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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
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1997 0-23930
TARGETED GENETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1549568
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1100 OLIVE WAY, SUITE 100
SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 623-7612
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
WARRANTS FOR THE PURCHASE OF SHARES OF COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS, $.01 PAR VALUE
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Indicate the aggregate market value of voting stock held by nonaffiliates of
the Registrant as of March 6, 1998: $26,557,036.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 6, 1998:
TITLE OF CLASS NUMBER OF SHARES
-------------- ----------------
Common Stock, $.01 par value 20,216,714
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on May 5, 1998, are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements within the following description of the business of
Targeted Genetics Corporation and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: technological uncertainty; results of
clinical trials; ability to obtain adequate financing in the future;
uncertainty regarding patents and proprietary rights; changes in, or failure
to comply with, governmental regulations; competition; rapid technological
change; availability of key personnel and scientific collaborators; ability to
manufacture and market products; and dependence on corporate collaborators.
See "Factors Affecting Forward-Looking Information".
OVERVIEW
Targeted Genetics is focused on the development of gene and cell therapies
for the treatment of certain acquired and inherited diseases. The Company is
developing a broad base of core technologies that it believes will allow it to
address a variety of such diseases. These technologies include proprietary
viral and non-viral gene delivery systems as well as novel techniques for
cytotoxic T lymphocyte ("CTL") immunotherapy. The Company is using its core
technology platform to develop potential products for the treatment of various
genetic disorders, cancer and infectious diseases.
The Company believes that in the area of gene therapy, different disease
targets will require different methods of gene delivery, depending on the
target cell to be modified, the duration of gene expression required and the
need for in vivo or ex vivo delivery. Accordingly, the Company has focused its
efforts on multiple gene delivery systems based on three different vector
technologies: adeno-associated viral ("AAV"), non-viral and retroviral. The
Company believes these systems may provide it with the flexibility necessary
to develop gene therapies for a broader range of diseases than would be
possible using a single gene delivery system.
In the area of cell therapy, the Company's expertise with CTLs enables it to
isolate from patients and efficiently multiply antigen-specific CTLs, which
are immune cells that target and kill specific diseased cells ("Targeted
CTLs"). This expertise forms the basis for a series of potential
immunotherapies for the treatment of infectious diseases and cancer. Targeted
CTLs are based on the Company's proprietary Rapid Expansion Method ("REM")
technology, which is used to grow CTLs ex vivo prior to infusion into the
patient. The Company has demonstrated that REM enables it to grow billions of
CTLs from individual cloned cells over several weeks, while preserving the
cells' specific disease-fighting capabilities.
The Company's three product development programs are summarized in the
following table.
TECHNOLOGY GENE STATUS
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CYSTIC FIBROSIS
Maxillary sinus AAV vector CFTR Phase II
Lung/nose AAV vector CFTR Phase I
Lung--aerosol AAV vector CFTR Preclinical
CANCER
Ovarian/breast non-viral vector E1A tumor suppressor Phase I
Head and neck/breast/lung non-viral vector E1A tumor suppressor Phase I
INFECTIOUS DISEASE
HIV Targeted CTLs -- Phase I
Hepatitis B Targeted CTLs -- Preclinical
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In addition to the product development programs summarized above, the
Company is performing research, both internally and through outside
collaborators, oriented toward identifying promising new applications of its
technology base. Also, the Company is collaborating with certain academic
researchers who are using its retroviral vectors in Phase I clinical trials
focused on HIV infection, melanoma and leukemia.
PRODUCT DEVELOPMENT PROGRAMS
Cystic Fibrosis
Cystic fibrosis is the most common single-gene deficiency affecting the
Caucasian population, afflicting approximately 30,000 people in the United
States and 60,000 people worldwide. The disease is caused by a dysfunctional
cystic fibrosis transmembrane regulator ("CFTR") gene, which results in a
build-up of mucus in the lungs, infections and early death. Current treatments
for cystic fibrosis offer only symptomatic relief and cannot cure or halt the
progression of the disease.
tgAAV-CFTR. Based on preclinical findings by the Company and its scientific
collaborators, the Company believes that the persistence of expression and
lack of toxicity observed with its AAV-based gene delivery vector potentially
make it better suited than other types of vectors for delivery of the CFTR
gene to the lung. In preclinical studies in rabbits, the Company and its
collaborators at The Johns Hopkins University ("Johns Hopkins") were able to
detect expression of the CFTR gene in the lung for periods of up to six months
with no observed side effects. These results were confirmed in similar studies
in rhesus monkeys, in which gene transfer occurred in up to 50% of target
airway cells, and gene expression, which was confirmed in all animals,
persisted for up to six months. Based on these preclinical data, the Company
began two clinical trials in late 1995 to evaluate the safety and feasibility
of in vivo gene therapy for the treatment of cystic fibrosis by direct
delivery of the CFTR gene using an AAV vector. The Company's AAV-CFTR product
("tgAAV-CFTR") has been granted orphan drug status by the United States Food
and Drug Administration (the "FDA").
The first clinical trial, which began in November 1995, is a Phase I
clinical trial at Johns Hopkins and the University of Florida in which tgAAV-
CFTR is delivered to the nose and lung of adult cystic fibrosis patients
having mild lung disease. The trial is designed as an interpatient dose
escalation trial enrolling a total of 18 patients, two at each of nine
escalating dose levels. The tgAAV-CFTR is administered in an open-label single
dose to the right lower lobe of the lung via bronchoscopy and to one nostril.
Patients are monitored for, among other things, safety and assessment of gene
transfer and expression. A total of 19 patients have been treated in this
clinical trial with no apparent side effects related to the study drug.
A second clinical trial began in December 1995 at Stanford University. This
trial was designed as a Phase I/II trial, pursuant to which tgAAV-CFTR is
administered to the maxillary sinuses of cystic fibrosis patients with chronic
sinusitis. The Phase I part of this trial, designed as a dose escalation
study, was completed in 1996. A total of ten patients were enrolled, and 15
sinuses were treated, in five cohorts receiving escalating doses. The results
of the trial suggests that tgAAV-CFTR is safe and well tolerated with no
resulting inflammatory response or other side effects, even after repeat
delivery. Furthermore, administration of tgAAV-CFTR resulted in consistent
gene transfer and, in the only patient measured at such timepoint, persistence
of the gene for at least 70 days after treatment. Additionally, the dose level
was established for the Phase II part of the trial, in which up to 50 patients
are to receive tgAAV-CFTR in one sinus and a placebo in the other. Patients in
the Phase II trial are monitored to assess the ability of tgAAV-CFTR to
prevent the relapse of chronic sinusitis. The Phase II part of the trial began
in February 1997 and the Company expects to complete patient treatment in the
first half of 1998.
The Company is preparing to initiate a Phase I clinical trial in 1998
involving the aerosol delivery of tgAAV-CFTR to the whole lung. The Company
expects to begin a toxicology study in non-human primates in the first half of
1998, which must be completed prior to beginning the clinical trial.
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Cancer
Cancer is the second leading cause of death in the United States, with over
one million new cases diagnosed each year. The Company's approach to the
treatment of cancer utilizes a proprietary non-viral delivery system to
deliver in vivo an E1A tumor suppressor gene to cancer cells.
tgDCC-E1A. Cancer arises when the genetic pathways that control normal cell
growth and division are disrupted. Certain of these pathways are regulated by
cellular oncogenes or tumor suppressor genes. Cancer may result from the
structural alteration and abnormal expression of cellular oncogenes or from
mutation or deletion of tumor suppressor genes. Some viruses have evolved
genes that may mimic functions normally exhibited by cellular genes. One such
example is the E1A gene of the adenovirus type 5. The E1A gene was shown, by
Dr. Mien Chie Hung and his colleagues at University of Texas M.D. Anderson
Cancer Center ("M.D. Anderson"), to function as a suppressor of the HER-2/neu
oncogene, which is known to be overexpressed in certain cancers. In
preclinical mouse studies, E1A was shown to inhibit expression of the HER-
2/neu oncogene, to inhibit growth and metastasis of cancer cells, and to
increase significantly the long-term survival of the mice. The Company has
worldwide rights to the use of the E1A gene as a tumor suppressor under
patents filed by Dr. Hung.
Other research, conducted by Dr. Steven Frisch and his colleagues at the
Burnham Institute, has suggested that E1A may have other tumor suppression
activity unrelated to the inhibition of HER-2/neu expression. Preclinical in
vitro experiments have shown that E1A, when introduced to a variety of tumor
cell lines, is capable of altering tumor cells such that they appear to have
characteristics of normal cells. Furthermore, in vivo mouse studies involving
tumor cells not overexpressing HER-2/neu showed reduced tumor growth rates
with the administration of E1A versus the same tumor cells without E1A. E1A
was also shown in preclinical studies to sensitize tumor cells to killing by
certain chemotherapeutic agents. The Company has worldwide rights to patents
filed by Dr. Frisch that are complementary to those filed by Dr. Hung.
The Company's E1A product ("tgDCC-E1A") is a formulation that combines the
E1A tumor suppressor gene with the Company's proprietary non-viral gene
delivery system based on the cationic lipid DC cholesterol ("DC Chol"). In the
Company's first Phase I clinical trial, which began in July 1996 at M.D.
Anderson, 18 patients with ovarian or breast cancer received weekly doses of
tgDCC-E1A for up to six months. In early 1997, two additional sites were added
to the study, Rush Presbyterian Medical Center in Chicago ("Rush") and
Virginia Mason Medical Center in Seattle. This trial was conducted as an
interpatient, escalating dose study with doses of tgDCC-E1A delivered
intraperitoneally in the ovarian cancer patients and intrapleurally in the
breast cancer patients. The objectives of the trial were to assess safety,
levels of gene transfer and expression and tumor response. Data from the study
are currently being analyzed.
A second Phase I clinical trial began in early 1997 at M.D. Anderson, Rush,
and Wayne State University in Detroit, in which 18 patients with inoperable
primary head or neck tumors or metastatic breast or lung tumors were
administered up to ten weekly doses of tgDCC-E1A, injected directly into the
patient tumor. The trial was conducted as an interpatient escalating dose
study with up to six patients in each of four dose cohorts. The objectives of
the trial were to assess safety, levels of gene transfer and expression and
tumor response. A total of 18 patients were treated in the trial, which was
completed in December 1997. Data from the study are currently being analyzed.
Based on the data obtained from the two Phase I clinical trials described
above, the Company has begun planning a Phase II clinical trial of tgDCC-E1A
in head and neck cancer. This trial is expected to begin in the second half of
1998.
In 1996, the Company entered into a license, research and marketing
agreement with Laboratoires Fournier S.C.A. ("Fournier") under which Fournier
received exclusive rights to develop and commercialize tgDCC-E1A
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in Europe. Fournier is conducting a Phase I clinical trial in ovarian cancer
patients at five hospitals in the United Kingdom and plans to begin additional
clinical trials in 1998. See "Research and Development Collaborations."
Infectious Diseases
Human Immunodeficiency Virus ("HIV"). HIV is a retrovirus that is the cause
of AIDS, a condition that is characterized by loss of CD4 cells and
progressive immunologic impairment and death. According to the Centers for
Disease Control and Prevention, approximately one million people in the United
States have been infected with HIV. The World Health Organization estimates
that approximately 17 million people worldwide have been infected with HIV and
projects that the worldwide incidence of HIV infection will grow to 30 million
to 40 million people by the end of the century.
The Company and certain other researchers believe that the key to successful
long-term treatment of HIV infection may lie in manipulating and harnessing
the cell-mediated arm of the immune response. Researchers have found that HIV-
infected people who remain symptom-free for prolonged periods have high levels
of CTLs that suppress viral proliferation in CD4 cells. The Company believes
that the provision of large quantities of cloned HIV-specific CTLs may provide
a means of allowing HIV-infected people to maintain an effective immune
response, thereby preventing progression to AIDS.
In early 1996, the Company began a Phase I clinical trial at the Fred
Hutchinson Cancer Research Center (the "Hutchinson Center") in which six HIV-
infected patients were administered five escalating doses of Targeted CTLs
specific to the HIV gag protein. The first three doses consisted of unmarked
cells and the last two consisted of cells modified with a retroviral vector
containing a marker gene. Patients in the trial are monitored for safety,
persistence of the infused Targeted CTLs and changes in viral burden. The
results of the trial are expected to be published in 1998. The Company and its
collaborators at the Hutchinson Center are evaluating options related to
additional trials in HIV.
Hepatitis B. Hepatitis B virus ("HBV") is a disease of global significance,
with over 300 million carriers worldwide. HBV is the cause of up to 80% of
cases of primary liver cancer. Over 75% of the chronic carriers of HBV are in
Asia. It is estimated that 200,000 to 300,000 HBV infections occur annually in
the United States and that chronic infection develops in approximately 10% of
those cases.
During acute HBV infection most patients develop a strong immune response
that is capable of clearing the virus. In contrast, the CTL response to HBV is
usually not detectable in chronically infected patients. The lack of core
specific CTL response may contribute to failure of virus elimination resulting
in chronic inflammation. Thus, the Company believes that restoring the immune
response by administering Targeted CTLs specific for HBV may provide an
effective means to treat patients with this chronic disease.
