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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________
Commission File No. 000-24505
COLLATERAL THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0661290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
11622 El Camino Real, San Diego, 92130
California (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 619-794-3400
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(TITLE OF CLASS)
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 (Section 229.405 of this chapter) 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sales price of the common stock on the Nasdaq
National Market on March 12, 1999 was $30,984,039. This amount excludes
7,040,781 shares of the Registrant's common stock held by executive officers,
directors and affiliated parties at March 12, 1999. Exclusion of such shares
should not be construed to indicate that any such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.
The number of shares of the Registrant's common stock outstanding
was 10,581,814 as of March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the Company's 1999
Annual Meeting are incorporated herein by reference into Part III of this
Report.
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PART I
ITEM 1. BUSINESS
This report on Form 10-K may contain certain projections, estimates and
other forward-looking statements that involve a number of risks and
uncertainties. For a discussion of factors which may affect the outcome
projected in such statements, see "Cautionary Factors that may Affect Future
Results" and "Risks and Uncertainties" in this report on Form 10-K. While
this outlook represents our current judgment on the future direction of our
business, suck risks and uncertainties could cause actual results to differ
materially from our future performance listed below. We undertake no
obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events and circumstances arising after
the date on this report Form 10-K.
OVERVIEW
We are focused on the discovery, development and commercialization of
non-surgical gene therapy products for the treatment of cardiovascular
diseases, including:
- coronary artery disease,
- peripheral vascular disease,
- congestive heart failure, and
- heart attack.
Our non-surgical gene therapy products use technology which includes:
- methods of gene therapy,
- therapeutic genes, and
- gene delivery vectors.
We believe that our products under development hold the potential to
revolutionize the treatment of cardiovascular diseases and that such products
can result in a new standard of care. This standard would offer patients
simpler, more cost-effective and lower-risk alternatives to currently
available treatments, such as coronary artery bypass surgery and angioplasty.
Our initial non-surgical gene therapy products are designed to promote
and enhance angiogenesis, a natural biological process that results in the
growth of additional blood vessels to restore adequate levels of blood flow
to oxygen-deprived tissues. Our chief scientist has led animal studies which
demonstrated high-yield gene transfer to heart muscle cells and, for the
first time, angiogenesis sufficient to normalize heart blood flow and
function. In addition, these animal studies showed no significant side
effects such as inflammation or immune response.
We have designed our initial gene therapy products for administration
using proprietary methods of gene therapy. These methods are based on the
non-surgical delivery of genes designed to promote and enhance angiogenesis
in the heart. Our initial gene therapy products use an adenoviral vector to
transfer genes into cells. We have designed our products so that they may be
non-surgically administered by an interventional cardiologist. In order to
administer our products the interventional cardiologist would give the
patient a one-time intra-coronary injection through a heart catheter. The
injection could be administered at the time of initial angiography, on an
out-patient basis. In addition to our products designed to promote and
enhance angiogenesis, we are also actively researching gene therapy products
designed to stimulate heart muscle regeneration and to enhance function of
the heart in heart failure. We are also evaluating additional gene delivery
vectors for use in our proprietary methods of gene therapy.
We designed GENERX-Trademark-, our initial non-surgical gene therapy
product, to promote and enhance angiogenesis for the treatment of coronary
artery disease in patients with stable exertional angina.
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Stable exertional angina commonly refers to chest pain upon exercise.
GENERX-Trademark- uses a fibroblast growth factor gene known as FGF-4 to
promote angiogenesis. In December 1997, our strategic partner, Schering AG
filed a commercial investigational new drug application for this product with
the FDA. A Phase 1/2 clinical trial, early stage testing in humans, of
GENERX-Trademark- began in May 1998. In addition to GENERX-Trademark-, we
are developing the following non-surgical cardiovascular gene therapy
products:
- GENEVX-TM-, which uses a vascular endothelial growth factor
gene known as a VEGF gene and which is an additional gene therapy
product to promote and enhance angiogenesis for the treatment of
coronary artery disease which we designed to relieve stable
exertional angina;
- GENVASCOR-TM-, which uses the FGF-4 gene and which is a gene
therapy product to promote and enhance angiogenesis for the
treatment of peripheral vascular disease resulting from decreased
blood flow, usually in the lower limbs;
- GENECOR-TM-, which is a gene therapy product to promote and
enhance angiogenesis for the treatment of congestive heart failure;
- CORGENIC-TM-, which uses the adrenegic signaling protein gene for
the treatment of congestive heart failure to enhance responsiveness
of the heart to adrenergic stimulation; and
- MYOCOR-TM-, which is a treatment for patients who have
suffered a heart attack and is focused on heart muscle regeneration
and improvement of heart function.
We have assembled a broad portfolio of therapeutic genes. This portfolio
consists of genes that we either discovered or exclusively licensed for use in
the development of cardiovascular gene therapy products. The portfolio includes
both issued patents and pending patent applications. These genes include
numerous human genes in the FGF and VEGF families to be used in our products
that promote or enhance angiogenesis. In addition, we have filed U.S. and
international patent applications for the human adenylylcyclase VI or ACVI gene
to be used with our CORGENIC-Trademark- gene therapy product.
