of these partnerships, we
have retained a substantial financial interest in the sales of commercial
products that result from our work.
10
Results of Operations
- ---------------------
Revenue. Revenues for the three-month and nine-month periods ended
September 30, 2001 increased to $5.5 million and $13.7 million, respectively,
from $1.9 million and $6.9 million for the same periods in 2000. These increases
are primarily attributable to our hemophilia product development collaboration
with Genetics Institute, the biotechnology division of Wyeth-Ayerst (a division
of American Home Products Corporation) and our multiple-product development
collaboration with Biogen. Increased revenues also reflect increased activities
at Emerald Gene Systems, our joint venture with Elan and our AIDS vaccine
program being developed in collaboration with the International AIDS Vaccine
Initiative, or IAVI.
Research and Development Expenses. Research and development expenses for
the three-month period ended September 30, 2001 increased to $8.9 million from
$4.5 million for the same period in 2000. Research and development expenses for
the nine-month period ended September 30, 2001 increased to $21.9 million from
$12.8 million for the same period in 2000. The increases in research and
development expenses for both the three-month periods and the nine-month periods
reflect the following:
. increased research and development efforts in our hemophilia, arthritis,
AIDS vaccine, cystic fibrosis and cancer development programs;
. increased expenses related to the research and development operations
assumed from the acquisition of Genovo;
. increased expenses attributable to developing our core technology platforms
for gene delivery; and
. increased costs associated with expanding our manufacturing facilities.
Expenses for 2001 also reflect increased activity within our majority-owned cell
therapy subsidiary, CellExSys, Inc. Our research and development expense has
fluctuated from quarter to quarter due to the varying stages of our development
programs, varying stages of clinical development of our potential products and
the availability of resources. We expect this variability to continue in the
future. Our recent trend of quarterly increases in research and development
expenses should be partially offset by the anticipated spin-off of CellExSys in
the fourth quarter of 2001.
Acquired in-process research and development. In September 2000, we
incurred in-process research and development, or IPR&D, expenses of $28.0
million, when we purchased Genovo. We incurred no IPR&D expenses in 2001.
Amortization of intangibles. Amortization of intangibles includes
amortization of goodwill, non-competition agreements and work force know-how
acquired upon our acquisition of Genovo in September 2000. We recorded
amortization expense of $1.5 million for the third quarter of 2001 and $4.6
million for the nine-month period ended September 30, 2001, as compared to
$169,000 for both periods in 2000.
11
General and Administrative Expenses. General and administrative expenses
for the third quarter of 2001 increased to $1.5 million from $1.1 million for
the same period in 2000. General and administrative expenses for the nine months
ended September 30, 2001 increased to $4.9 million from $3.3 million for the
same period in 2000. The increases in both periods reflect the addition of
Genovo operating costs, greater investments in business development, costs
associated with our CellExSys cell therapy subsidiary and increased
administrative support for our growing number of collaborative partnerships.
Equity in Loss of Joint Venture. We recognized losses of $946,000 for the
third quarter of 2001 and losses of $2.8 million for the nine-month period ended
September 30, 2001 for our 80.1% equity share in the losses of Emerald Gene
Systems, our joint venture with Elan. Our equity losses in Emerald were $623,000
for the third quarter of 2000 and $1.8 million for the nine-month period ended
September 30, 2000. Emerald's primary business focus is to develop enhanced gene
delivery systems directed towards enhanced gene delivery capabilities based on a
combination of our gene delivery technologies and Elan's drug delivery
technologies.
Investment Income. Investment income for the third quarter of 2001 was
$415,000 as compared to $577,000 for the same period in 2000. This decrease in
2001 is due to a lower average cash balance and slightly lower interest rates.
Investment income for the nine months ended September 30, 2001 increased to $1.7
million from $1.3 million for the same period in 2000, which is primarily due to
an increase in the value per share of our short-term bond mutual fund for the
period.
Interest Expense. Interest expense for the third quarter of 2001 increased
to $114,000 from $68,000 for the same period in 2000. Interest expense for the
nine-month period ended September 30, 2001 increased to $244,000 from $196,000
for the same period in 2000. The year-to-year increases in both periods were
primarily due to higher average outstanding principal balances in the third
quarter of 2001, partially offset by lower average principal balances in the
first quarter of 2001.