In 1997, the Company took the necessary steps to adapt its Targeted CTL
technology to the treatment of HBV in preparation for a preclinical study in
which chimpanzees chronically infected with HBV are to be administered
Targeted CTLs. The objective of the study, which began in late 1997, is to
establish safety of the therapy and, potentially, obtain proof of concept that
HBV-specific Targeted CTLs may be promising as a treatment for humans infected
with HBV.
CORE TECHNOLOGIES
The Company is developing a broad range of core technologies that it
believes will allow it to address issues specific to a variety of diseases.
The Company believes that in the area of gene therapy, different disease
targets will require different methods of gene delivery, depending on the
target cell to be modified, the duration of gene expression required and the
need for in vivo or ex vivo delivery. Accordingly, the Company is developing
multiple gene delivery systems based on three different vector technologies:
AAV, non-viral and retroviral. In certain treatments, for which in vivo
modification of slowly dividing or nondividing target cells is required or
6
preferred, such as modification of lung cells to treat cystic fibrosis, the
Company is utilizing its AAV vector technology. The Company uses its
retroviral vector technology in therapeutic areas where permanent modification
of rapidly dividing cells is necessary. In therapeutic indications where the
use of AAV and retroviral vectors is not desirable or feasible, the Company is
utilizing its non-viral delivery systems. The Company believes that non-viral
vectors may provide greater flexibility relating to the size and sequence of
transferred genes and may also allow targeted delivery in vivo.
In the area of cell therapy, the Company's expertise in isolating and
multiplying CTLs forms the basis for a series of potential immunotherapies.
Gene Therapy
Overview. Gene therapy is an approach to the treatment and prevention of
genetic and acquired diseases that involves the insertion of genetic
information into target cells to produce specific proteins needed to correct
or modulate disease conditions. Proteins are the fundamental components of all
living cells and are essential to cellular structure, growth and function.
Proteins are produced by cells from a set of genetic instructions encoded in
DNA, which contains all the information necessary to control cellular
biological processes. DNA is organized into segments called genes, with each
gene containing the information required to express, or produce, a specific
protein.
An alteration in the function of, or absence of, specific genes is
responsible for causing some diseases, including inherited diseases such as
cystic fibrosis and certain types of cancer. Gene therapy may be used to treat
such diseases by replacing a missing or defective gene to facilitate the
normal protein production capabilities of cells. In addition, gene therapy may
be used to enable cells to perform additional roles in the body, such as
enhancing the function of the immune system to fight infectious diseases or
cancer. Gene therapy may also be used to inhibit production of undesirable
proteins or viruses within cells.
A key factor in the progress of gene therapy is the development of safe and
efficient methods of transferring genes into cells. For transfer into cells,
the gene is incorporated into a delivery system called a vector. Vectors may
be derived from either viral or non-viral systems. The most common gene
delivery approach to date relies on viral gene transfer, whereby modified
viruses are used to transfer the desired genetic material into host cells. The
process of gene transfer can be accomplished ex vivo (outside the body), in
which cells are removed from the patient, genetically modified, and then
reinfused into the patient, or in vivo (inside the body), in which vectors are
introduced directly into the patient's body.
The use of viruses takes advantage of their natural ability to introduce
genes into host cells and use the host's metabolic machinery to produce
proteins essential for the survival and function of the virus. In gene therapy
applications, viruses are genetically modified to contain the desired genes
and to inhibit the ability of the virus to reproduce. Successful application
of viral gene transfer to indications requiring long-term gene expression
entails a number of essential technical requirements, including the ability of
the viral vector to carry desired segments of genes, to transfer genes into a
sufficient number of target cells and to enable genes contained in the viral
vector to persist in the host cell. A number of different viral vectors,
including AAV and retroviral vectors, are being used for potential gene
therapy applications requiring long-term gene expression.
Current non-viral vector systems generally consist of DNA incorporating the
desired gene, combined with various compounds aimed at enabling the DNA to be
taken up by the host cell. These in vivo gene delivery approaches include
encapsulating genes into lipid carriers such as liposomes, which facilitate
the entry of DNA into cells; ionically binding negatively charged DNA to the
surface of cationic lipids which are positively charged prior to infusion;
injecting pure plasmid or "naked" DNA in an aqueous solution; and directing
DNA to receptors on target cells by combining the gene with protein carriers
that are taken up by the cell.
AAV Vectors. Targeted Genetics and its scientific collaborators have
developed significant expertise with respect to the design and use of AAV
vectors in gene therapy. The Company believes that certain features of
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AAV vectors make them particularly well suited for the treatment of a number
of diseases: (i) AAV has never been associated with causing any human disease;
(ii) AAV generally cannot replicate without the presence of a helper virus;
(iii) AAV vectors contain no viral genes that, if present, might produce
unwanted immune responses leading to side effects or reduced efficacy; (iv)
unlike some other types of viral systems, AAV vectors can introduce genes into
nondividing or slowly dividing cells, such as cells lining the airway of the
lung; (v) AAV vectors may persist in the host cell to provide relatively long-
term expression; and (vi) AAV vectors can be purified and concentrated, and
thereby may allow for more efficient manufacturing.
The Company is building its proprietary position in AAV through the
development or acquisition of exclusive rights to inventions that (i) provide
important enhancements to AAV vectors; (ii) demonstrate novel approaches to
the use of AAV vectors for gene therapy; and (iii) establish new and improved
methods for large-scale production of AAV vectors. The Company has exclusive
rights from the National Institutes of Health (the "NIH") to an issued patent
for use of a novel AAV vector for cystic fibrosis.
In addition to its development program for cystic fibrosis, the Company is
conducting research to assess the potential for delivery of genes to other
target cells using AAV vectors. To date, the Company has focused its internal
efforts in this area to cells of the cardiovascular system and the
gastrointestinal tract. The Company plans to examine the use of its AAV
vectors in additional cell types, both internally, to the extent resources are
available to do so, and through academic collaborators.
Non-Viral Vectors. The Company has exclusive rights to a significant body of
non-viral gene delivery technology based on the use of cationic lipids to
promote the uptake of DNA into cells. The Company believes that non-viral
vectors may have several characteristics that may make them particularly well
suited for the treatment of certain diseases, including (i) the ability to
target such vectors to a specific cell type; (ii) relative ease of
manufacture; and (iii) the ability to transfer relatively large segments of
DNA in a single vector. These non-viral vectors are formulated by complexing
negatively charged DNA with cationic lipids which are positively charged to
promote DNA uptake by cells. Such complexes appear to have good safety
profiles and can be used in vivo as well as ex vivo. For in vivo use, these
complexes can potentially be delivered topically, intravenously,
intraperitoneally, intrapleurally or by aerosol.
The Company is working to develop a series of these non-viral delivery
systems based on discoveries by Dr. Leaf Huang of the University of
Pittsburgh. His original DC Chol system, which appears to have a favorable
clinical toxicity profile, was used in two clinical trials by unaffiliated
investigators prior to the Company using it in its tgDCC-E1A cancer clinical
trials. The Company has acquired an exclusive or co-exclusive license to an
issued U.S. patent for the original DC Chol system for the treatment of cancer
and certain other diseases. Dr. Huang is developing a series of non-viral
delivery systems for which the Company has obtained exclusive worldwide rights
in the field of gene therapy from the University of Pittsburgh. One type of
system under development employs additional analogs of DC Chol that may have
an even more favorable toxicity profile. In another system, the DNA is
condensed into particles of defined size that have gene transfer efficiency
that is fifty- to eighty-fold higher than the original DC Chol system. An
alternate version of this system is being developed that includes specific
ligands to enhance delivery to specific target cells and to increase stability
when delivered intravenously. An additional system being developed also has
increased efficiency of gene transduction and higher stability in serum for
intravenous delivery. The Company's initial internal efforts in this area,
based on the work of Dr. Huang, are devoted to the development of an efficient
lipid-based delivery vehicle with properties suitable for systemic delivery of
genes to target tissues via the bloodstream.
Retroviral Vectors. The Company uses retroviral vectors to modify T cells
and stem cells. These cells multiply to generate large numbers of progeny
(daughter) cells and are well suited as targets for retroviral vectors that
can modify only rapidly dividing cells. The Company believes that it has
positioned itself at the forefront of retroviral gene delivery technology
through its exclusive relationship with Dr. A. Dusty Miller, a leader in the
development of packaging cell lines for retroviral vectors. One of Dr.
Miller's more recent inventions in this area is an improved retroviral vector
packaging cell line called PG13, which the Company has licensed
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exclusively from the Hutchinson Center. Vectors produced in this cell line
have been shown to have improved efficiency for ex vivo transfer of genes to
human blood cells such as T cells and stem cells.
To date, the Company's internal efforts with retroviral vectors have been
primarily oriented toward improvements in the design, manufacture and methods
of using such vectors for gene transfer and expression. Additionally, the
Company has manufactured retroviral vectors for several investigator-sponsored
clinical trials.
Targeted CTLs
Overview. The immune system is the body's major defense mechanism
responsible for protecting against disease. It functions through a complex
interplay of components and allows the body to detect foreign agents and
thereby defend against infections and diseases. The immune system recognizes
parts of proteins called antigens that are present on the surface of diseased
cells but are not present on normal cells. The immune response to an antigen
involves the integrated action of various classes of white blood cells,
including lymphocytes. Lymphocytes comprise two major classes: B cells, which
produce antibodies that mediate humoral immunity, and T cells, which direct
cell-mediated immunity.
T cells direct cell-mediated immunity by recognizing antigens on diseased
cells. The two main classes of T cells are CD4 cells and CD8 cells. In
general, CD8 cells are CTLs that recognize, contact and kill the diseased
cells. CD4 cells are primarily helper cells that coordinate the function of
other immune cells, including CTLs, by secreting growth factors known as
cytokines. CTLs are disease-specific, i.e., they individually recognize and
bind to only a single, specific antigen. Furthermore, only in the presence of
CD4 helper cells do these specific CTLs proliferate to produce the large
population of antigen-specific CTLs required to elicit an effective immune
response.
In some disease states, the immune system fails to mount or maintain an
effective immune response. For infectious diseases and cancer, it is believed
such failure may be associated with an inadequate CTL response. For example,
HIV infects and kills CD4 cells, which leads to subsequent loss of CTL
function and, thus, to destruction of the immune system by the virus.
Targeted CTL Cell Therapy. Targeted Genetics is working to develop a highly
targeted form of cell therapy, which is intended to produce a powerful,
disease-specific immune response through the infusion of large numbers of
antigen-specific CTLs. In the Company's Targeted CTL program, antigen-specific
CTLs are isolated from a small sample of the patient's blood, multiplied to
large numbers ex vivo and then reinfused into the patient. In essence, these
Targeted CTLs are intended to amplify the natural disease-fighting function of
the immune system relating to specific infected or cancerous cells.
The Company believes that its Targeted CTL program represents an improvement
over other approaches to immunotherapy because it is based on cloned, antigen-
specific CTLs. The Company believes that Targeted CTLs may be more effective
than other immunotherapy approaches because virtually all of the reinfused
cells will be CTLs targeting the specific diseased cells. The Company also
believes that the safety and side effect profile may be improved over other
immunotherapy approaches because of the uniformity and consistency of the
reinfused cells.
The Company's focus on Targeted CTLs originated from research conducted by
its collaborators at the Hutchinson Center, Drs. Philip Greenberg and Stanley
Riddell. These researchers conducted a Phase I clinical trial to evaluate the
safety of infusing donor-derived, CMV-specific CTLs to bone marrow transplant
patients, and the potential of this approach for providing an immune response
against CMV during the short period in which transplant patients have a high
probability of developing CMV. This trial, which was published in The New
England Journal of Medicine in October 1995, was the first clinical trial in
which cloned, antigen-specific CTLs had been used. None of the 14 patients
receiving the CTLs developed CMV viremia or disease. Dr. Riddell is now
conducting a Phase II clinical trial following up on the promising results
observed in Phase I.
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Rapid Expansion Method. The Targeted CTL program is based on the Company's
proprietary REM technology, which is used to rapidly grow CTLs prior to
infusion into the patient. REM represents a significant improvement over other
methods of multiplying T cell clones. Using REM, CTL clones can be multiplied
over a thousandfold in less than two weeks. The Company has demonstrated that
REM enables it to grow billions of CTLs from individual cloned cells over
several weeks, while preserving the cells' disease-fighting capabilities in
vitro. The Company has seen consistent results from REM in both CD8 and CD4 T
cells and for all disease specificities tested to date. The Company has shown
that REM is effective for growing Targeted CTLs specific for HIV, CMV, HBV,
malignant melanoma and prostate tumor peptides. The Company has filed patent
applications, on a worldwide basis, relating to the original REM process and
to subsequent process improvements.
RESEARCH AND DEVELOPMENT COLLABORATIONS
Laboratoires Fournier S.C.A.
In May 1996, the Company and Fournier entered into a license, research and
marketing agreement under which Fournier received exclusive rights to develop
and commercialize in Europe tgDCC-E1A and any other product candidates based
on the E1A tumor suppressor gene and developed pursuant to the agreement.