We incorporated in California in April 1995 and reincorporated in Delaware
in 1998. The period from April 1995 to December 1995 represents our start-up
phase. During this phase, we began to establish infrastructure, build a
personnel base, secure initial funding, and pursue limited research. In 1995,
we borrowed $500,000 from Schering AG to fund operations. During this period,
we also entered into an agreement with the University of California to license
certain technology relating to non-surgical gene therapy for the promotion and
enhancement of angiogenesis.
During the period from January 1996 to April 1996, we continued limited
research and development activities and initiated discussions with Schering AG
to expand the funding relationship with respect to the field of gene therapy for
the promotion and enhancement of angiogenesis. In May 1996, we entered into a
strategic collaboration with Schering AG, covering gene therapy products for the
promotion and enhancement of angiogenesis.
With the additional funding obtained from Schering AG, we continued to
expand our research and development efforts and entered into additional
licensing arrangements. We secured the license rights to several therapeutic
genes for the promotion and enhancement of angiogenesis in March 1997. In
December 1997, our strategic partner, Schering AG filed a commercial
investigational new drug application for GENERX-Trademark- with the FDA.
A Phase 1/2 clinical trial, early stage testing in humans, for
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GENERX-Trademark- began in May 1998. In July 1998, we completed an initial
public offering to support our continued growth and product development
activities.
We intend to focus on research and development of products while leveraging
our technology through the establishment of product development, manufacturing
and marketing collaborations with select pharmaceutical and biotechnology
companies. Schering AG has made equity investments in us based upon our
collaboration agreement. In addition, subject to certain conditions, under the
terms of the collaboration Schering AG is to:
- fund research activities related to our collaboration,
- make additional payments upon our satisfying certain research,
development and commercialization milestones,
- make royalty payments based on worldwide net sales of gene therapy
products to promote and enhance angiogenesis which are developed under
the collaboration,
- fund the cost of Phase 1/2 early stage clinical trials and Phase 3
large-scale comparative clinical trials for angiogenic gene therapy
products covered by the agreement, and
- pay the start-up capital costs to make, as well as to market, promote
and sell our non-surgical angiogenic gene therapy products.
The collaboration provides us with financial resources and product
development support to allow us to develop gene therapy products to promote and
enhance angiogenesis. For further information regarding this collaboration,
please see "--Collaborative, Licensing and Research Arrangements." For other
products, we intend to select development and/or commercialization partners
after we have completed preclinical and, in some cases, clinical research for
each product. We expect that, in the event of successful commercialization of
our products, royalties on worldwide sales of such products would generate
significant revenues in the long-term.
CARDIOVASCULAR DISEASE AND CURRENT TREATMENTS
Cardiovascular disease is the leading cause of death in the U.S. In 1998,
the American Heart Association reported that an estimated 58 million patients in
the U.S. had cardiovascular disease. The American Heart Association also
estimated that the U.S. healthcare system spends approximately $171 billion
annually on the care and treatment of patients with cardiovascular diseases.
CORONARY ARTERY DISEASE. The coronary arteries supply blood to the heart
muscle. When insufficient oxygen reaches the heart muscle as a result of
restricted blood flow, an injury, myocardial ischemia, occurs that may result in
a heart attack or death. Brief episodes of ischemia often result in chest pain
or angina. Nearly all ischemic heart disease is due to atherosclerotic disease
of the coronary arteries. Atherosclerosis is a general term for the build-up of
fatty and cholesterol plaque deposits on the inside lining of arterial walls
thereby restricting blood flow. Restoring blood flow is the most effective
method to relieve painful ischemic symptoms and to reduce the long-term risk of
a heart attack. When blood flow through coronary arteries is insufficient,
myocardial ischemia occurs and ischemic injury signals are generated. In
response to these signals, the body's natural healing process is initiated and
the heart may develop limited collateral circulation in an effort to restore
blood flow. Research has shown that the extent of natural collateral vessel
formation in the heart is often inadequate to provide full
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restoration of blood flow. The American Heart Association reported in 1998
that an estimated 13.9 million patients in the U.S. had coronary artery
disease, including approximately 7.2 million patients with angina. Current
treatments for coronary artery disease include drug therapy, coronary artery
bypass surgery and catheter-based treatments, including angioplasty,
atherectomy and coronary stenting.
Cardiovascular drug therapy represents the largest component of the
worldwide pharmaceutical market; however, this therapy, in many cases:
- only treats symptoms,
- is not a cure for coronary artery disease,
- requires long-term administration,
- has adverse side effects, and
- is costly.
Coronary artery bypass surgery is highly invasive and traumatic to the
patient. However, it is often considered the most effective and long-lasting
treatment currently available for severe coronary artery disease. While
current catheter-based treatments such as angioplasty and coronary stents are
less invasive, they are limited by restenosis, a narrowing of the treated
coronary artery, which often requires additional interventions. The American
Heart Association has estimated that in 1995 the number of surgical
procedures in the U.S. for the treatment of coronary artery disease totaled
1.0 million. These procedures included approximately 570,000 coronary artery
bypass surgeries and approximately 434,000 angioplasty procedures.