Accounting Change. In the fourth quarter of 2000, we adopted SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, effective January 1, 2000. The adoption of SAB 101 resulted in a charge
of $3.7 million for the nine-month period ended September 30, 2000 and was
reflected as a cumulative effect of the change in accounting principle. Prior to
the adoption of SAB 101, we recognized nonrefundable, up-front license fees as
revenue when the technology was transferred and when all of the significant
contractual obligations relating to the fees had been fulfilled. The adoption of
SAB 101 results in the deferral of these fees and subsequent recognition of
these fees as revenue over the remaining term of the research and development
collaboration agreements.
12
As provided in SAB 101, our results for the three-month and nine-month
periods ended September 30, 2000 were restated to reflect the effects of the
accounting change. The effects of our adoption of SAB 101 on the accompanying
results of operations are as follows:
Three-months ended September 30, 2001
------------------------------------------------------------------
2001 2000
--------------------------------- --------------------------
Amount Per Share Amount Per Share
--------------------------------- --------------------------
Reversal of previously
recognized revenue $ - $ - $ (4,954,000) $ (0.13)
Amortized revenue from
cumulative effect adjustment 537,000 0.01 525,000 0.01
Amortization of deferred revenue
from upfront payments 1,120,000 0.03 - -
--------------------------------- --------------------------
Total $ 1,657,000 $ 0.04 $ (4,429,000) $ (0.12)
================================= ==========================
Nine-months ended September 30, 2001
------------------------------------------------------------------
2001 2000
--------------------------------- --------------------------
Amount Per Share Amount Per Share
--------------------------------- --------------------------
Reversal of previously
recognized revenue $ - $ - $ (4,954,000) $ (0.14)
Cumulative effect adjustment - - (3,682,000) (0.10)
Amortized revenue from
cumulative effect adjustment 1,582,000 0.04 1,575,000 0.04
Amortization of deferred revenue
from upfront payments 3,324,000 0.07 - -
--------------------------------- --------------------------
Total $ 4,906,000 $ 0.11 $ (7,061,000) $ (0.20)
================================= ==========================
The reversal of previously recognized revenue relates to license payments of
$5.0 million received from Biogen in 2000. The cumulative effect adjustment
relates to $6.0 million, less amortization of $2.3 million of revenue recognized
in 1998 and 1999, in milestone and license payments received from Celltech Group
plc in 1998.
Liquidity and Capital Resources
- -------------------------------
We have financed our operations through public and private offerings of our
equity securities, research funding under collaborative agreements, license
fees, capital and operating lease transactions, equipment financing arrangements
and investment income. As of September 30, 2001, we had $28.2 million in cash
and cash equivalents, compared with $38.6 million as of December 31, 2000. In
addition, we had $19.5 million in working capital as of September 30, 2001
compared with $29.5 million as of December 31, 2000. The primary uses of cash
for the first nine months of 2001 were $16.1 million to finance our operations
and working capital requirements, $3.9 million for investments in leasehold
improvements and capital equipment for
13
the expanded clinical manufacturing facility and $0.8 million in principal
payments on capital lease obligations. The primary sources of cash were $8.0
million received under equity and loan funding arrangements with our partners,
$2.4 million received under equipment financing arrangements and $2.8 million in
proceeds from warrant and stock option exercises.
Gene therapy products are subject to long development timelines and the
risks of failure inherent in the development of products based on innovative
technologies. Although our technology appears promising, we do not know whether
any commercially viable products will result from our research and development
activities. Because we do not anticipate having any product-related revenue for
at least the next several years, we expect to generate substantial additional
losses in the future. We expect that our primary source of revenues will be
under existing collaborative development agreements, and potentially new
collaborative relationships.
We believe that our existing assets, commitments from our partners to fund
planned activities, and available equity and credit facilities will be
sufficient to fund our operations into mid-2003. This estimate is a
forward-looking statement based on certain assumptions which could be negatively
impacted by the Factors Affecting Our Operating Results, Our Business and Our
Stock Price discussed below. Our business strategy includes entering into
additional strategic alliances, expanding our existing collaborations and
pursuing other funding options to further strengthen our financial position. We
may be unsuccessful in establishing additional collaborative relationships or in
maintaining our existing ones. Over the long term, regardless of our partnering
success, we expect that we will need to raise substantial additional funds to
continue developing and commercializing our products.
Our expenses and net losses have been variable in the past and we expect
that this will continue in relation to the progress in clinical trial and
manufacturing activity. We expect funding generated from our collaborations with
Biogen, Celltech, Emerald, Genetics Institute, Genzyme and IAVI to fluctuate as
well. We also have contractual commitments for the following cash resources:
. a $10.0 million equity investment by Biogen;
. $5.0 million remaining under a $10.0 loan agreement with Biogen; and
. up to $10.0 million of funds remaining under a $12.0 million convertible
loan with Elan. Advances under this loan are currently available only to
support our share of Emerald's research and development costs.