Fournier has agreed to coordinate development of tgDCC-E1A in Europe by
conducting clinical trials, preparing and filing submissions for regulatory
approval in its territory and paying all associated costs, while the Company
has corresponding responsibilities with respect to development and
commercialization in the United States.
Fournier has paid a $5 million upfront license fee and $2.5 million of
milestone payments through the end of 1997. The agreement provides that
Fournier will make additional milestone payments to the Company upon the
achievement of specified goals by Fournier or the Company and royalties on
sales of resulting products, if any. In addition, if the parties are able to
negotiate a mutually acceptable supply agreement, the Company will be entitled
to manufacture products for Fournier in return for manufacturing fees.
Pursuant to the agreement, the Company has agreed to indemnify Fournier with
respect to claims incurred as a result of the manufacture, supply or sale of
tgDCC-E1A. The agreement may be terminated if the parties mutually agree on or
about the second anniversary of the agreement that the results of the
collaboration are unsatisfactory.
Pasteur Merieux
In December 1995, the Company entered into an agreement with Pasteur Merieux
pursuant to which Pasteur Merieux was granted an exclusive worldwide license
and sublicense to certain technology and patent rights relating to DC Chol as
an immunoadjuvant in traditional vaccines. In consideration of such grant,
Pasteur Merieux paid a process development fee and an upfront license fee. The
Company has a supply agreement under which it sells DC Chol to Pasteur
Merieux. In addition, the Company may receive milestone payments upon
realization of certain benchmarks and a royalty on sales of the products, if
any, incorporating the underlying technology.
RELATIONSHIP WITH IMMUNEX CORPORATION
Targeted Genetics was formed in 1989 as a subsidiary of Immunex Corporation
("Immunex"), a biotechnology company developing immunoregulatory proteins as
therapeutics. In February 1992, Targeted Genetics and Immunex entered into a
technology license agreement. In exchange for shares of Preferred Stock, which
were converted into 1,920,000 shares of Common Stock at the time of the
Company's initial public offering, Immunex granted a worldwide, exclusive
field of use license to Targeted Genetics for certain Immunex proprietary
technology specifically applicable to Targeted Genetics' gene therapy
business. The technology transferred from Immunex to Targeted Genetics relates
to gene identification and cloning, panels of retroviral vectors, packaging
cell technology, recombinant cytokines, DNA constructs, cell lines,
promoter/enhancer elements and immunological assays. In addition, until
February 1999, the Company has the option to acquire a nonexclusive,
worldwide, fully paid royalty-free license (and in certain cases an
opportunity to negotiate the
10
conversion of a nonexclusive license into an exclusive license) for certain
additional technology relating to Targeted Genetics' gene therapy business.
Targeted Genetics granted to Immunex a right of first offer and a 30-day right
of first refusal on technology the Company intends to out-license that is
based on Immunex technology. The Company may accept or reject any offers made
by Immunex under such rights. Immunex currently owns approximately 13% of the
Company's outstanding common stock.
PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to the Company's business. The Company's
policy is to file patent applications to protect technology, inventions and
improvements to inventions that are considered important to the development of
its business. The Company also relies on trade secrets, know how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. To date, the Company has filed or exclusively
licensed 56 patent applications relating to its product and technology
development programs with the United States Patent and Trademark Office (the
"USPTO"), as well as foreign counterparts of certain of these applications in
Europe, Japan and certain other countries. Of these patent applications, 17
patents have been issued or allowed by the USPTO.
In addition to the intellectual property that Targeted Genetics owns or has
exclusively licensed, the Company has licensed several issued and pending
patents that relate to its development programs on a nonexclusive basis. Among
these are the two key patents that relate to the use of AAV vectors for gene
therapy licensed from the NIH and the University of Florida Research
Foundation. In addition, the Company has acquired nonexclusive rights to the
cystic fibrosis gene being delivered in an AAV vector.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in
regard to human therapeutic uses. In addition, the coverage claimed in a
patent application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any patent applications will
result in the issuance of patents or, if any patents are issued, whether the
patents will be subjected to further proceedings limiting their scope, whether
they will provide significant proprietary protection or will be circumvented
or invalidated. Since patent applications in the United States are maintained
in secrecy until patents issue and patent applications in certain other
countries generally are not published until more than 18 months after they are
filed, and since publication of discoveries in scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it or
any licensor was the first creator of inventions covered by pending patent
applications or that it or such licensor was the first to file patent
applications for such inventions. Moreover, the Company is currently involved
in one patent interference proceeding declared by the USPTO to determine
priority of invention relating to certain components that may be useful in
retroviral vectors and may have to participate in additional interference
proceedings. Although the Company does not anticipate that material
expenditures will be made in connection with such proceedings, participation
could result in substantial cost to the Company, even if the eventual outcome
were favorable to it. In addition, although the Company believes that the
technology which is the subject of the current patent interference proceeding
is not material to its current product development programs, there can be no
assurance that such technology will not become material in the future. If the
outcome of the current or any additional interference proceeding were
unfavorable, the Company may be unable to obtain rights to the invention
involved. There can be no assurance that the Company's patents, if issued,
would be held valid or enforceable by a court or that a competitor's
technology or product would be found to infringe such patents. Litigation,
which could result in substantial cost to the Company, may be necessary to
enforce the Company's patents or to determine the scope and validity of other
parties' proprietary rights. If the outcome of any such litigation were
adverse, the Company's business could be materially adversely affected. The
Company is unable to predict how courts will resolve any future issues
relating to the validity and scope of its patents should they be challenged.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to the
Company's business. Some of these technologies, applications or patents may
conflict with the Company's
11
technologies or patent applications. Such conflict could limit the scope of
the patents, if any, that the Company may be able to obtain or result in
denial of the Company's patent applications. In addition, if patents that
cover the Company's activities are issued to other companies, there can be no
assurance that the Company would be able to develop or obtain alternative
technology.
Furthermore, as the biotechnology industry expands and more patents are
issued, the risk increases that the Company's processes and potential products
may give rise to claims that they infringe the patents of others. Such other
persons could bring legal actions against the Company claiming damages and
seeking to enjoin clinical testing, manufacturing and marketing of the
affected product or use of the affected process. Litigation may be necessary
to enforce patents issued to the Company, to protect trade secrets or know how
owned by the Company or to determine the enforceability, scope and validity of
proprietary rights of others. If the Company becomes involved in such
litigation, it could result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. If there were an adverse outcome of any such litigation, the
Company's business could be materially adversely affected. In addition to any
potential liability for significant damages, the Company could be required to
obtain a license to continue to manufacture or market the affected product or
use the affected process. Costs associated with any licensing arrangement may
be substantial and could include ongoing royalties. There can be no assurance
that any license required under any such patent would be made available to the
Company on acceptable terms, if at all.
In addition to patent protection, the Company relies upon trade secret
protection for its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or disclose such technology. To protect its trade
secrets, the Company requires its employees, consultants, scientific advisors
and parties to collaborative agreements to execute confidentiality agreements
upon the commencement of employment, the consulting relationship or the
collaboration with the Company. In the case of employees, the agreements also
provide that all inventions resulting from work performed by them while in the
employ of the Company will be the exclusive property of the Company. There can
be no assurance, however, that these agreements will provide meaningful
protection of the Company's trade secrets or adequate remedies in the event of
unauthorized use or disclosure of such information.
COMPETITION
The Company is aware of a number of companies and institutions that are
developing or considering the development of potential gene therapy and cell
therapy treatments, including early-stage gene therapy companies, fully
integrated pharmaceutical companies, universities, research institutions,
governmental agencies and other healthcare providers. In addition, the
Company's potential products will be required to compete with existing
pharmaceutical products, or products developed in the future, that are based
on established technologies. Many of the Company's competitors have
substantially more financial and other resources, larger research and
development staffs, and more experience and capabilities in researching,
developing and testing products in clinical trials, in obtaining FDA and other
regulatory approvals, and in manufacturing, marketing and distribution than
the Company. In addition, the competitive positions of other early-stage
companies may be enhanced significantly through their collaborative
arrangements with large pharmaceutical companies or academic institutions. The
Company's competitors may succeed in developing, obtaining patent protection
for, receiving FDA and other regulatory approvals for, or commercializing
products more rapidly than the Company. If the Company is successful in
commercializing its products, it will be required to compete with respect to
manufacturing efficiency and marketing capabilities, areas in which it has no
experience. The Company also competes with others in acquiring products or
technology from research institutions or universities. The Company's
competitors may develop new technologies and products that are available for
sale prior to the Company's potential products or that are more effective than
the Company's potential products. In addition, competitive products may be
manufactured and marketed more successfully than the Company's potential
products. Such developments could render the Company's potential products less
competitive or obsolete, and could have a material adverse effect on the
Company's business, financial condition and results of operations.
12
GOVERNMENTAL REGULATION
All of the Company's potential products will require regulatory approval by
U.S. and foreign governmental agencies prior to commercialization in such
countries. Human therapeutic products are subject to rigorous preclinical and
clinical testing and other premarket approval procedures administered by the
FDA and similar authorities in foreign countries. The FDA exercises regulatory
authority over the development, testing, formulation, manufacture, labeling,
storage, record keeping, reporting, quality control, advertising, promotion,
export and sale of the Company's potential products. Similar requirements are
imposed by foreign regulators. In some cases, state requirements also apply.
Gene therapy and cell therapy are relatively new technologies and have not
been extensively tested in humans. The regulatory requirements governing gene
and cell therapy products and related clinical procedures are uncertain and
are subject to change. Obtaining approval from the FDA and other regulatory
authorities for a new therapeutic product is likely to take several years, if
ever, and involve substantial expenditures. Moreover, ongoing compliance with
applicable requirements can entail the expenditure of substantial resources.
Difficulties or unanticipated costs may be encountered by the Company in its
efforts to secure necessary governmental approvals, which could delay or
preclude the Company from marketing its products.
The activities required before a new therapeutic agent may be marketed in
the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation and may require animal studies to assess the product's
potential safety and efficacy. Animal safety studies must be conducted in
accordance with the FDA's Good Laboratory Practice regulations. The results of
these studies must be submitted to the FDA as part of an Investigational New
Drug application ("IND"), which must be reviewed and cleared by the FDA before
proposed clinical testing can begin. Clinical trials must be conducted in
accordance with Good Clinical Practices under protocols that detail the
objectives of the trial, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA
as part of the IND. The FDA's review or approval of a study protocol does not
necessarily mean that, if the trial is successful, it will constitute proof of
efficacy or safety. Further, each clinical trial must be approved by and
conducted under the auspices of an independent Institutional Review Board
("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
and the possible liability of the institution. The IRB is also responsible for
continuing oversight of the approved protocols in active trials. An IRB may
require changes in a protocol, and there can be no assurance that an IRB will
permit any given trial to be initiated or completed.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, gene therapy clinical trials generally are
conducted with a small number of patients, who may or may not be afflicted
with a specific disease, to determine the preliminary safety profile. In Phase
II, clinical trials are conducted with larger groups of patients afflicted
with a specific disease in order to determine preliminary efficacy and optimal
dosages and to obtain expanded evidence of safety. In Phase III, large-scale,
multicenter, comparative clinical trials are conducted with patients afflicted
with a target disease in order to provide enough data for the statistical
proof of efficacy and safety required by the FDA and others for market
approval. The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension or termination of
clinical trials if an unwarranted risk is presented to patients. Because gene
therapy products are a new category of therapeutics, there can be no assurance
as to the length of the clinical trial period or the number of patients the
FDA will require to be enrolled in the clinical trials in order to establish
to its satisfaction the safety and efficacy of such products.
FDA marketing approval must be obtained after completion of clinical trials
of a new product. The Company expects that its products will be regulated as
biologic drugs. According to the FDA's 1993 notice outlining its regulatory
approach to somatic and gene therapy products, these products are also subject
to the drug provisions of the Federal Food, Drug and Cosmetic Act. This notice
also stated, however, that the FDA's regulatory approach may evolve as
scientific knowledge increases in the area of somatic and gene therapy.
Current regulations relating to biologic drugs will require the Company to
submit to the FDA both a Product
13
License Application ("PLA") and an Establishment License Application ("ELA"),
which must be approved by the FDA before commercial marketing is permitted.
The PLA/ELA must include results of product development activities,
preclinical studies and clinical trials, in addition to detailed manufacturing
information. FDA approval of PLA/ELAs generally takes at least one year. The
process may take substantially longer if the FDA has questions or concerns
about a product. The FDA may also request additional data relating to safety
or efficacy. Notwithstanding the submission of relevant data, the FDA may
ultimately decide that a PLA/ELA does not satisfy its regulatory criteria for
approval. The FDA may also modify the scope of the desired claims or require
the addition of warnings or other safety-related information and require
additional clinical tests following approval to confirm product safety and
efficacy (Phase IV trials). Even if FDA regulatory clearances are obtained, a
marketed product is subject to continual review, and later discovery of
previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on marketing a product or
in withdrawal of the product from the market, as well as possible civil or
criminal sanctions.