PERIPHERAL VASCULAR DISEASE. Peripheral vascular disease results from
decreased blood flow in patients with atherosclerosis, usually in the lower
limbs. Based on an IMS Health marketing report which was prepared in 1996,
there were an estimated 726,000 patients in the U.S. suffering from
peripheral vascular disease, of whom over 100,000 would require a limb
amputation. Current treatments for patients with peripheral vascular disease
include drug therapy in the initial stages of the disease and surgery if the
disease has progressed or is incapacitating. If drug therapy is selected,
agents designed to improve blood flow by decreasing blood viscosity and low
dose aspirin are therapies of choice. When these agents are used in
combination with a program of daily walking and smoking cessation, improved
function may be obtained and the need for invasive surgical therapies may be
postponed or eliminated. Surgical intervention includes arterial grafting,
surgical removal of the fatty plaque deposits and endovascular treatments
such as angioplasty.
CONGESTIVE HEART FAILURE. Congestive heart failure is caused when the
heart is unable to contract adequately to pump blood throughout the body. The
normal physiological stimulation of heart function is generated when chemical
transmitters known as catecholamines bind with certain receptors on the
surfaces of heart cells, triggering a series of events that result in
increased heart rate and force of contraction. In congestive heart failure,
the heart is unable to respond adequately to catecholamines. According to
the American Heart Association, in 1998 there were an estimated 4.9 million
patients in the U.S. who had congestive heart failure which was the single
most frequent cause of hospitalization for people 65 and older. According to
the American Heart Association, approximately 50% of patients with congestive
heart failure die within five years of diagnosis. Current treatments for
congestive heart failure include drug therapy and, rarely, heart
transplantation. Currently available drug treatments generally only treat
symptoms and have a limited effect on the progression of the disease.
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HEART ATTACK. A heart attack occurs when a blockage in a coronary
artery severely restricts or completely occludes blood flow to a portion of
the heart. When blood supply is greatly reduced or occluded for more than a
short time, heart muscle cells die. Heart muscle cells do not have the
biological capacity to multiply to replace the dead cells. In the healing
phase, after a heart attack, white blood cells migrate into the area and
remove the dead heart muscle cells, and fibroblast cells proliferate and form
a collagen scar in the affected region of the heart. Collagen is a fibrous
material found in scar tissue. Following a heart attack, the heart's ability
to maintain normal function will depend on the location of the damage and the
amount of damaged tissue. The American Heart Association estimated that in
1998 approximately 1.1 million patients would have a heart attack and an
estimated 350,000 patients would die as a direct result of a heart attack.
Current therapeutic treatments for heart attack focus on acute care upon the
onset of a heart attack and on long-term care to limit the development of
heart failure and recurrent heart attack. A form of drug therapy may be used
to dissolve a blood clot immediately following a heart attack. After a heart
attack, patients generally are required to make certain lifestyle changes,
such as altering their diet, increasing their exercise levels and ceasing
smoking, and to take medicine to alleviate symptoms.
GENE THERAPY
Gene therapy is an approach to the treatment and prevention of genetic
and acquired diseases. This approach involves the insertion of genetic
information into target cells, a process known as transfection, to produce
specific proteins needed to correct or modulate disease conditions. Proteins
are fundamental components of all living cells and are essential for cellular
structure, growth and function. Proteins are produced by cells from a set of
genetic instructions encoded in DNA. DNA is organized into segments called
genes, with each gene containing the information required to produce a
specific protein. By directing the cells to produce proteins, gene therapy
offers the opportunity to correct defects or diseases that could not formerly
be treated.
A key factor in the progress of gene therapy is the development of safe
and efficient methods of transferring genes into cells. In one method 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 relies on viral gene transfer, whereby
modified viruses are used to transfer the desired genetic material into
cells. Gene transfer can be accomplished by removing cells from the patient,
genetically modifying them and then reinfusing them into the patient.
Alternatively, vectors may be introduced directly into the patient's body.
The use of viruses takes advantage of their natural ability to introduce
genes into host cells and to use the host's metabolic machinery to produce
proteins essential for the survival and function of the virus. Viruses used as
vectors are genetically modified (1) to remove the DNA necessary for the virus
to reproduce and (2) to contain the desired gene. Successful application of
viral gene transfer to the treatment of disease requires that the viral
vector:
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- carry the desired gene,
- transfer the gene into a sufficient number of target cells, and
- produce a therapeutic effect.
A number of different viral vectors, including adenovirus, adeno-associated
virus, and retrovirus, are being used for potential gene therapy
applications.
OUR THERAPEUTIC APPROACH
Our non-surgical cardiovascular gene therapy approach is primarily focused on:
- angiogenesis,
- myocardial adrenergic signaling, and
- heart muscle regeneration.