We currently have $9.5 million outstanding under loan agreements with our
corporate partners that become due at dates ranging from November 2003 to
September 2006. Of this amount, $4.0 million has been drawn on loans that
contain provisions, which in one case is subject to consent of the partner,
allowing us to issue stock in repayment of the amounts owed.
As of September 30, 2001, we have warrants outstanding that allow the
holders to purchase up to 3.3 million shares of common stock at $2.00 per share.
These warrants expire in April 2003 and, if exercised, would provide us with
proceeds of up to $6.7 million.
14
Factors Affecting Our Operating Results, Our Business and Our Stock Price
- -------------------------------------------------------------------------
In addition to the other information contained in this quarterly report,
you should read and consider the following risk factors. If any of these risks
actually occur, our business, operating results or financial condition could be
harmed and the trading price of our stock could decline.
If we are unable to secure financing on terms acceptable to us for future
capital needs, we will be unable to fund continuing operations.
Developing and commercializing our potential products will require
substantial additional financial resources. Because internally generated cash
flow will not fund development and commercialization of our products, we will
look to outside sources for funding. These sources could involve one or more of
the following types of transactions:
. product development and funding collaborations;
. technology sales;
. technology licenses;
. issuing debt; or
. issuing equity.
We may be unable to obtain financing when needed on acceptable terms, if at
all. If we cannot obtain additional financing when needed, we will be unable to
fund continuing operations.
We have a history of losses and may never become profitable, which could result
in a decline in the value of our common stock and a loss of your investment.
We have generated small amounts of revenue and incurred significant net
losses since we began business. As of September 30, 2001, we had an accumulated
deficit of $170 million. We expect to continue to incur substantial additional
losses in the future, primarily due to the following factors:
. all of our products are in a testing phase and have not received regulatory
approval; and
. we will spend significant amounts on operating expenses, in order to
complete any of our product candidates.
We may never generate profits, and if we do become profitable, we may be
unable to sustain or increase profitability. As a result, the trading price of
our stock could decline and you could lose all or part of your investment.
15
Market fluctuations or volatility could cause the market price of our common
stock to decline and limit our ability to raise capital.
In recent years the stock market in general and the market for
biotechnology-related companies in particular have experienced extreme price and
volume fluctuations, often unrelated to the operating performance of the
affected companies. Our common stock has experienced, and is likely to continue
to experience, these fluctuations in price. These fluctuations could cause the
market price of our common stock to decline. Should this occur over a sustained
time period, our ability to raise the necessary capital to fund the development
of our product candidates will be impaired.
If our preclinical and clinical trials are unsuccessful or we do not receive
regulatory approval for our products, all of which are in the early stage of
product development, we may be unable to generate sufficient capital to maintain
our business.
All of our potential products are either in research and development or in
early-stage clinical trials. Applying for regulatory approval of our potential
products depends upon completion of additional research and development and
testing, both in preclinical and clinical trials. Our trials may fail to
demonstrate the safety and efficacy of any potential product, and we may
encounter unacceptable side effects or other problems. Should this occur, we may
have to delay or discontinue development of the potential product. Even after
successful clinical trials, marketing any product in the United States or abroad
requires receipt of regulatory approval from the Food and Drug Administration,
or FDA, and applicable state and foreign regulators. If we are unable to gain
regulatory approval of any product, we will be unable to generate product
revenue and may be unable to maintain our business.
Delays or unexpected costs in obtaining approval of our potential products or
complying with governmental regulatory requirements could make it more difficult
to maintain or improve our financial condition.
The regulatory process in the gene therapy industry is costly, time
consuming and subject to unpredictable delays, and regulatory requirements
governing gene and cell therapy products frequently change. In addition, the
requirements of the FDA, National Institutes of Health (NIH) and other agencies
for clinical trials and the criteria regulators use to determine safety and
efficacy of a product candidate vary among trials and potential products.