The FDA recently amended its regulations to eliminate the ELA requirement
for therapeutic DNA plasmid products, therapeutic synthetic peptide products
of 40 or fewer amino acids, monoclonal antibody products for in vivo use, and
therapeutic recombinant DNA-derived products. Manufacturers of these products
will instead be required to submit a biologics license application, which will
include, among other information, nonclinical and clinical data demonstrating
that the manufactured product meets prescribed standards for safety, purity
and potency, and information pertaining to manufacturing methods. It is
unclear whether any of the Company's products will fall within the category of
products for which the ELA requirement has been eliminated, or what effect
such elimination may have on product development and FDA review.
The FDA requires that manufacturers of a product comply with current Good
Manufacturing Practices ("cGMP") requirements, both as a condition of product
approval and on a continuing basis. In complying with cGMP requirements,
manufacturers must expend time, money and effort on a continuing basis in
production, record keeping and quality control. Manufacturing facilities are
subject to periodic inspections by the FDA to ensure compliance. Failure to
pass such inspections may subject the manufacturer to possible FDA action such
as the suspension of manufacturing, seizure of the product, withdrawal of
approval or other regulatory sanctions. The FDA may also require the
manufacturer to recall a product.
In addition to regulations enforced by the FDA, the Company is also subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other federal, state and local regulations. The Company's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and radioactive compounds. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any resulting damages, and any such
liability could exceed the Company's resources.
HUMAN RESOURCES
At December 31, 1997, Targeted Genetics had 90 full time equivalent
employees; effective February 15, 1998, the Company reduced its workforce to
64 full time equivalent employees in order to reduce the amount of cash being
used to fund operations. Of the remaining employees, 50 are directly involved
in research and development, of whom 9 have Ph.D. or M.D. degrees. A
significant number of the Company's management and professional employees have
prior experience with other biotechnology or pharmaceutical companies. The
Company considers its relations with its remaining employees to be good.
The Company's success will depend in large part on its ability to attract
and retain key employees and scientific advisors. Competition among
biotechnology and pharmaceutical companies for highly skilled scientific and
management personnel is intense. After the recent workforce reduction, the
Company put into place several programs involving restructuring and repricing
of stock options and cash retention bonuses in order to provide
14
appropriate incentive to all retained employees to continue their employment
with the Company. However, there can be no assurance that the Company will be
successful in retaining its existing personnel or advisors, or in attracting
additional qualified employees.
EXECUTIVE OFFICERS
The following are the executive officers of Targeted Genetics who will serve
in the capacities noted until their successors are duly appointed and
qualified.
NAME AGE POSITION
----------------------- --- ----------------------------------------
H. Stewart Parker 42 President, Chief Executive Officer and
Director
Barrie J. Carter, Ph.D. 53 Executive Vice President and Director of
Research and Development
James A. Johnson 41 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
H. Stewart Parker managed the formation of Targeted Genetics as a wholly
owned subsidiary of Immunex and has been President, Chief Executive Officer
and a director since the Company's inception in 1989. She served in various
capacities at Immunex from August 1981 through December 1991, most recently as
Vice President, Corporate Development. Ms. Parker also served as President and
a director of Receptech Corporation, a company formed by Immunex in 1989 to
accelerate the development of soluble cytokine receptor products
("Receptech"), from February 1991 to January 1993. She received her B.A. and
M.B.A. from the University of Washington.
Barrie J. Carter is Executive Vice President and Director of Research and
Development of Targeted Genetics. He joined the Company in August 1992. For
the previous 22 years he was employed by the NIH in Bethesda, Maryland where
he was Chief of the Laboratory of Molecular and Cellular Biology in the
National Institute for Diabetes and Digestive and Kidney Diseases from 1982 to
1992. Dr. Carter received his B.Sc. (Honors) from the University of Otago,
Dunedin, New Zealand and his Ph.D. in the Biochemistry Department of the
University of Otago Medical School. He then spent a period of postdoctoral
training at the Imperial Cancer Research Fund Laboratories in London, England
before joining the NIH. His long-term research interests are in molecular
biology of viruses, development of AAV vectors and gene therapy. Dr. Carter
serves on the Editorial Boards of Human Gene Therapy and Molecular
Therapeutics: Gene Therapy & Oligonucleotides and as an Associate Editor of
Virology. Since 1995, he has been an Affiliate Professor of Medicine at the
University of Washington Medical School.
James A. Johnson joined the Company in March 1994 as Vice President,
Finance, Chief Financial Officer, Treasurer and Secretary. He was employed by
Immunex from January 1988 to February 1994, initially as Director of Finance
and as Vice President, Finance since February 1990. While at Immunex, Mr.
Johnson served as Treasurer of Targeted Genetics from its inception in 1989.
From November 1989 to January 1993, he also served as Treasurer and Assistant
Secretary of Receptech. He received his B.A. from the University of
Washington.
FACTORS AFFECTING FORWARD-LOOKING INFORMATION
Need for Additional Capital. The Company expects negative cash flow from
operations to continue in the foreseeable future. The Company will require
substantial additional funds to continue the development and commercialization
of its potential products. Adequate funds, whether obtained through financial
markets or from collaborative or other arrangements with corporate partners or
other sources, may not be available when needed or may not be available on
terms favorable to the Company. If additional funds are raised by issuing
equity securities, dilution to existing shareholders may result. If funding is
insufficient at any time in the future, the Company may be required to delay,
scale back or eliminate some or all of its research and development
15
programs. Furthermore, if at any time the Company's funds are depleted, the
Company may be required to cease operations. The Company estimates that its
cash, cash equivalents and securities available for sale will be sufficient to
meet its needs until May 1998.
Early Stage of Product Development, Technological Uncertainty. The Company
has no commercial products and all of its potential products are in research,
development or early-stage clinical trials. Prior to any commercial use, these
potential products will require significant additional research and
development, extensive clinical testing and regulatory approval. There can be
no assurance that the Company's efforts to develop, test and gain regulatory
approval of its potential products will be successful.
History of Losses and Uncertainty of Future Results. Targeted Genetics is a
development stage company and has generated minimal revenues and significant
net losses since inception. The Company expects to incur substantial
additional losses over at least the next several years. To achieve profitable
operations, Targeted Genetics, alone or with corporate collaborative partners,
must successfully develop, manufacture, obtain regulatory approvals and market
its potential products. There can be no assurance that the Company's efforts
in these areas will be successful.
Uncertainties Relating to Clinical Trials. Existing data on the safety and
efficacy of gene and cell therapy treatments are very limited. There can be no
assurance that clinical trials of the Company's potential products will
demonstrate safety and efficacy. Furthermore, there can be no assurance that
the Company will not encounter unacceptable side effects or other problems in
clinical trials of its potential products that will cause the Company to delay
or discontinue development of such products. The rate of completion of the
Company's clinical trials depends on, among other factors, the rate of patient
enrollment. Delays in patient enrollment may result in increased costs, delays
or termination of clinical trials.
Uncertainty of Patent Position and Proprietary Rights. The failure of the
Company or its licensors to obtain and maintain patent protection for the
Company's technology could have a material adverse effect on the Company.
Patent positions in the biotechnology field are highly uncertain and involve
complex legal, scientific and factual questions. There can be no assurance
that any patent application relating to the technology used by the Company
will result in a patent being issued or that, if issued, the patent will
afford protection against competitors. As the biotechnology industry expands
and more patents are issued, the risk increases that the Company's processes
and potential products may give rise to claims that they infringe the patents
of others. If the Company becomes involved in patent litigation, it could
result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. In addition to any
potential liability for significant damages, the Company could be required to
obtain a license to continue to manufacture or market the affected product or
use the affected process. There can be no assurance that any license required
under any such patent would be made available to the Company on acceptable
terms, if at all. The Company also relies upon unpatented proprietary
technology. There can be no assurance that the Company can meaningfully
protect its rights in such unpatented proprietary technology. See "Business--
Patents and Proprietary Rights."
Uncertainty of Governmental Regulatory Requirements; Lengthy Approval
Process. The process of obtaining regulatory approvals for clinical trials or
for the manufacturing or marketing of the Company's potential products is
costly and time-consuming and is subject to unanticipated delays. There can be
no assurance that the Company will be able to obtain the necessary regulatory
approvals for manufacturing or marketing any of its product candidates. Even
if regulatory approval of a potential product is obtained, later discovery of
previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on marketing a product or
withdrawal of the product from the market, as well as possible criminal or
civil sanctions. All manufacturing operations also are subject to the FDA's
current Good Manufacturing Practice ("cGMP") requirements on an ongoing basis.
There can be no assurance that the Company will be able to attain or maintain
compliance with cGMP requirements. See "Business--Governmental Regulation."
16
Dependence on Corporate Collaborators. The Company will depend to a
significant extent on collaborative partners, licensees or other entities for
development, manufacturing and commercialization of its potential products.
Although the Company believes that such collaborative partners would have an
economic motivation to commercialize products that result from the Company's
research and development efforts, the amount and timing of resources devoted
to these activities would be controlled by such partners. Furthermore, there
can be no assurance that present or future collaborators will not pursue
existing or alternative technologies in preference to potential products being
developed in collaboration with the Company.
Competition. The Company is experiencing intense competition from companies
developing gene and cell therapy technologies as well as those using more
traditional approaches to treating human diseases. Many of these competitors
have substantially more financial and other resources, larger research and
development staffs, and more experience and capabilities in researching,
developing and testing products in clinical trials, in obtaining FDA and other
regulatory approvals, and in manufacturing, marketing and distribution than
the Company. Consequently, the Company's competitors may succeed in
commercializing products more rapidly than the Company. The Company's
competitors may also manufacture and market competitive products more
successfully than the Company's potential products. Such developments could
render the Company's potential products less competitive or obsolete. See
"Business--Competition."
Rapid Technological Change. Gene and cell therapy are new and rapidly
evolving fields and are expected to continue to undergo significant and rapid
technological change. Rapid technological development could result in actual
and proposed technologies, products or processes of the Company becoming
obsolete prior to successful commercialization.
Dependence on Key Personnel and Scientific Collaborators. The Company's
success will depend in large part on its ability to attract and retain key
employees and scientific collaborators. There can be no assurance that the
Company will be successful in retaining its existing personnel or in
attracting additional qualified employees. The Company also depends on the
continued availability of outside scientific collaborators who perform
research in certain areas relevant to the Company's research. There can be no
assurance that the Company will be successful in maintaining its relationships
with scientific collaborators, or that inventions or processes developed by
the Company's collaborators will become the property of the Company.
No Commercial Manufacturing or Marketing Capability. The Company's current
facilities and staff will need to be expanded, or supplemented through the use
of contract providers, for large-scale clinical or commercial production of
its potential products. In addition, the Company has no experience in sales
and marketing. To market any products that may result from its development
programs, Targeted Genetics will have to develop marketing and sales
capabilities, either on its own or in conjunction with others. There can be no
assurance that the Company will be successful in obtaining the necessary
manufacturing or marketing capabilities. Furthermore, the Company's dependence
upon third parties for the manufacture, marketing and sale of its potential
products may materially adversely affect the Company's ability to develop and
deliver products on a timely and competitive basis.
Hazardous Materials; Environmental Matters. The Company's research and
development activities involve the controlled use of hazardous materials,
chemicals, biological materials and radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by applicable laws and
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any resulting damages, and any such
liability could exceed the Company's resources.
Product Liability. The testing, manufacture, marketing and sale of human
healthcare products entail the inherent risk of liability claims or product
recalls and associated adverse publicity. The Company currently has a limited
amount of product liability insurance. Such insurance is expensive and there
can be no assurance that it will continue to be available in sufficient
amounts and on acceptable terms, if at all. A product liability claim or
17
product recall could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 2. PROPERTIES
Targeted Genetics currently occupies approximately 33,000 square feet of
laboratory and office space in a single facility in Seattle, Washington. The
lease expires on April 1, 1999 and includes options to extend the lease term
for three consecutive five-year periods. The average annual rent payment
during the initial term of the lease is approximately $408,000. In 1996, the
company entered into a lease for approximately 4,700 square feet of office
space in an office complex adjoining its primary facility. The lease expires
on March 31, 2004 and includes options to extend the lease term for two
consecutive five-year periods. The average annual rent payment during the
initial term of the lease is approximately $95,000. The Company believes its
current facilities, together with approximately 2,000 square feet of expansion
space remaining in its primary facility and additional expansion space
available in the adjoining office complex, will be adequate to meet its
projected needs for the next several years. Within that time frame, the
Company may be required to locate alternative facilities, depending on the
Company's growth and development.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of its fiscal year ended December 31, 1997.
18
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the
symbol TGEN. At March 6, 1998, there were approximately 3,500 holders of the
Company's common stock. The Company has never paid cash dividends and does not
anticipate paying them in the foreseeable future. The following table sets
forth for each calendar quarter indicated, the high and low bid quotations for
the Company's common stock. These quotes reflect inter-dealer prices, without
retail mark-up or commission and may not necessarily represent actual
transactions.
1996
----
1st Quarter........................... $7 1/4 $4
2nd Quarter........................... 6 1/4 3 7/8
3rd Quarter........................... 5 2 7/8
4th Quarter........................... 5 1/4 3 1/2
1997
----
1st Quarter........................... $5 3/4 $3 3/8
2nd Quarter........................... 3 5/8 2 1/2
3rd Quarter........................... 6 7/16 2 7/8
4th Quarter........................... 5 1/2 2 1/4
On March 15, 1997, the Company issued to The Burnham Institute a warrant to
purchase up to 50,000 shares of the Company's common stock (the "Burnham
Warrant") as partial consideration for the execution of a license agreement.