ANGIOGENESIS. We are developing non-surgical gene therapy treatments to
enhance and promote angiogenesis for the treatment of coronary artery
disease, peripheral vascular disease and congestive heart failure. Our chief
scientist led animal studies which demonstrated that gene therapy with human
angiogenic growth factor genes resulted in high-yield gene transfer limited
to the heart. In addition, the studies demonstrated in an animal model that
gene therapy, for the first time, fully restored regional blood flow and
heart function in an ischemic region of the heart. The results were achieved
within two weeks of a one-time treatment and the effects persisted over the
study period of 12 weeks following the administration of gene therapy,
without any significant side effects such as inflammation or immune response.
Longer term studies are in progress.
Our proprietary methods of gene therapy are based on intravascular
delivery of a gene designed to enhance and promote angiogenesis. This
delivery of genetic information into the heart cells produces a specific
protein to stimulate site-specific angiogenesis. We have designed our
products so that they may be non-surgically administered by an interventional
cardiologist. In order to administer our products the interventional
cardiologist could give the patient a one-time intra-coronary injection
through a heart catheter. The injection could be administered at the time of
initial angiography, on an out-patient basis. Gene transfer is accomplished
using, as a vector, a human adenovirus which has been rendered
replication-deficient and made incapable of causing a typical infection.
MYOCARDIAL ADRENERGIC SIGNALING. We are also developing methods of gene
therapy to enhance myocardial adrenergic signaling in patients with advanced
congestive heart failure by increasing the heart's ability to contract in
response to catecholamine stimulation, an aspect of the heart's normal
physiological response. In severe heart failure, the ability of the heart to
respond to catecholamine stimulation is markedly impaired. In our preclinical
research, investigators demonstrated that gene therapy can be used to produce
the protein adenylylcyclase in heart muscle cells. Production of this protein
caused an increase in the response to catecholamine stimulation which in turn
enhanced the heart's ability to contract.
HEART MUSCLE REGENERATION. We are also developing methods of gene therapy
for the treatment of heart attack. Our research on the treatment of heart
attack is focused on the regeneration of heart muscle to reduce the effects of
muscle cell death and possibly improve heart performance following a heart
attack. We are sponsoring preclinical research to identify certain genes that
may have the capacity
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to transform potential scar tissue cells into functioning heart muscle cells.
If these genes are confirmed to have the capacity to transform the cells
responsible for making the scar tissue into heart muscle cells, we plan to
develop a non-surgical gene therapy product that could be delivered by
intra-coronary administration following heart attack. Our Business Strategy
Our objective is to become the leader in the development and
commercialization of non-surgical cardiovascular gene therapy products for sale
to worldwide markets. The key elements of our strategy are as follows:
DEVELOP A NEW PARADIGM FOR THE TREATMENT OF CARDIOVASCULAR DISEASES. In
1998, the American Heart Association estimated that the U.S. healthcare system
spends approximately $171 billion annually on the care and treatment of patients
with cardiovascular diseases. We believe that our products under development
hold the potential to revolutionize the treatment of cardiovascular diseases.
We believe that these products can provide a new standard of care, by offering
patients simpler, more cost-effective and lower-risk alternatives to currently
available treatments.
MAINTAIN LEADERSHIP IN CARDIOVASCULAR GENE THERAPY. We believe that we
have established a leadership position in the field of cardiovascular gene
therapy, based on:
- the depth and breadth of our technology portfolio;
- the first successful demonstration of gene therapy to promote and
enhance angiogenesis in controlled animal studies; and
- the filing of a commercial investigational new drug application
and initiation of Phase 1/2 clinical trials with respect to our
first gene therapy product for the promotion and enhancement of
angiogenesis.
In addition, we have five other gene therapy products in various stages of
development that focus on cardiovascular diseases. We intend to continue to
focus our resources exclusively on the field of cardiovascular gene therapy in
order to maintain our leadership position.
EXPAND, ENHANCE AND PROTECT PROPRIETARY POSITIONS. We have developed
proprietary non-surgical methods of gene therapy which enable site-specific,
high-yield delivery of genes to the heart. We have assembled a broad portfolio
of proprietary genes to promote and enhance angiogenesis including FGF, VEGF and
other human genes for use with our methods of cardiovascular gene therapy. In
conjunction with our scientific collaborators, we have developed significant
expertise with respect to the design and delivery of adenovirus vectors in gene
therapy. We are seeking to refine and enhance our proprietary methods of gene
therapy to include, for example, adeno-associated viral and other gene delivery
vectors. We expect to broaden the application of such methods to the treatment
of other cardiovascular diseases. We intend to continue to pursue a strategy of
internal development and in-licensing of technologies and genes to broaden our
product development programs. In addition, we intend to vigorously protect our
current intellectual property position.
ESTABLISH STRATEGIC COLLABORATIONS TO ENHANCE PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. We intend to focus on research and development of
products while leveraging our technology through the establishment of
collaborations with select pharmaceutical and biotechnology companies
primarily in the areas of product development, manufacturing and marketing.
We have an exclusive arrangement
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with Schering AG covering gene therapy products to promote and enhance
angiogenesis. For other products, we intend to select potential development
and/or commercialization partners after we have completed preclinical and, in
some cases, clinical research. We believe that this will allow us to:
- assess the potential commercial value of our products,
- select a partner on more favorable terms than would otherwise be
available at earlier stages, and
- minimize the financial burden to fund development programs by
obtaining up-front and milestone payments, technology access fees and
development funding.