Accordingly, we cannot predict how long it will take or how much it will cost to
obtain regulatory approvals for clinical trials or for manufacturing or
marketing our potential products. Delays in bringing a potential product to
market or unexpected costs in obtaining regulatory approval could decrease our
ability to generate product sales revenue. In addition, all manufacturing
operations are subject on an ongoing basis to the current Good Manufacturing
Practices requirements of the FDA, as well as to other federal, state and local
regulations. While we currently anticipate that we will be able to manufacture
products that meet these requirements, we may be unable to attain or maintain
compliance with current or future regulatory requirements. If we discover
previously unknown problems after we receive regulatory approval of a potential
product or fail to comply with applicable requirements, we may suffer
restrictions on our ability to market the product, including mandatory
withdrawal of the product from the market. This, or an unexpected increase in
the cost of compliance, could make it more difficult to maintain or improve our
financial condition.
16
Failure to recruit patients could delay or prevent clinical trials of our
potential products, which could cause a delay or inability to develop our
potential products.
Identifying and qualifying patients to participate in testing our potential
products is critical to our near-term success. The timing of our clinical trials
depends on the speed at which we can recruit patients to participate in testing
our products. Delays in recruiting or enrolling patients to test our products
could result in increased costs, delays in advancing our product development,
delays in proving the effectiveness of our technology or termination of the
clinical trials altogether. Any of these events could delay or prevent the
development of our product candidates.
Our business will not succeed if we fail to achieve market acceptance.
Even if our potential products succeed in clinical trials and are approved
for marketing, these products may never achieve market acceptance. Competing
gene therapy products or alternative treatment methods, including more
traditional approaches to treating disease, may be more effective or may be more
economically feasible than our products. Moreover, doctors, patients, the
medical community in general or the public may never accept or use any products
based on gene delivery or other technologies that we develop.
We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.
Our success depends in part on our ability to protect our proprietary
rights. We own or exclusively license patents and patent applications for a
number of genes, processes, practices and techniques critical to our present and
potential products. If we fail to obtain and maintain patent or other
intellectual-property protection for this technology, our competitors could
market competing products using those genes, processes, practices and
techniques. The failure of our licensors to obtain and maintain patent
protection for technology they license to us could similarly harm our business.
Patent applications and patent positions in the field of biotechnology are
highly uncertain and involve complex legal, scientific and factual questions.
Our patent applications may not result in issued patents and the scope of any
patent may be reduced both before and after the patent is issued. Even if we
secure a patent, the patent may not provide significant protection and may be
circumvented or invalidated.
We also rely on unpatented proprietary technology and technology that we
have licensed on a nonexclusive basis. While we take precautions to protect our
proprietary unpatented technology, we may be unable to meaningfully protect this
technology from unauthorized use or misappropriation by a third party. In any
event, other companies may independently develop substantially equivalent
proprietary information and techniques.
Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our proprietary rights and could
divert our resources.
As the biotechnology industry expands, the risk increases that other
companies may claim that our processes and potential products infringe on their
patents. In addition, litigation may be
17
necessary to enforce our intellectual property rights or determine the rights of
others. Defending these claims, regardless of their merit, would be costly and
would likely divert management's attention and resources away from our
operations. If we infringe on another company's patented processes or
technology, we may have to pay damages. We may also be required to obtain a
license, or develop or obtain alternative technology, in order to continue
manufacturing or marketing the affected product or using the affected process.
If we are unable to obtain a license on acceptable terms or obtain or develop
alternative technology, we may be unable to develop or commercialize some or all
of our product candidates and our business could be harmed.
Our potential tgAAV-CF product uses our proprietary adeno-associated virus,
or AAV, delivery technology to deliver a normal copy of a CFTR gene to which we
have rights under a nonexclusive license. The United States Patent and Trademark
Office has declared an interference proceeding to determine the priority of
invention of this gene. If the eventual outcome does not favor our licensor, we
will have to pay increased license fees to the prevailing party to secure and
maintain access to the CFTR gene to continue with development of tgAAV-CF. The
costs of licensing the CFTR gene could be substantial. If we cannot maintain
access to the CFTR gene, we may be unable to develop or deliver our potential
tgAAV-CF product, which could result in decreased ability to generate revenue
and difficulty in obtaining additional financing to fund our operations.
We may be unable to develop and commercialize some of our potential products if
our relationships with scientific collaborators and corporate partners are not
successful.
Our success depends on the continued availability of outside scientific and
corporate collaborators to perform research and develop processes to advance and
augment our internal efforts and to fund our development programs. Competition
for collaborators in gene therapy is intense. If we are unsuccessful in
recruiting or maintaining our relationships with scientific collaborators and
other corporate partners, we could experience delays in our research and
development or loss of access to important enabling technology. Even if we
maintain our current, or establish new, scientific collaborations or other
partnerships, however, they may never result in the successful development of
product candidates.