The Burnham Warrant vested 16,667 shares upon execution of such license
agreement; additional shares vest upon the occurrence of certain milestones
relating to pre-clinical animal studies and the issuance of patents. The
vested portion of the Burnham Warrant is exercisable until March 15, 2004 at
an exercise price per share of $4.50. On May 15, 1997, the Company issued to
Francis Chisari a warrant to purchase up to 25,000 shares of the Company's
common stock (the "Chisari Warrant") as partial consideration for the
execution of a consulting agreement. The Chisari Warrant vested 5,000 shares
immediately; on each May 15, beginning on May 15, 1998, the warrant vests with
respect to an additional 5,000 shares. The vested portion of the Chisari
Warrant is exercisable until May 15, 2004 at an exercise price per share of
$3.13. Each of the Burnham Warrant and the Chisari Warrant provides for
accelerated vesting in the event of certain mergers or other similar
transactions that result in a change in control of the Company. Each of the
Burnham Warrant and the Chisari Warrant were issued in a transaction not
involving a public offering and therefore exempt pursuant to Section 4(2) of
the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ----------- ----------- -----------
RESULTS OF OPERATIONS
Revenues................ $ 1,978,477 $ 2,254,178 $ 842,460 $ 448,822 $ 412,076
Expenses................ 16,166,251 28,292,220 10,764,744 8,848,167 5,477,588
Net loss................ (14,187,774) (26,038,042) (9,922,284) (8,399,345) (5,065,512)
Basic and diluted net
loss per share......... (.70) (1.59) (.94) (1.40) N.M.(/1/)
FINANCIAL CONDITION
Cash, cash equivalents
and securities
available for sale..... $ 5,037,821 $ 19,051,070 $14,442,562 $11,474,787 $ 6,797,182
Total assets............ 9,767,084 25,139,052 19,960,460 17,045,881 12,115,184
Long-term obligations,
including current
portion................ 2,547,324 3,378,420 3,286,508 2,837,370 1,184,706
Shareholders' equity.... 5,591,587 19,507,788 15,772,836 13,242,145 12,115,184
- --------
(/1/)Per share amounts are not meaningful.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Targeted Genetics Corporation, a development stage company, was incorporated
in March 1989 as a wholly owned subsidiary of Immunex Corporation. The
Company's activities were carried out as a project within Immunex through
December 31, 1991. In 1992, the Company began to operate independently from
Immunex and raised $16.6 million, net of expenses, in a private placement of
preferred stock. Through additional public offerings, the Company has raised
an additional $38.4 million. In June 1996, the Company completed a merger with
RGene Therapeutics, Inc. ("RGene"), a privately-held biotechnology company.
Currently, the Company's only significant revenue sources are a research and
development collaborative agreement related to the European development of the
Company's tgDCC-E1A cancer product and interest income earned on investments.
The Company has generated an accumulated deficit of $67.8 million through
December 31, 1997.
It is not anticipated that the Company will have any product-related
revenues for a number of years. Accordingly, the Company expects to generate
substantial additional losses in the future attributable to the continuation
of preclinical and clinical research programs, development of manufacturing
capabilities and the preparation for commercialization of its products under
development. The Company's ability to achieve profitability depends in part on
its ability, alone or with others, to complete the development of product
candidates, obtain regulatory approvals, comply with applicable regulatory
requirements and manufacture and market such products, of which there can be
no assurance.
RISKS AND UNCERTAINTIES
This discussion contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The Company's future cash requirements and
expense levels will depend on many factors, including continued scientific
progress in its research and development programs; the results of research and
development, preclinical studies and clinical trials; acquisition of products
or technology, if any; relationships with corporate collaborators; competing
technological and market developments; the time and costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of manufacturing
scale-up and commercialization activities; and other factors. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to publicly release the results of any revisions to these forward-
looking statements that may be made to reflect events or circumstances after
the date of this report or to reflect the occurrence of unanticipated events.
See "Factors Affecting Forward-Looking Information".
RESULTS OF OPERATIONS
Revenue under collaborative agreements decreased to $888,000 for the year
ended December 31, 1997, from $1.2 million for the year ended December 31,
1996. The decrease primarily resulted from a reduction in milestone payments
received under the Company's collaborative agreement with Laboratoires
Fournier S.C.A. ("Fournier"). Similarly, the increase in 1996 versus 1995 was
attributable to receipts from Fournier.
Investment income decreased to $651,000 for the year ended December 31,
1997, from $924,000 for the year ended December 31, 1996. The decrease
resulted from a lower average cash balance and securities available for
investment. The increase in 1996 versus the year ended December 31, 1995 was
attributable to a higher average investment balance during the year and higher
rates of return on those balances.
Research and development expenses increased to $13.0 million for the year
ended December 31, 1997, from $11.5 million for the year ended December 31,
1996. Although internal expenses for research and development leveled off in
1997, the Company experienced an increase in external expenses related to
intellectual property and to the continued progression of the Company's
clinical trial programs. Of the increase, approximately $1.4 million related
to these two areas. The increase in 1996 versus the year ended December 31,
1995 was
20
approximately $3.3 million, of which $1.6 million related to the RGene
acquisition and continuation of the acquired research, development and
clinical programs. Of this amount, approximately $1.3 million represented
recurring, routine charges and approximately $300,000 represented non-
recurring charges. Also contributing to the increase in expenses in 1996 over
1995 were a moderate increase in the level of expenses supporting the
advancement of clinical, manufacturing process development and regulatory
programs as well as additional employees and related expenses in preclinical
immunology.
A one-time expense resulting from the acquisition of RGene was charged
against income in 1996. Of the total RGene purchase price, $13.5 million was
allocated to RGene's existing in-process technology and was written-off in the
second quarter to in-process research and development expense.
General and administrative expenses decreased slightly to $2.8 million for
the year ended December 31, 1997, from $2.9 million for the year ended
December 31, 1996. Consistent with internal research and development expenses,
general and administrative expenses leveled off in 1997. The increase in 1996
expenses versus the year ended December 31, 1995 reflected $338,000 of non-
recurring expenses incurred as a result of the RGene acquisition. Other
factors contributing to the increase in 1996 expenses were increases in
business development and investor relations activities and, to a lesser
extent, modest growth in administrative staff.
Interest expense decreased to $338,000 for the year ended December 31, 1997,
from $397,000 for the year ended December 31, 1996. This expense resulted from
obligations under capital leases used to purchase laboratory and computer
equipment, furniture and leasehold improvements. The decrease from the prior
year was due to a declining principal balance under the related lease
obligations. The increase in 1996 versus the year ended December 31, 1995 was
due to an increase in the amount of equipment purchases financed. The Company
expects that it will continue to finance equipment purchases, if favorable
terms are available.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash, cash equivalents and securities
available for sale totaling $5.0 million, compared to $19.1 million at
December 31, 1996. The decrease was primarily attributable to the Company's
use of $12.5 million to fund its operations for the year. Also, $1.3 million
was used for payments under equipment leases and notes and $705,000 was used
for purchases of equipment. These cash outflows were offset partially by the
receipt of $468,000 from equipment financing transactions and $277,000 from
the exercise of warrants by existing shareholders.
In February 1998, the Company reorganized in order to reduce its cash burn
rate, in the process reducing its employee headcount by 29% to approximately
64 full-time equivalent employees. Taking into account the effect of the
reorganization, the Company estimates that its cash, cash equivalents and
securities available for sale at December 31, 1997 will be sufficient to meet
its cash needs until May 1998. Therefore, the Company must raise additional
capital in the near term in order to continue its operations beyond such time.
The Company expects to raise such capital through a private placement of
equity securities. There can be no assurance, however, that the Company will
be successful in completing such a private placement. If the Company is unable
to raise sufficient capital, it may be required to scale back its programs,
dispose of technology or cease operations.
Over the long-term, the Company will need to raise substantial additional
funds in the future to continue the development and commercialization of its
products. The Company's business strategy involves entering into agreements
with corporate partners that provide license fees, milestone payments,
research and development funding and, potentially, equity investment. There
can be no assurance, however, that the Company will be successful in
establishing any such collaborative arrangements or that any such future
partner would be successful in commercializing products. Regardless of its
success in partnering, the Company expects that it will need to seek
additional sources of public or private equity capital in the future. There
can be no assurance that adequate funds will be available to the Company
through such sources when needed or will be available on terms favorable to
the Company. If at any time the Company is unable to obtain sufficient funds,
the Company will be
21
required to delay, restrict or eliminate some or all of its research or
development programs, dispose of assets or technology, or cease operations.
IMPACT OF YEAR 2000
The Company has completed a computer system assessment and will have to
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project cost is estimated at less than $100,000, which includes
approximately $50,000 for the purchase of new software that will be
capitalized and approximately $50,000 that will be expensed as incurred. To
date, the Company has not incurred any costs for the development of a
modification plan or for the purchase new software. The project is estimated
to be completed no later than June 30, 1999, which is prior to any anticipated
impact on its operating systems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
(a) The information required by this item concerning the Company's directors
is incorporated by reference from the section captioned "ELECTION OF
DIRECTORS" in the Company's definitive Proxy Statement for the annual meeting
to be held on May 5, 1998.
(b) The information required by this item concerning the Company's executive
officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "EXECUTIVE COMPENSATION" in the Company's definitive Proxy
Statement for the annual meeting to be held on May 5, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "PRINCIPAL TARGETED GENETICS SHAREHOLDERS" in the Company's
definitive Proxy Statement for the annual meeting to be held on May 5, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following Financial Statements are submitted in a separate section
beginning on Page F-1 of this report.
PAGE(S) IN
10-K
----------
Report of Ernst and Young LLP, Independent Auditors................ F-1
Balance Sheets at December 31, 1997 and 1996....................... F-2
Statements of Operations for the years ended December 31, 1997,
1996, and 1995 and for the period from March 9, 1989 (date of
inception) through December 31, 1997.............................. F-3
Statements of Shareholders' Equity for the period from March 9,
1989 (date of inception) through December 31, 1997................ F-4
Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995 and for the period from March 9, 1989 (date of
inception) through December 31, 1997.............................. F-6
Notes to Financial Statements...................................... F-7
2. Financial Statement Schedules
All financial statement schedules have been omitted because the required
information is either included in the financial statements or the notes
thereto or is not applicable.