We expect that in the event of successful commercialization of our
products, royalties on worldwide sales of such products would generate
significant revenues in the long-term.
OUR CORE TECHNOLOGIES
Our non-surgical gene therapy products use technology which includes:
- methods of gene therapy,
- therapeutic genes, and
- gene delivery vectors.
METHODS OF GENE THERAPY. Our core technologies are focused on the
administration of therapeutic genes to patients through the use of non-surgical,
intravascular delivery. Administration will take place through a catheter by an
interventional cardiologist. We can use this technology to provide a means to
increase production of a specific protein in living cells and thereby alter cell
function as a therapy to treat a disease condition. However, please see "Risks
Related to Our Business--Our products may not successfully complete clinical
trials required for commercialization." for further information regarding these
methods.
PORTFOLIO OF THERAPEUTIC GENES. Genes which regulate biological
activity in the cardiovascular system are key enabling components of our core
technology. This portfolio consists of genes which we either discovered or
exclusively licensed for use in the development of cardiovascular gene
therapy products. Our portfolio includes both issued patents and pending
patent applications. These genes include numerous human genes in the FGF and
VEGF families to be considered for use in our products which promote or
enhance angiogenesis. In addition, we have filed U.S. and international
patent applications for the human adenylylcyclase VI or ACVI gene to be used
with our CORGENIC-Trademark- gene therapy product.
Our portfolio of genes includes: FGF-4, FGF-4f, VEGF-145, VEGF-145-I,
VEGF-145-II, VEGF-145-III, VEGF-138, and others. In addition, pursuant to a
pending patent application filed by us with the Patent and Trademark Office
entitled "Truncated VEGF-Related Proteins," we believe that we have a
proprietary position with respect to other invented genes that code for other
proteins which are potentially able to promote and enhance angiogenesis. In
addition, we have a patent application pending for the use of certain other
therapeutic genes including the human adenylylcyclase VI or ACVI gene.
Please see "Risks Related to Our Business--Risks Related to Patents and
Proprietary Information." for further information regarding our patents.
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GENE DELIVERY VECTORS. We are using the human adenovirus gene delivery
vector, rendered replication-deficient by deleting some of its DNA and replacing
it with a particular therapeutic gene. We believe that the following features
of adenovirus vectors make them particularly well-suited for the treatment of a
number of human diseases:
- Unlike some other types of viral systems, adenovirus vectors can
introduce genes into non-dividing cells, such as heart muscle cells,
or slowly dividing cells;
- Adenoviruses can be rendered replication-deficient;
- Naturally occurring adenoviruses usually result in no more than mild
self-limited viral illness; and
- Adenovirus vectors can be easily and efficiently manufactured.
We are attempting to build a proprietary position in gene delivery vectors
through the development and acquisition of exclusive rights to inventions that
provide important enhancements to currently available adenovirus vectors. We
are seeking to refine and enhance our proprietary methods of gene therapy to
include, for example, adeno-associated viral and other gene delivery vectors,
and to broaden the application of our methods of gene therapy to treat other
cardiovascular diseases. For further information regarding our gene delivery
vectors please see, "Risks Related to Our Business--Our products may not
successfully complete clinical trials required for commercialization." and
"Risks Related to Patents and Proprietary Information."
OUR PRODUCT DEVELOPMENT PROGRAMS
In the table below under the heading development status, the terms
research, preclinical, and Phase 1/2 are used as follows:
- Research indicates that studies are being conducted in animal models
or biochemical or cell culture systems in order to identify a product
candidate;
- Preclinical indicates that we are currently testing for potency,
pharmacology and/or toxicology of a gene therapy product candidate in
animal models or biochemical or cell culture systems; and
- Phase 1/2 indicates that we are in early stage testing in humans for
safety, pharmacologic profile and preliminary indications of efficacy
in a limited patient population.
For further information regarding risks related to the above development
phases please see "Risks Related to Our Business--Our products may not
successfully complete clinical trials required for commercialization."
Also, in reviewing the table below you should note that through May 2003,
Schering AG has certain rights to enter into research and development agreements
with us for new product opportunities that we may identify within the field of
gene therapy to promote angiogenesis. For further information
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regarding our collaboration with Schering AG, please see "Collaborative,
Licensing and Research Arrangements" and "Risks Related to Our
Business--Risks Related to Our Reliance on Collaborative Relationships and
Licensing Arrangements."