The development and commercialization of many of our potential products,
and therefore the success of our business, substantially depends on the
performance of our collaborators. If our corporate partners do not commit
sufficient financial and technical resources to our research and development
programs or the commercialization of our products, the preclinical or clinical
development related to the collaboration could be delayed or terminated. Our
current or future collaborators may develop, market or provide funding for
competing products or alternative technologies. In addition, disputes may arise
with respect to ownership of technology or product candidates developed under
our collaborations. Moreover, our corporate partners may terminate any existing
partnerships, and we may be unable to enter into additional collaborations on
acceptable terms, if at all.
18
If we are unable to license necessary technology from third parties, we may be
unable to successfully develop and commercialize our potential products.
We have entered into various license agreements, both exclusive and
nonexclusive, that give us and our partners rights to use technologies owned or
licensed by commercial and academic organizations in the research, development
and commercialization of our potential products and those of our partners. Our
success depends on our ability to obtain and maintain these kinds of licensing
arrangements. Disputes may arise regarding rights to inventions and know-how
resulting from the joint creation or use of intellectual property by our
licensors and us and our scientific collaborators. In addition, many of our
in-licensing agreements contain milestone-based termination provisions. If we or
any of our corporate partners fail to meet agreed milestones, the licensor could
terminate the relevant agreement.
If we are unable to maintain our current licenses and obtain additional
licenses in the future on acceptable terms, we and our corporate partners may be
required to expend significant time and resources to develop or in-license
replacement technology. If we are unable to develop alternative technology or
obtain a replacement license on acceptable terms, we may be unable to develop or
commercialize some or all of our potential products and our business may suffer.
If we or our business partners are unable to successfully market and distribute
any potential product, our business will be harmed.
We have no experience in sales and marketing. To market any products that
may result from our development programs, we will need to develop marketing and
sales capabilities, either on our own or with others. We intend to enter into
collaborations with corporate partners to utilize the mature marketing and
distribution capabilities of our partners. While we believe that these
collaborative partners will be motivated to market and distribute our potential
products, our current and potential future partners may not commit sufficient
resources to commercializing our technology on a timely basis. If our business
partners do not successfully market and distribute our products and we are
unable to develop sufficient marketing and distribution capabilities on our own,
our business will be harmed.
The intense competition and rapid technological change in our market may result
in pricing pressures and failure of our potential products to achieve market
acceptance.
We presently face competition from other companies and institutions
developing gene therapy and cell therapy technologies and from companies using
more traditional approaches to treating human diseases. We also compete with
other companies to acquire products or technology from research institutions or
universities. Most of our competitors have substantially more financial and
infrastructure resources and experience than we do in the following areas:
. research and development;
. clinical trials;
. obtaining FDA and other regulatory approvals;
. manufacturing; and
. marketing and distribution.
19
In addition, the competitive positions of other companies may be
strengthened through collaborative relationships. Consequently, our competitors
may be able to commercialize and obtain regulatory approval for new products
more rapidly than we do, or manufacture and market competitive products more
successfully than we do. This could result in pricing pressures or our products
failing to achieve market acceptance. In addition, gene therapy is a new and
rapidly evolving field and is expected to continue to undergo significant and
rapid technological change. Rapid technological development by our competitors,
including development of technologies, products or processes that are more
effective than those we have developed, could result in our actual and proposed
technologies, products or processes losing market share or becoming obsolete.
If we do not attract and retain qualified personnel, we will be unable to
successfully and timely develop our potential products.
Our future success depends in large part on our ability to attract and
retain key technical and management employees and scientific advisors. We have
programs in place to retain personnel, including competitive compensation
packages and programs to create a positive work environment. Because competition
for employees in our field is intense, however, we may be unable to retain our
existing personnel or attract additional qualified employees and advisors. If we
experience excessive turnover or difficulties in recruiting new personnel, our
research and development could be delayed and we could experience difficulties
in generating sufficient revenue to maintain our business.
Our limited manufacturing capability may limit our ability to successfully
introduce our potential products.
We currently do not have the capacity to manufacture large-scale clinical
or commercial quantities of our potential products. To do so, we will need to
expand our current facilities and staff or supplement them through the use of
contract providers. We leased a building for the purpose of developing a
facility to manufacture AAV vectors for Phase III and early commercial purposes.