3. Exhibits
2.1 Agreement and Plan of Merger dated as of April 16, 1996, by and (E)
among Targeted Genetics Corporation, TGC Acquisition Corporation
and RGene Therapeutics, Inc. (Exhibit 2.1)
3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (I)
3.2 Amended and Restated Bylaws (Exhibit 3.2) (I)
4.1 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (D)
Genetics Corporation, issued to MMC/GATX Partnership No. 1 on
December 27, 1993, as amended (Exhibit 4.1)
4.2 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (A)
Genetics Corporation, issued to LINC Capital Management, Ltd. on
December 27, 1993 (Exhibit 4.2)
4.3 Warrant to Purchase 18,701 shares of the Common Stock of Targeted (B)
Genetics Corporation, issued to MMC/GATX Partnership No. 1 on
November 30, 1994 (Exhibit 4.3)
4.4 Warrant Agreement between Targeted Genetics Corporation and First (D)
Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit
4.4)
4.5 First Amendment to the Warrant Agreement between Targeted Genetics (L)
Corporation and First Interstate Bank of Washington, N.A., as
Warrant Agent (Exhibit 3.1)
4.6 Specimen Warrant Certificate (Exhibit 4.5) (C)
4.7 Warrant to Purchase 21,315 shares of the common stock of Targeted (D)
Genetics Corporation, issued to Financing for Science
International, Inc. on November 30, 1995 (Exhibit 4.6)
4.8 Rights Agreement, dated as of October 17, 1996, between Targeted (H)
Genetics Corporation and ChaseMellon Shareholder Services
(Exhibit 2.1)
4.9 Warrant to purchase 50,000 shares of the Common Stock of Targeted (J)
Genetics Corporation, issued to the Burnham Institute on March
15, 1997 (Exhibit 4.1)
4.10 Warrant to purchase 25,000 shares of the Common Stock of Targeted (K)
Genetics Corporation, issued to Francis Chisari on May 15, 1997
(Exhibit 4.1)
23
10.1 Form of Indemnification Agreement between the registrant and its (A)
officers and directors (Exhibit 10.6)
10.2 Form of Senior Management Employment Agreement between the (I)
registrant and its executive officers (Exhibit 10.2)
10.3 Non-exclusive License Agreement, dated as of November 19, 1991, (A)
between the Fred Hutchinson Cancer Research Center and Immunex
Corporation* (Exhibit 10.7)
10.4 Gene Transfer Technology License Agreement, dated as of February (A)
18, 1992, between Immunex Corporation and Targeted Genetics
Corporation* (Exhibit 10.8)
10.5 License Agreement, dated as of June 1, 1992, between Wisconsin (A)
Alumni Research Foundation and Targeted Genetics Corporation*
(Exhibit 10.9)
10.6 License Agreement, dated as of August 14, 1992, between Leland (A)
Stanford Junior University and Targeted Genetics Corporation*
(Exhibit 10.10)
10.7 PHS Patent License Agreement--Non-exclusive, dated as of July 13, (A)
1993, between National Institutes of Health Centers for Disease
Control and Targeted Genetics Corporation* (Exhibit 10.13)
10.8 Non-exclusive Patent License Agreement, dated as of December 25, (A)
1993, between The University of Florida Research Foundation,
Inc. and Targeted Genetics Corporation* (Exhibit 10.14)
10.9 Research and Exclusive License Agreement, dated as of January 1,
1994, between Targeted Genetics Corporation and the Fred
Hutchinson Cancer Research Center*
10.10 PHS Patent License Agreement--Exclusive, dated as of March 10,
1994, between National Institutes of Health Centers for Disease
Control and Targeted Genetics Corporation*
10.11 Exclusive License Agreement, dated as of March 14, 1994, between
Medical College of Ohio and Targeted Genetics Corporation*
10.12 License Agreement, dated as of March 16, 1994, between the Johns (A)
Hopkins University and Targeted Genetics Corporation* (Exhibit
10.17)
10.13 License Agreement, dated as of March 28, 1994, between Targeted
Genetics Corporation and the University of Michigan*
10.14 Exclusive License Agreement dated as of March 23, 1994, between
the Fred Hutchinson Cancer Research Center and Targeted Genetics
Corporation*
10.15 Exclusive License Agreement, dated as of August 25, 1994, between (B)
Targeted Genetics Corporation and the Fred Hutchinson Cancer
Research Center* (Exhibit 10.20)
10.16 Development Agreement dated April 6, 1994, by and between Argus (F)
Pharmaceuticals, Inc. and RGene Therapeutics, Inc.* (Exhibit
10.28)
10.17 Patent and Technology License Agreement effective as of March 1, (F)
1994, by and among the Board of Regents of the University of
Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.*
(Exhibit 10.29)
10.18 First Amended and Restated License Agreement effective October (F)
12, 1995 between The University of Tennessee Research
Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30)
10.19 Amendment to the First Amended and Restated License Agreement, (G)
between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc., dated as of June 19, 1996* (Exhibit
10.1)
10.20 Exclusive Sublicense Agreement effective July 23, 1996 by and (I)
between Alkermes, Inc. and Targeted Genetics Corporation.*
(Exhibit 10.20)
24
10.21 Revised License Agreement effective October 1, 1996, by and (I)
between the University of Pittsburgh--of the Commonwealth System
of Higher Education and Targeted Genetics Corporation* (Exhibit
10.21)
10.22 Agreement dated as of May 28, 1996 by and between RGene (F)
Therapeutics, Inc. and Laboratoires Fournier S.C.A.* (Exhibit
10.32)
10.23 License Agreement, dated as of March 15, 1997, between the
Burnham Institute and Targeted Genetics Corporation*
10.24 Olive Way Building Lease, dated as of November 20, 1993, between (A)
Metropolitan Federal Savings and Loan Association and Targeted
Genetics Corporation (Exhibit 10.21)
10.25 First Amendment to Olive Way Building Lease, dated as of December (B)
10, 1994, between Targeted Genetics Corporation and Metropolitan
Federal Savings and Loan Association (Exhibit 10.22)
10.26 Second Amendment to Olive Way Building Lease, dated as of June (I)
12, 1996, between Targeted Genetics Corporation and Ironwood
Apartments, Inc. (successor in interest to Metropolitan Federal
Savings and Loan Association) (Exhibit 10.25)
10.27 Office Lease, dated as of October 7, 1996, by and between (I)
Benaroya Capital Company, LLC and Targeted Genetics Corporation
(Exhibit 10.26)
10.28 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A)
December 27, 1993 (Exhibit 10.22)
10.29 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as (A)
of December 27, 1993 (Exhibit 10.23)
10.30 Loan and Security Agreement, dated as of November 30, 1994, (B)
between MMC/GATX Partnership No. 1 and Targeted Genetics
Corporation (Exhibit 10.25)
10.31 Master Equipment Lease Agreement, dated as of October 17, 1995, (D)
between Financing for Science International, Inc. and Targeted
Genetics Corporation (Exhibit 10.28)
10.32 Registration Rights Agreement dated as of April 27, 1992, among (A)
Targeted Genetics Corporation and the holders of Series A and
Series B Convertible Preferred Stock (Exhibit 10.26)
10.33 1992 Restated Stock Option Plan (Exhibit 10.33) (I)
10.34 Stock Option Plan for Nonemployee Directors
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- --------
* Confidential treatment has been granted by or requested from the
Securities and Exchange Commission for portions of these exhibits.
(A) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 33-77054) filed on March
30, 1994, as amended.
(B) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(C) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 33-91500) filed on April
24, 1995, as amended.
(D) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(E) Incorporated by reference to the designated exhibit included with the
Company's Form 8-K filed April 16, 1996.
25
(F) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 333-03592) filed on April
16, 1996, as amended.
(G) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(H) Incorporated by reference to the designated exhibit included with the
Company's Form 8-A filed October 22, 1996.
(I) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(J) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending March 31,
1997.
(K) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1997.
(L) Incorporated by reference to the designated exhibit included with the
Company's Form 8-A/A filed July 29, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
26
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TARGETED GENETICS CORPORATION
/s/ H. Stewart Parker
By: _________________________________
H. STEWART PARKER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: March 18, 1998
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ H. Stewart Parker President and Chief March 18, 1998
____________________________________ Executive Officer, Director
H. STEWART PARKER (Principal Executive
Officer)
/s/ James A. Johnson Vice President, Finance, March 18, 1998
____________________________________ Chief Financial Officer,
JAMES A. JOHNSON Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Jeremy L. Curnock Cook Chairman of the Board, March 18, 1998
____________________________________ Director
JEREMY L. CURNOCK COOK
/s/ Jack L. Bowman Director March 18, 1998
____________________________________
JACK L. BOWMAN
/s/ Stephen A. Duzan Director March 18, 1998
____________________________________
STEPHEN A. DUZAN
/s/ James D. Grant Director March 18, 1998
____________________________________
JAMES D. GRANT
/s/ Donald E. O'Neill Director March 18, 1998
____________________________________
DONALD E. O'NEILL
/s/ Mark Richmond, Ph.D. Director March 18, 1998
____________________________________
MARK RICHMOND, PH.D.
/s/ Martin P. Sutter Director March 18, 1998
____________________________________
MARTIN P. SUTTER
27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Targeted Genetics Corporation
We have audited the accompanying balance sheets of Targeted Genetics
Corporation (a development stage company) as of December 31, 1997 and 1996,
and the related statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997 and the
period from March 9, 1989 (date of inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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 Targeted Genetics
Corporation (a development stage company) at December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 and the period from March 9, 1989 (date
of inception) through December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
company will continue as a going concern. As more fully described in Note 1,
the Company has incurred substantial operating losses and negative operating
cash flows. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classifications of assets and liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young LLP
Seattle, Washington
February 3, 1998
F-1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 1,011,845 $ 3,532,568
Securities available for sale.................... 4,025,976 15,518,502
Prepaid expenses and other....................... 248,278 468,671
------------ ------------
Total current assets........................... 5,286,099 19,519,741
Property, plant and equipment, net................. 3,927,533 4,991,017
Other assets....................................... 553,452 628,294
------------ ------------
$ 9,767,084 $ 25,139,052
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................. $ 1,352,297 $ 1,887,880
Accrued payroll and other liabilities............ 275,876 364,964
Current portion of long-term obligations......... 1,030,562 1,250,263
------------ ------------
Total current liabilities...................... 2,658,735 3,503,107
Long-term obligations.............................. 1,516,762 2,128,157
Commitments
Shareholders' equity:
Preferred stock, $.01 par value, 6,000,000 shares
authorized,
none outstanding................................ -- --
Common stock, $.01 par value, 40,000,000 shares
authorized,
20,211,114 and 20,136,468 outstanding at
December 31, 1997
and 1996, respectively.......................... 73,401,141 73,115,362
Unrealized gains on securities available for
sale............................................ 5,181 19,387
Deficit accumulated during development stage..... (67,814,735) (53,626,961)
------------ ------------
Total shareholders' equity..................... 5,591,587 19,507,788
------------ ------------
$ 9,767,084 $ 25,139,052
============ ============
See accompanying notes to the financial statements
F-2
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD FROM
MARCH 9,
1989
(DATE OF
INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
--------------------------------------- DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ----------- ------------
Revenues:
Collaborative
agreements........... $ 888,335 $ 1,202,965 $ 75,000 $ 2,166,300
Investment income..... 650,892 923,720 667,835 3,651,894
Other................. 439,250 127,493 99,625 666,368
------------ ------------ ----------- ------------
Total revenues...... 1,978,477 2,254,178 842,460 6,484,562
------------ ------------ ----------- ------------
Expenses:
Research and
development.......... 13,043,288 11,502,584 8,194,913 47,316,992
In-process research
and development...... -- 13,517,911 -- 13,517,911
General and
administrative....... 2,784,806 2,874,316 2,267,516 12,233,842
Interest.............. 338,157 397,409 302,315 1,230,552
------------ ------------ ----------- ------------
Total expenses...... 16,166,251 28,292,220 10,764,744 74,299,297
------------ ------------ ----------- ------------
Net loss................ $(14,187,774) $(26,038,042) $(9,922,284) $(67,814,735)
============ ============ =========== ============
Basic and diluted net
loss per share......... $ (0.70) $ (1.59) $ (0.94)
============ ============ ===========
Shares used in
computation of basic
and diluted net loss
per share.............. 20,196,325 16,407,928 10,532,950
============ ============ ===========
See accompanying notes to the financial statements
F-3
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
UNREALIZED
GAINS
(LOSSES) DEFICIT
ON ACCUMULATED
COMMON STOCK ADVANCES SECURITIES DURING TOTAL
PREFERRED ---------------------- FROM AVAILABLE DEVELOPMENT SHAREHOLDERS'
STOCK SHARES AMOUNT IMMUNEX FOR SALE STAGE EQUITY
------------ ---------- ----------- ----------- ---------- ------------ -------------
Net loss from March 9,
1989 (date of
inception) through
December 31, 1991...... $ -- -- $ -- $ 2,807,316 $ -- $ (2,807,316) $ --
Sale of common stock... -- 1,080,000 27,600 -- -- -- 27,600
Issuance of 1,920,000
shares of Series A
preferred stock to
Immunex in repayment
of advances........... 2,807,316 -- -- (2,807,316) -- -- --
Sale of 3,675,986
shares of Series B
preferred stock, net
of issuance costs of
$772,415.............. 16,597,399 -- -- -- -- -- 16,597,399
Issuance of common
stock as compensation. -- 120,000 66,000 -- -- -- 66,000
Net loss--1992......... -- -- -- -- -- (1,394,462) (1,394,462)
------------ ---------- ----------- ----------- --------- ------------ -----------
Balance at December 31,
1992................... 19,404,715 1,200,000 93,600 -- -- (4,201,778) 15,296,537
Net loss--1993......... -- -- -- -- -- (5,065,512) (5,065,512)
------------ ---------- ----------- ----------- --------- ------------ -----------
Balance at December 31,
1993................... 19,404,715 1,200,000 93,600 -- -- (9,267,290) 10,231,025
Sale of common stock in
initial public
offering, net of
issuance costs of
$1,404,056............ -- 2,154,345 11,522,014 -- -- -- 11,522,014
Conversion of Series A
and B preferred stock
to common stock....... (19,404,715) 5,595,986 19,404,715 -- -- -- --
Exercise of stock
options............... -- 8,500 4,555 -- -- -- 4,555
Unrealized losses on
securities available
for sale.............. -- -- -- -- (116,104) -- (116,104)
Net loss--1994......... -- -- -- -- -- (8,399,345) (8,399,345)