[LOGO]
<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY MEDICAL DEVELOPMENT DEVELOPMENT
CANDIDATE (DESIGNATED GENE) INDICATION STATUS PARTNER
--------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Stable
GENERX-Trademark- Angiogenesis Exertional Phase 1/2 Schering AG
(FGF-4) Angina due to
Coronary Artery
Disease
Stable
GENEVX-Trademark- Angiogenesis Exertional Preclinical Schering AG
(VEGF) Angina due to
Coronary Artery
Disease
GENVASCOR-Trademark- Angiogenesis Peripheral Preclinical Schering AG
(FGF-4) Vascular Disease
GENECOR-Trademark- Angiogenesis Congestive Heart
Failure Preclinical --
CORGENIC-Trademark- Myocardial Congestive Heart
Adrenergic Failure Preclinical --
Signaling
MYOCOR-Trademark- Heart Muscle Heart Attack
Regeneration Research --
</TABLE>
GENERX-Trademark-, which uses the FGF-4 gene in an adenovirus vector, is
our initial angiogenic product for the treatment of coronary artery disease
and is designed to relieve stable exertional angina. In May 1998, Berlex
Laboratories, Inc., a subsidiary of Schering AG, initiated a Phase 1/2
clinical trial for GENERX-Trademark- in collaboration with us. The trial,
which is placebo-controlled and double-blind, will enroll approximately 100
patients and is being conducted in 10 major cardiovascular centers in the
U.S. This trial will evaluate safety and efficacy at up to six different dose
levels of GENERX-Trademark- in patients with chronic stable exertional angina
due to atherosclerosis.
GENEVX-Trademark-, which uses a VEGF gene in an adenovirus vector, is
our second product for the promotion and enhancement of angiogenesis for the
treatment of coronary artery disease and is also designed to relieve stable
exertional angina. We are currently conducting preclinical studies in order
to support an investigational new drug application for this product in
collaboration with Schering AG. We believe that this product, like
GENERX-Trademark-, has the potential to stimulate the growth of collateral
blood vessels that will increase blood flow and improve heart function in an
ischemic region of the heart.
GENVASCOR-Trademark-, which uses the FGF-4 gene in an adenovirus vector,
is our first product for the promotion and enhancement of angiogenesis for
the treatment of peripheral vascular disease. We are currently conducting
preclinical studies in order to support an investigational new drug
application for this product in collaboration with Schering AG. We believe
that this product has the potential to
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stimulate the growth of collateral blood vessels which will increase blood
flow and function in an ischemic region of the lower limbs.
We are developing two products for the treatment of congestive heart
failure. GENECOR-Trademark- is based on our angiogenesis technology and its
application to the treatment of certain types of congestive heart failure.
CORGENIC-Trademark- is our first product being developed to enhance
the heart's ability to contract.
MYOCOR is our product in development for the treatment of heart attack. It
is focused on the regeneration of heart muscle to reduce the effects of muscle
cell death and possibly improve heart performance following a heart attack.
COLLABORATIVE, LICENSING AND RESEARCH ARRANGEMENTS
THE FOLLOWING SECTION DESCRIBING CERTAIN COLLABORATIVE AND LICENSING
ARRANGEMENTS CONTAINS CERTAIN INFORMATION CONCERNING THE POTENTIAL FEES WHICH
ARE PAYABLE BY US UNDER SUCH ARRANGEMENTS. WE CONTINUALLY EVALUATE THE
SAFETY, EFFICACY AND POSSIBLE COMMERCIALIZATION OF OUR THERAPEUTIC GENES AND
METHODS OF GENE THERAPY. ON THE BASIS OF SUCH EVALUATIONS, WE MAY ALTER OUR
CURRENT RESEARCH AND DEVELOPMENT PROGRAMS. ACCORDINGLY, WE MAY ELECT TO
CANCEL, FROM TIME TO TIME, ONE OR MORE OF THESE ARRANGEMENTS SUBJECT TO ANY
APPLICABLE ACCRUED LIABILITIES AND, IN CERTAIN CASES, TERMINATION FEES.
ALTERNATIVELY, THE PARTY TO SUCH ARRANGEMENT MAY, IN CERTAIN CIRCUMSTANCES,
BE ENTITLED TO TERMINATE THE ARRANGEMENT. FURTHER, THE AMOUNTS PAYABLE UNDER
CERTAIN OF OUR ARRANGEMENTS DEPEND ON THE NUMBER OF PRODUCTS OR INDICATIONS
FOR WHICH ANY PARTICULAR TECHNOLOGY LICENSED UNDER SUCH ARRANGEMENT IS USED
BY US. THUS, ANY STATEMENT OF POTENTIAL FEES PAYABLE BY US UNDER EACH
AGREEMENT IS SUBJECT TO A HIGH DEGREE OF POTENTIAL VARIATION FROM THE AMOUNTS
INDICATED IN THIS REPORT.