This manufacturing facility, if successfully developed, as well as any future
manufacturing facilities that we may construct, will be subject to initial and
ongoing regulation by the FDA and other governmental agencies. We may be unable
to obtain regulatory approval for or maintain in operation this or any other
manufacturing facility. If we are unable to obtain and maintain the necessary
manufacturing capabilities, either alone or through third parties, we will be
unable to manufacture sufficient product to sustain our business.
Our use of hazardous materials to develop our potential products exposes us to
liability risks and the risk of regulatory limitation of our use of these
materials, either of which could reduce our ability to generate revenue and make
it more difficult to fund our operations.
Our research and development activities involve the controlled use of
hazardous materials, including chemicals, biological materials and radioactive
compounds. Although we believe that our safety procedures for handling and
disposing of these materials comply with applicable laws and regulations, we
cannot eliminate the risk of accidental contamination or injury from hazardous
materials. If a hazardous material accident occurred, we would be liable for any
resulting damages. This liability could exceed our financial resources.
Additionally,
20
hazardous materials are subject to regulatory oversight. Accidents
unrelated to our operations could cause federal, state or local regulatory
agencies to restrict our access to hazardous materials needed in our research
and development efforts. If our access to these materials is limited, we could
experience delays in our research and development programs. Paying damages or
experiencing delays caused by restricted access could reduce our ability to
generate revenue and make it more difficult to fund our operations.
The costs of product liability and other claims and product recalls could exceed
the amount of our insurance, which could significantly harm our financial
condition or our reputation.
Our business activities expose us to the risk of liability claims or
product recalls and any adverse publicity that might result from a liability
claim against us. We currently have only limited amounts of liability insurance,
and the amounts of claims against us may exceed our insurance coverage.
Liability insurance is expensive and may not continue to be available on
acceptable terms. A product liability or other claim not covered by insurance or
in excess of our insurance or a product recall could significantly harm our
financial condition or our reputation. In addition, a liability claim against
one of our corporate partners or another gene therapy company could also harm
our reputation.
Pre-acquisition contingencies could arise resulting from our acquisition of
Genovo.
In September 2000, we acquired Genovo, a privately held biotechnology
company specializing in viral gene delivery. Managing the Genovo acquisition may
entail certain financial risks and strains, including the potential for
contingent liabilities that pre-date our acquisition of Genovo to arise,
resulting in higher than expected acquisition costs and charges against
earnings.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
Because of the short-term nature of our investments, we believe that our
exposure to market rate fluctuations on those investments is nominal. At
present, we do not employ any derivative or other financial instruments or
derivative commodity instruments to hedge any market risks and we do not
currently plan to employ them in the future. At September 30, 2001, we held
$28.2 million in cash and cash equivalents, primarily invested in a short-term
bond fund owning securities that, on the average, mature in less than one year.
21
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we receive demands or may be subject to litigation
matters incidental to our business. We are not currently a party to any material
legal proceedings.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) See the Index to Exhibits included in this quarterly report.
(b) We did not file any current reports on Form 8-K during the quarter
ended September 30, 2001.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TARGETED GENETICS CORPORATION
-----------------------------
(Registrant)
Date: November 13, 2001 /s/ H. Stewart Parker
----------------------------- --------------------------------------
H. Stewart Parker, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2001 /s/ Todd E. Simpson
----------------------------- --------------------------------------
Todd E. Simpson, Vice President,
Finance and Administration, Chief
Financial Officer (Principal Financial
and Accounting Officer)
23
Targeted Genetics Corporation
INDEX TO EXHIBITS
Exhibit No. Description Note
3.1 Restated Articles of Incorporation (A)
3.2 Amended and Restated Bylaws (Exhibit 3.1) (C)
4.1 Rights Agreement, dated as of October 17, 1996, between Targeted (B)
Genetics and ChaseMellon Shareholder Services, L.L.C.
(Exhibit 2.1)
4.2 First Amendment to Rights Agreement, dated July 21, 1999, between (D)
Targeted Genetics and ChaseMellon Shareholder Services, L.L.C.
(Exhibit 1.9)
- -------------------------------------------------------------------------------
(A) Incorporated by reference to designated exhibit included with Targeted
Genetics' Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, filed on August 11, 2000.
(B) Incorporated by reference to the designated exhibit included with
Targeted Genetics' Registration Statement on Form 8-A, filed on October
22, 1996.
(C) Incorporated by reference to the designated exhibit included with
Targeted Genetics' Annual Report on Form 10-K for the year ended
December 31, 1996, filed on March 12, 1997.
(D) Incorporated by reference to the designated exhibit included with
Targeted Genetics' Current Report on Form 8-K, filed on August 4, 1999.
24