------------ ---------- ----------- ----------- --------- ------------ -----------
Balance at December 31,
1994................... -- 8,958,831 31,024,884 -- (116,104) (17,666,635) 13,242,145
Sale of common stock
and 830,598 warrants,
net of issuance costs
of $214,519........... -- 3,322,392 12,244,461 -- -- -- 12,244,461
Exercise of stock
options............... -- 35,960 26,091 -- -- -- 26,091
Unrealized gains on
securities available
for sale.............. -- -- -- -- 182,423 -- 182,423
Net loss--1995......... -- -- -- -- -- (9,922,284) (9,922,284)
------------ ---------- ----------- ----------- --------- ------------ -----------
Balance at December 31,
1995................... $ -- 12,317,183 $43,295,436 $ -- $ 66,319 $(27,588,919) $15,772,836
See accompanying notes to the financial statements
F-4
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY--(CONTINUED)
PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
UNREALIZED
GAINS
(LOSSES) DEFICIT
ON ACCUMULATED
COMMON STOCK ADVANCES SECURITIES DURING TOTAL
PREFERRED ---------------------- FROM AVAILABLE DEVELOPMENT SHAREHOLDERS'
STOCK SHARES AMOUNT IMMUNEX FOR SALE STAGE EQUITY
---------- ---------- ----------- ---------- ---------- ------------ -------------
Balance at December 31,
1995................... $ -- 12,317,183 $43,295,436 $ -- $ 66,319 $(27,588,919) $ 15,772,836
Sale of common stock,
net of issuance costs
of $1,476,779......... -- 4,025,000 14,623,221 -- -- -- 14,623,221
Issuance of common
stock in RGene
acquisition........... -- 3,636,364 14,854,546 -- -- -- 14,854,546
Exercise of stock
options............... -- 78,460 44,179 -- -- -- 44,179
Exercise of warrants... -- 61,000 285,480 -- -- -- 285,480
Issuance of common
stock in payment for
consulting and license
fees.................. -- 18,461 12,500 -- -- -- 12,500
Unrealized losses on
securities available
for sale.............. -- -- -- -- (46,932) -- (46,932)
Net loss--1996......... -- -- -- -- -- (26,038,042) (26,038,042)
---------- ---------- ----------- ---------- --------- ------------ ------------
Balance at December 31,
1996................... -- 20,136,468 73,115,362 -- 19,387 (53,626,961) 19,507,788
Exercise of stock
options............... -- 15,380 8,414 -- -- -- 8,414
Exercise of warrants... -- 59,266 277,365 -- -- -- 277,365
Unrealized losses on
securities available
for sale.............. -- -- -- -- (14,206) -- (14,206)
Net loss--1997......... -- -- -- -- -- (14,187,774) (14,187,774)
---------- ---------- ----------- ---------- --------- ------------ ------------
Balance at December 31,
1997................... $ -- 20,211,114 $73,401,141 $ -- $ 5,181 $(67,814,735) $ 5,591,587
========== ========== =========== ========== ========= ============ ============
See accompanying notes to the financial statements
F-5
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
PERIOD FROM
MARCH 9, 1989
(DATE OF
INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------- DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ -------------
OPERATING ACTIVITIES:
Net loss............... $(14,187,774) $(26,038,042) $ (9,922,284) $(67,814,735)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
In-process research and
development........... -- 12,867,986 -- 12,867,986
Depreciation and
amortization.......... 1,641,151 1,919,510 1,484,549 6,723,542
Expenses paid with
common stock.......... -- 12,500 -- 78,500
(Increase) decrease in
prepaid expenses and
other................. 38,789 (201,575) (49,865) (458,076)
(Increase) decrease in
accrued interest on
securities available
for sale.............. 162,497 (72,570) (9,287) 6,999
Increase (decrease) in
current liabilities... (190,996) 1,141,275 (17,955) 1,720,270
------------ ------------ ------------ ------------
Net cash used in
operating activities. (12,536,333) (10,370,916) (8,514,842) (46,875,514)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property,
plant and equipment... (704,896) (1,542,594) (1,335,876) (9,418,087)
Purchases of securities
available for sale.... (814,251) (23,574,123) (13,047,852) (79,478,896)
Sales of securities
available for sale.... 12,130,074 20,369,007 10,119,622 75,451,101
Net cash received in
RGene acquisition..... -- 1,594,386 -- 1,594,386
Increase in other
assets................ (50,000) (145,000) (76,500) (769,179)
------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities........... 10,560,927 (3,298,324) (4,340,606) (12,620,675)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from sale
of capital stock...... 285,779 14,952,880 12,270,552 55,660,779
Advances from Immunex.. -- -- -- 2,807,316
Proceeds from equipment
financing
transactions.......... 468,363 1,097,588 1,089,789 5,412,245
Payments under capital
leases and installment
loans................. (1,299,459) (1,003,474) (657,058) (3,372,306)
------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities........... (545,317) 15,046,994 12,703,283 60,508,034
------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ (2,520,723) 1,377,754 (152,165) 1,011,845
Cash and cash
equivalents, beginning
of period.............. 3,532,568 2,154,814 2,306,979 --
------------ ------------ ------------ ------------
Cash and cash
equivalents, end of
period................. $ 1,011,845 $ 3,532,568 $ 2,154,814 $ 1,011,845
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES
OF NON-CASH INVESTING
AND FINANCING
ACTIVITIES:
Deferred sales tax on
leasehold improvements
and equipment......... $ -- $ -- $ 16,407 $ 509,588
============ ============ ============ ============
Preferred stock issued
to Immunex in payment
of advances........... $ -- $ -- $ -- $ 2,807,316
============ ============ ============ ============
See accompanying notes to the financial statements
F-6
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Targeted Genetics Corporation (the "Company") is developing gene therapy
products for the treatment of certain acquired and inherited diseases. As a
development stage company, the Company has devoted substantially all its
efforts to date to conducting research and development activities, recruiting
personnel and raising capital.
The Company was incorporated in the state of Washington in March 1989 as a
wholly owned subsidiary of Immunex Corporation ("Immunex"). In February 1992,
the Company issued 1,920,000 shares of Series A convertible preferred stock to
Immunex in exchange for the grant of a license to certain technology,
settlement of advances from Immunex and cancellation of 40,000 shares of
common stock issued by the Company to Immunex on March 28, 1989. At December
31, 1997, Immunex held approximately 13% of the outstanding stock of the
Company.
The Company has incurred operating losses and negative cash flows from
operations each year since inception. As of December 31, 1997, the Company had
an accumulated deficit of $67.8 million. The financial statements have been
prepared assuming the Company will continue as a going concern and do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result
from the outcome of this uncertainty.
As a result of its significant development efforts, the Company has required
substantial working capital to fund its operations. To date, the Company has
financed it operations principally through the net proceeds from its equity
offerings. As of December 31, 1997, the Company had cash, cash equivalents and
securities available for sale of $5.0 million. The funds will enable the
company to sustain operations until approximately May 1998. The Company is
actively pursuing additional working capital, through a private placement of
equity securities, to meet its future operational requirements. If the Company
is not able to secure additional sources of working capital, it will be forced
to curtail operations or dispose of assets or technology. There can be no
assurance such funds will be available as needed or on terms that are
acceptable to the Company or that the Company will successfully complete other
steps necessary to continue as a going concern.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all short-term investments with a purchased maturity
of three months or less to be cash equivalents. Cash equivalents, valued at
cost which approximates market, consist principally of money market accounts
and short-term government obligations.
Securities Available for Sale
Securities available for sale consist primarily of corporate debt securities
and U.S. Government notes, all of which mature within one year. Management
currently classifies the Company's entire investment portfolio, other than
cash equivalents, as securities available for sale. Such securities are stated
at market value, with the unrealized gains and losses included as a component
of shareholders' equity. The cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity,
which are included in investment income. Realized gains and losses and
declines in value judged to be other than temporary on securities available
for sale are also included in investment income. The cost of securities sold
is calculated using the specific identification method.
F-7
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of furniture
and equipment is provided using the straight-line method over the assets'
estimated useful lives, ranging from three to seven years. Furniture and
equipment under capitalized leases are amortized over the life of the lease.
Leasehold improvements are amortized over the life of the improvements or the
term of the lease, whichever is shorter.
Stock Compensation
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("Statement 123"), whereby it will apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock option plan.
Accordingly, the Company's stock-based compensation expense is recognized
based on the intrinsic value of the option on the date of the grant.
Recognition of the stock-based compensation under Statement 123 requires the
use of fair value method to value stock options using option value models
which were developed for purposes other than valuing employee stock options.
Revenue Under Collaborative Agreements
Revenue under collaborative agreements is recognized as defined under the
terms of the respective collaborative agreements. Revenue related to
milestones is recognized upon the achievement of the related milestone and
when collection is probable. Royalty payments and other similar payments due
as a direct result of such revenues being earned and received are offset
against and recognized in the same period as such revenue.
Net Loss Per Share
In February 1997, The Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share ("Statement 128"). Under Statement 128, the
Company is required to present basic and diluted earnings per share for all
years presented. Basic net loss per share is computed based upon the weighted
average number of common shares outstanding during the period. Diluted net
loss per share includes the impact of stock options, warrants and other
potentially dilutive securities unless the effect of their inclusion would be
antidilutive. There was no restatement required due to the adoption of
Statement 128.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
F-8
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
All securities available for sale at December 31, 1997 mature within one
year. Securities available for sale consisted of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
December 31, 1997:
U.S. corporate securities... $ 2,485,485 $ 5,779 $ 133 $ 2,491,131
U.S. Treasury securities and
obligations of U.S.
government agencies........ 1,535,310 -- 465 1,534,845
----------- ------- ------- -----------
$ 4,020,795 $ 5,779 $ 598 $ 4,025,976
=========== ======= ======= ===========
December 31, 1996:
U.S. corporate securities... $ 3,905,454 $ 4,311 $ 4,665 $ 3,905,100
U.S. Treasury securities and
obligations of U.S.
government agencies........ 11,593,661 26,686 6,945 11,613,402
----------- ------- ------- -----------
$15,499,115 $30,997 $11,610 $15,518,502
=========== ======= ======= ===========
The gross realized gains on sales of securities available for sale totaled
$4,448, $27,300 and $25,047 and the gross realized losses totaled $5,806,
$1,097 and $48,013, in 1997, 1996, and 1995, respectively.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
----------------------
1997 1996
----------- ----------
Furniture and equipment............................. $ 5,648,213 $5,248,913
Leasehold improvements.............................. 4,484,365 4,420,590
----------- ----------
10,132,578 9,669,503
Less accumulated depreciation and amortization...... 6,205,045 4,678,486
----------- ----------
$ 3,927,533 $4,991,017
=========== ==========
The Company has leased furniture and equipment, primarily laboratory
equipment. The total cost of leased furniture and equipment capitalized at
December 31, 1997 and 1996 was $4,321,900 and $3,796,152, respectively, with
related accumulated depreciation of $2,788,565 and $1,840,284 at December 31,
1997 and 1996, respectively.
At December 31, 1997, the Company had pledged furniture and equipment,
having a net book value of $295,799, as collateral under an installment loan
agreement.
F-9
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
DECEMBER 31,
---------------------
1997 1996
---------- ----------
Deferred state sales tax............................. $ 400,056 $ 467,540
Installment note payable, effective rate of 16.73%,
due in monthly installments through 1999............ 403,335 634,609
Capitalized lease obligations (see note 8)........... 1,743,933 2,276,271
---------- ----------
2,547,324 3,378,420
Less current portion................................. 1,030,562 1,250,263
---------- ----------
$1,516,762 $2,128,157
========== ==========
The state of Washington granted the Company a deferral of state sales tax on
new construction and equipment used in research and development activities.
The remaining obligation is payable over the next four years.
Principal payments related to long-term obligations for each of the five
years ending December 31, 2002 are $1,030,562, $886,068, $518,035, $81,973,
and $30,686, respectively.
NOTE 6. SHAREHOLDERS' EQUITY
Warrants
In July 1995, the Company issued warrants to purchase 830,598 shares of
common stock in conjunction with an offering of its common stock. At December
31, 1997, 710,332 of such warrants were outstanding and exercisable at a price
of $4.68 per share, expiring January 1998. The Company has issued a total of
137,016 warrants related to equipment financing, collaborative and license
agreements. These warrants have a weighted average price of $4.77 per share
and expire from May 1999 to December 2003. At December 31, 1997, 847,348
shares of common stock were reserved for all such warrants.
Shareholder Rights Plan
In October 1996, the Company adopted a Shareholder Rights Plan under which
it distributed a dividend of one right for each outstanding share of common
stock. The issuance of these rights had no dilutive effect, did not impact
reported earnings per share and is not taxable to the Company or the Company's
shareholders. These rights could cause substantial dilution to certain persons
or groups that attempt to acquire the Company on terms not approved by the
Board of Directors.
Stock Options
The Company has two stock option plans under which 2,300,000 shares of
common stock were reserved for issuance. Generally, options vest in annual
increments over a three- or five-year period. All options expire ten years
from date of grant.
Options have been granted at market value or, prior to the Company's initial
public offering, at the estimated fair value at the date of grant as
established by the Company's Board of Directors. As of December 31, 1997,
options on 464,998 shares were available for future grant.