Our business strategy includes the establishment of research collaborations
with major pharmaceutical and biotechnology companies. The purpose of these
collaborations is to support and supplement our discovery, preclinical and Phase
1/2 clinical research and subsequent development phases. Our strategy also
includes the implementation of long-term strategic partnerships with major
pharmaceutical and biotechnology companies to support Phase 2 and Phase 3
clinical trials and product commercialization activities, including product
manufacturing, marketing and distribution. To date, we have established one
such relationship with Schering AG. For further information regarding this
collaboration please see "Risks Related to Our Business--Risks Related to Our
Reliance on Collaborative Relationships and Licensing Arrangements." and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SCHERING AG COLLABORATION, LICENSE AND ROYALTY AGREEMENT
In May 1996, we entered into a collaboration agreement with Schering AG
which established a strategic alliance covering the development and
commercialization of gene therapy products to promote angiogenesis. Under
this agreement, we agreed to conduct research and development in the field of
gene therapy to promote angiogenesis solely with Schering AG during the term
of the agreement. We granted Schering AG an exclusive worldwide license to
all rights to our technology in the field of angiogenic gene therapy and to
certain other rights to technology developed by us with funding support from
Schering AG during the five-year research and development program under the
agreement. Schering AG has the right to sublicense its rights to Schering AG
affiliates without our consent and to third parties who are not affiliates of
Schering AG with our consent which is not to be unreasonably withheld.
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In exchange for such rights, Schering AG agreed to:
- purchase up to $5.0 million of our equity;
- contribute up to $5.0 million annually to support our research and
development pursuant to the Schering Agreement for a product
considered an "initial product" under the terms of the arrangement,
which amount may be increased to support research and development for
additional products within the field of gene therapy to promote and
enhance angiogenesis;
- pay us milestone payments totaling up to $20.5 million for each
product deemed an initial product or new product under the terms of
the arrangement based on our achievement of milestones pertaining to
certain regulatory filings and the development and commercialization
of products under the Schering Agreement; and
- pay us a royalty rate based on worldwide net sales of each product and
to pay an additional supplemental royalty based on worldwide net sales
of each product and the product's cost of goods, up to a maximum
specified royalty rate, on a country-by-country basis. Payments are
to be made from the first commercial sale until the later of 10 years
following the first sale in such country or until the expiration of
the last to expire patent covering technology licensed or developed
under the agreement which has valid claims in such country.
Schering AG and we are performing research and development together, with
Schering AG responsible for the preparation and filing of all regulatory
applications and approvals. Schering AG is also responsible for all activities
relating to the manufacture, marketing and sale of products described in the
research and development plan under our collaboration agreement.
In addition, under our agreement with Schering AG, through May 2003
Schering AG has the right of first refusal to enter into exclusive research and
development agreements with us for new product opportunities that we may
identify within the field of gene therapy to promote angiogenesis. If we are
unable to reach agreement with Schering AG on terms and conditions regarding
such research and development agreements for new product opportunities, then we
may develop such products on our own or with third parties, provided that we or
our licensees pay Schering AG a royalty on worldwide net sales of such new
products. This arrangement is additionally subject to Schering AG's right to
enter into an agreement on the same terms as are offered to a third party. If
we are able to reach agreement on the terms and conditions of such an agreement,
Schering AG would have the same exclusive worldwide rights under our technology
to the new product as for the initial products.
In addition, through May 2003 Schering AG has a right of first negotiation
to enter into an agreement to license on an exclusive basis from us new products
outside the field of gene therapy to promote angiogenesis. From May 2003
through May 2006, Schering AG also has a right of first offer to enter into a
license agreement with us covering potential new products in the field of gene
therapy to promote angiogenesis, products outside of the field of gene therapy
to promote angiogenesis and certain other technology and know-how.
Schering AG has the unilateral right to terminate the Schering agreement
on 60 days prior written notice to us. Upon such notice, Schering AG is
required to pay us a termination fee. In addition, Schering AG would be
required to provide us with copies of and the right to reference all
investigational
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new drug applications or any other submissions that had been filed by
Schering AG with all regulatory health authorities with respect to products
covered under the Schering agreement.
In the event that Schering AG exercises such unilateral right to
termination, Schering AG retains a paid-up, irrevocable, royalty-free,
nonexclusive, worldwide license, with the right to sublicense, to any new
inventions made during and pursuant to the Schering agreement. In addition,
Schering AG may terminate the Schering agreement upon 90 days written notice,
without payment of a termination fee, if a third party which is a competitor
of Schering AG or us acquires substantially all of our assets or 49% or more
of our voting stock. Upon such termination, Schering AG would retain any
license granted by us to Schering AG, while any licenses granted by Schering
AG to us would terminate.
In 1995, Schering AG provided $500,000 in loans to fund operations.
Principal and interest on the loans are due and payable upon demand on or
after June 30, 1999. In May 1996, under the Schering agreement, an affiliate
of Schering AG made an equity investment of $2.5 million in us. Following
our securing certain rights to develop a gene, in June 1997, the same
affiliate of Schering AG made an additional equity investment of $2.5 million
in us. Finally, in June 1997, such affiliate of Schering AG made an
additional equity investment of $679,808 in us. As of December 31, 1998,
said affiliate of Schering AG owned 15.1% of all of our outstanding capital
stock. As of December 31, 1998, Schering AG had paid us an aggregate of
$12.9 million in research and development support and milestone payments.
We intend to rely on our collaboration with Schering AG for significant
continued funding in support of our research efforts on gene therapy for the
promotion and enhancement of angiogenesis. If this funding were reduced or
terminated, we would be required to:
- devote additional internal resources, if and to the extent available,
to clinical trials, and other product development and
commercialization activities,
- scale back or terminate certain research and development programs,
- seek alternative collaborations or financing sources, or
- sell or license rights to some of our proprietary technology,
including our genes.