F-10
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of activity related to the Company's stock option plans follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
Balance, January 1, 1995.............................. 838,000 $2.44
Granted............................................. 253,237 4.09
Exercised........................................... (35,960) 0.73
Cancelled........................................... (22,860) 4.00
--------- -----
Balance, December 31, 1995............................ 1,032,417 2.87
Granted............................................. 332,157 4.86
Exercised........................................... (78,460) 0.56
Cancelled........................................... (71,700) 2.67
--------- -----
Balance, December 31, 1996............................ 1,214,414 3.57
Granted............................................. 571,728 3.75
Exercised........................................... (15,380) 0.55
Cancelled........................................... (74,060) 4.42
--------- -----
Balance, December 31, 1997............................ 1,696,702 $3.62
=========
Options for 611,465, 390,884 and 268,620, shares were exercisable at
December 31, 1997, 1996 and 1995, respectively. The following table summarizes
information related to outstanding and exercisable options at December 31,
1997:
OUTSTANDING EXERCISABLE
------------------------------ ----------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICES SHARES PRICE LIFE SHARES PRICE
------------ --------- -------- ----------- ------- --------
$0.50--$3.00 646,480 $1.89 7.19 283,460 $0.82
3.63-- 4.88 600,365 4.38 8.15 131,891 4.13
5.00-- 6.25 449,857 5.10 7.24 196,114 5.12
------------ --------- ----- ---- ------- -----
$0.50-- 6.25 1,696,702 $3.62 7.55 611,465 $2.91
========= =======
F-11
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". In
conformity with the provisions of SFAS No. 123, the Company has elected to
follow the intrinsic value method allowed under the statement for its stock
option plans and present pro forma disclosures using the fair value accounting
approach. Had compensation costs been recorded, the following amounts would
have been reported:
1997 1996 1995
------------ ------------ ------------
Net loss--as reported............. $(14,187,774) $(26,038,042) $ (9,922,284)
Net loss--pro forma............... (15,068,834) (26,558,542) (10,156,530)
Basic and diluted net loss per
share--as reported............... (.70) (1.59) (.94)
Basic and diluted net loss per
share--pro forma................. (.75) (1.62) (.96)
The fair value of each option is estimated on the date of grant using the
Black-Scholes multiple-option approach pricing model with the following
weighted average assumptions:
1997 1996 1995
------------ ------------ ------------
Expected dividend rate............ nil nil nil
Expected stock price volatility... .696 .664 .664
Risk-free interest rate........... 6.53% 6.03% 7.16%
Expected life of options from vest
date............................. 3 years 3 years 3 years
The weighted average fair value of options granted during 1997, 1996 and
1995 was $2.51, $3.11 and $2.64, respectively, per share.
NOTE 7. ACQUISITION OF RGENE THERAPEUTICS, INC.
On June 19, 1996, the Company completed its acquisition of RGene
Therapeutics, Inc. ("RGene"), a privately-held gene therapy company. The
Company issued 3,636,364 shares of common stock in exchange for all the
outstanding capital stock of RGene. The acquisition was accounted for as a
purchase and the consideration issued by the Company was allocated to RGene's
tangible and intangible assets acquired based on their relative fair values on
the acquisition date. The amount allocated to acquired in-process research and
development was written off to operations in 1996. The allocation of the
aggregate purchase price was as follows:
Cash and cash equivalents................ $ 3,911,901
Other current assets..................... 392,174
In-process technology.................... 13,517,911
-----------
$17,821,986
===========
The Company may issue up to $5 million in additional common stock to RGene's
former stockholders based on the achievement of certain clinical and business-
related milestones prior to December 31, 1998. The Company has also assumed
certain long-term consulting and research funding agreements as a result of
the merger.
NOTE 8. COMMITMENTS
The Company leases its research and office facilities under two
noncancellable operating leases which expire beginning April 1, 1999. The
leases may be extended under specific renewal options at the then prevailing
fair market value rental rate.
F-12
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rental payments under noncancellable leases at December 31,
1997 were as follows:
OPERATING CAPITAL
---------- ----------
Year Ending December 31:
1998.............................................. $ 563,635 $ 775,420
1999.............................................. 210,067 819,670
2000.............................................. 94,428 403,830
2001.............................................. 94,428 60,963
2002.............................................. 107,688 --
Thereafter........................................ 134,610 --
---------- ----------
Total minimum lease payments........................ $1,204,856 2,059,883
==========
Less amount representing interest................... 315,950
----------
Present value of minimum capitalized lease payments. $1,743,933
==========
In January 1998, four capital leases were extended. As such, the annual
future minimum rental payments for capital leases will be increased by
$244,344, $264,724, $122,697 and $33,847 beginning in 1998, respectively. Rent
expense under operating leases for the years ended December 31, 1997, 1996 and
1995 was $533,155, $432,335 and $396,220, respectively.
NOTE 9. EMPLOYEE RETIREMENT PLAN
The Company sponsors an Employee Retirement Plan in accordance with Section
401(k) of the Internal Revenue Code. All employees 21 years old or older are
eligible to participate in the plan. Contributions made into the plan are at
the discretion of the Company's Board of Directors. The Company incurred
$99,426 and $81,364 of expense in 1997 and 1996 related to contributions to
the plan. There were no contributions to the plan made by the Company in 1995.
NOTE 10. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards of
$52,547,000 and research and experimental credit carryforwards of $1,439,000.
The carryforwards are available to offset future federal income taxes and
begin to expire in 2008. The Company has provided a valuation allowance to
offset the excess of deferred tax assets over the deferred tax liabilities due
to the uncertainty of realizing the benefits of the net deferred tax asset.
The valuation allowance increased by $5,032,000 and $5,717,000 during 1997 and
1996, respectively.
F-13
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows:
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards................. $17,866,000 $13,352,000
Research and experimental credit carryforwards... 1,439,000 1,074,000
Depreciation..................................... 559,000 401,000
Other............................................ 135,000 140,000
----------- -----------
Total deferred tax assets...................... $19,999,000 $14,967,000
=========== ===========
Valuation allowance for deferred tax assets........ $19,999,000 $14,967,000
=========== ===========
Utilization of federal income tax carry forwards is subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986. The
Company's past sales and issuances of common stock have resulted in "ownership
changes" as defined under Section 382, resulting in limitations on the future
use of carry forwards. At December 31, 1997, the Company calculated its annual
limitation to be approximately $3,782,000. However, this annual limitation is
not expected to have a material adverse effect on the Company's utilization of
its net operating loss and research credit carryforwards.
F-14
EXHIBIT INDEX
2.1 Agreement and Plan of Merger dated as of April 16, 1996, by and (E)
among Targeted Genetics Corporation, TGC Acquisition Corporation
and RGene Therapeutics, Inc. (Exhibit 2.1)
3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (I)
3.2 Amended and Restated Bylaws (Exhibit 3.2) (I)
4.1 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (D)
Genetics Corporation, issued to MMC/GATX Partnership No. 1 on
December 27, 1993, as amended (Exhibit 4.1)
4.2 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (A)
Genetics Corporation, issued to LINC Capital Management, Ltd. on
December 27, 1993 (Exhibit 4.2)
4.3 Warrant to Purchase 18,701 shares of the Common Stock of Targeted (B)
Genetics Corporation, issued to MMC/GATX Partnership No. 1 on
November 30, 1994 (Exhibit 4.3)
4.4 Warrant Agreement between Targeted Genetics Corporation and First (D)
Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit
4.4)
4.5 First Amendment to the Warrant Agreement between Targeted Genetics (L)
Corporation and First Interstate Bank of Washington, N.A., as
Warrant Agent (Exhibit 3.1)
4.6 Specimen Warrant Certificate (Exhibit 4.5) (C)
4.7 Warrant to Purchase 21,315 shares of the common stock of Targeted (D)
Genetics Corporation, issued to Financing for Science
International, Inc. on November 30, 1995 (Exhibit 4.6)
4.8 Rights Agreement, dated as of October 17, 1996, between Targeted (H)
Genetics Corporation and ChaseMellon Shareholder Services
(Exhibit 2.1)
4.9 Warrant to purchase 50,000 shares of the Common Stock of Targeted (J)
Genetics Corporation, issued to the Burnham Institute on March
15, 1997 (Exhibit 4.1)
4.10 Warrant to purchase 25,000 shares of the Common Stock of Targeted (K)
Genetics Corporation, issued to Francis Chisari on May 15, 1997
(Exhibit 4.1)
10.1 Form of Indemnification Agreement between the registrant and its (A)
officers and directors (Exhibit 10.6)
10.2 Form of Senior Management Employment Agreement between the (I)
registrant and its executive officers (Exhibit 10.2)
10.3 Non-exclusive License Agreement, dated as of November 19, 1991, (A)
between the Fred Hutchinson Cancer Research Center and Immunex
Corporation* (Exhibit 10.7)
10.4 Gene Transfer Technology License Agreement, dated as of February (A)
18, 1992, between Immunex Corporation and Targeted Genetics
Corporation* (Exhibit 10.8)
10.5 License Agreement, dated as of June 1, 1992, between Wisconsin (A)
Alumni Research Foundation and Targeted Genetics Corporation*
(Exhibit 10.9)
10.6 License Agreement, dated as of August 14, 1992, between Leland (A)
Stanford Junior University and Targeted Genetics Corporation*
(Exhibit 10.10)
10.7 PHS Patent License Agreement--Non-exclusive, dated as of July 13, (A)
1993, between National Institutes of Health Centers for Disease
Control and Targeted Genetics Corporation* (Exhibit 10.13)
10.8 Non-exclusive Patent License Agreement, dated as of December 25, (A)
1993, between The University of Florida Research Foundation,
Inc. and Targeted Genetics Corporation* (Exhibit 10.14)
10.9 Research and Exclusive License Agreement, dated as of January 1,
1994, between Targeted Genetics Corporation and the Fred
Hutchinson Cancer Research Center*
10.10 PHS Patent License Agreement--Exclusive, dated as of March 10,
1994, between National Institutes of Health Centers for Disease
Control and Targeted Genetics Corporation*
10.11 Exclusive License Agreement, dated as of March 14, 1994, between
Medical College of Ohio and Targeted Genetics Corporation*
10.12 License Agreement, dated as of March 16, 1994, between the Johns (A)
Hopkins University and Targeted Genetics Corporation* (Exhibit
10.17)
10.13 License Agreement, dated as of March 28, 1994, between Targeted
Genetics Corporation and the University of Michigan*
10.14 Exclusive License Agreement dated as of March 23, 1994, between
the Fred Hutchinson Cancer Research Center and Targeted Genetics
Corporation*
10.15 Exclusive License Agreement, dated as of August 25, 1994, between (B)
Targeted Genetics Corporation and the Fred Hutchinson Cancer
Research Center* (Exhibit 10.20)
10.16 Development Agreement dated April 6, 1994, by and between Argus (F)
Pharmaceuticals, Inc. and RGene Therapeutics, Inc.* (Exhibit
10.28)
10.17 Patent and Technology License Agreement effective as of March 1, (F)
1994, by and among the Board of Regents of the University of
Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.*
(Exhibit 10.29)
10.18 First Amended and Restated License Agreement effective October (F)
12, 1995 between The University of Tennessee Research
Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30)
10.19 Amendment to the First Amended and Restated License Agreement, (G)
between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc., dated as of June 19, 1996* (Exhibit
10.1)
10.20 Exclusive Sublicense Agreement effective July 23, 1996 by and (I)
between Alkermes, Inc. and Targeted Genetics Corporation.*
(Exhibit 10.20)
10.21 Revised License Agreement effective October 1, 1996, by and (I)
between the University of Pittsburgh--of the Commonwealth System
of Higher Education and Targeted Genetics Corporation* (Exhibit
10.21)
10.22 Agreement dated as of May 28, 1996 by and between RGene (F)
Therapeutics, Inc. and Laboratoires Fournier S.C.A.* (Exhibit
10.32)
10.23 License Agreement, dated as of March 15, 1997, between the
Burnham Institute and Targeted Genetics Corporation*
10.24 Olive Way Building Lease, dated as of November 20, 1993, between (A)
Metropolitan Federal Savings and Loan Association and Targeted
Genetics Corporation (Exhibit 10.21)
10.25 First Amendment to Olive Way Building Lease, dated as of December (B)
10, 1994, between Targeted Genetics Corporation and Metropolitan
Federal Savings and Loan Association (Exhibit 10.22)
10.26 Second Amendment to Olive Way Building Lease, dated as of June (I)
12, 1996, between Targeted Genetics Corporation and Ironwood
Apartments, Inc. (successor in interest to Metropolitan Federal
Savings and Loan Association) (Exhibit 10.25)
10.27 Office Lease, dated as of October 7, 1996, by and between (I)
Benaroya Capital Company, LLC and Targeted Genetics Corporation
(Exhibit 10.26)
10.28 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A)
December 27, 1993 (Exhibit 10.22)
10.29 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as (A)
of December 27, 1993 (Exhibit 10.23)
10.30 Loan and Security Agreement, dated as of November 30, 1994, (B)
between MMC/GATX Partnership No. 1 and Targeted Genetics
Corporation (Exhibit 10.25)
10.31 Master Equipment Lease Agreement, dated as of October 17, 1995, (D)
between Financing for Science International, Inc. and Targeted
Genetics Corporation (Exhibit 10.28)
10.32 Registration Rights Agreement dated as of April 27, 1992, among (A)
Targeted Genetics Corporation and the holders of Series A and
Series B Convertible Preferred Stock (Exhibit 10.26)
10.33 1992 Restated Stock Option Plan (Exhibit 10.33) (I)
10.34 Stock Option Plan for Nonemployee Directors
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- --------
* Confidential treatment has been granted by or requested from the
Securities and Exchange Commission for portions of these exhibits.
(A) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 33-77054) filed on March
30, 1994, as amended.
(B) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(C) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 33-91500) filed on April
24, 1995, as amended.
(D) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(E) Incorporated by reference to the designated exhibit included with the
Company's Form 8-K filed April 16, 1996.
(F) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 333-03592) filed on April
16, 1996, as amended.
(G) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(H) Incorporated by reference to the designated exhibit included with the
Company's Form 8-A filed October 22, 1996.
(I) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(J) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending March 31,
1997.
(K) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1997.
(L) Incorporated by reference to the designated exhibit included with the
Company's Form 8-A/A filed July 29, 1997.