For more information regarding our collaboration with Schering AG please
see "Risks Related to Our Business--Risks Related to Our Reliance on
Collaborative Relationships and Licensing Arrangements." and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
UNIVERSITY OF CALIFORNIA LICENSE AGREEMENTS
ANGIOGENESIS GENE THERAPY. In September 1995, we entered into an
exclusive agreement with the Regents of the University of California, with
the right to sublicense, in the U.S. and in foreign countries for a gene
therapy approach for the promotion and enhancement of angiogenesis. This gene
therapy approach is based on scientific discovery research conducted at the
laboratory of Dr. H. Kirk Hammond, a co-founder and principal stockholder of
our company. The agreement may be canceled by us on 60 days notice, following
which we would continue to be responsible only for obligations and
liabilities accrued prior to termination. Under the agreement, we are
obligated to pay a non-refundable $550,000 licensing fee payable in
installments, of which $150,000 had been paid as of December 31,
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1998. If we pursue development of products incorporating technology licensed
under this agreement, we could be obligated to pay (1) an annual royalty fee
based on net sales of products incorporating the technology licensed under
the agreement and (2) a minimum annual royalty fee (which may be offset
against the previously mentioned net sales-based royalty fee). For the
period from 2003 through 2007, the minimum annual royalty fees could amount
to $2.15 million and, in each succeeding calendar year after 2007, $750,000
for the life of the agreement.
GENE THERAPY FOR CONGESTIVE HEART FAILURE. In January 1997, we entered
into an exclusive license agreement with the Regents of the University of
California, with the right to sublicense, in the U.S. and in certain foreign
countries for rights to a gene therapy approach for congestive heart failure.
The gene therapy approach relates to increasing myocardial adrenergic
responsiveness and is based on scientific discovery research conducted at Dr.
Hammond's laboratory. The agreement may be canceled by us on 60 days
notice, following which we would continue to be responsible only for
obligations and liabilities accrued prior to termination. Under the
agreement, we are obligated to pay a nonrefundable $650,000 licensing fee
payable in installments, of which $100,000 had been paid as of December 31,
1998. If we pursue development of products incorporating technology licensed
under this agreement, we could be obligated to pay (1) an annual royalty fee
based on net sales of products incorporating the technology licensed under
the agreement and (2) a minimum annual royalty fee (which may be offset
against the net sales-based royalty fee). For the period from 2004 through
2008, the minimum annual royalty fee could amount to $2.15 million and, in
each succeeding calendar year after 2008, $750,000 for the life of the
agreement.
ANGIOGENIC GENE THERAPY FOR CONGESTIVE HEART FAILURE. In June 1997, we
entered into an exclusive license agreement with the Regents of the
University of California, with the right to sublicense, in the U.S. and in
foreign countries for another gene therapy approach for congestive heart
failure. This gene therapy approach for promoting and enhancing angiogenesis
for the treatment of congestive heart failure is based on scientific
discovery research conducted at Dr. Hammond's laboratory. The agreement may
be canceled by us on 60 days notice, following which we would continue to be
responsible only for obligations and liabilities accrued prior to
termination. Under the agreement, we are obligated to pay a non-refundable
$325,000 licensing fee payable in installments, of which $50,000 had been
paid as of December 31, 1998. If we pursue development of products
incorporating technology licensed under this agreement, we could be obligated
to pay (1) an annual royalty fee based on net sales of products incorporating
the technology licensed under the agreement and (2) a minimum annual royalty
fee (which may be offset against the net sales-based royalty fee). For the
period from 2005 through 2009, the minimum annual royalty fee could amount to
$700,000 and, in each succeeding calendar year after 2009, $300,000 for the
life of the agreement.
The University of California licensing agreements formed the initial
basis for our technology regarding methods of gene therapy and were entered
into to advance our present efforts to develop gene therapy products.
Each of these agreements provides us with exclusive rights, subject to any
license rights of the U.S. Government, to develop and commercialize technology
covered by patent applications that have been filed in the U.S. and in foreign
countries. Under the terms of these agreements, we are required to satisfy
certain due diligence provisions with respect to the timely development and
commercialization of products covered by patents under the terms of the
agreements. If we fail to meet the due diligence deadlines, the Regents may
terminate the agreement or reduce the exclusive licenses to nonexclusive
licenses. We are entitled to a one-time extension of the due diligence
deadlines upon payment of certain
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fees. In the event of a material breach by us of any of these agreements,
which remains uncured for 60 days, the agreement that was breached may be
terminated by the Regents.
NEW YORK UNIVERSITY RESEARCH AND LICENSE AGREEMENT
In March 1997, we entered into an agreement with New York University.
Under this agreement, we have an exclusive worldwide license (with the right to
sublicense) to certain technology covering development, manufacture, use and
sale of gene therapy products based on FGF-4 for the treatment of coronary
artery disease, peripheral vascular disease and congestive heart failure. This
agreement provides us with exclusive rights in such fields to develop and
commercialize technology covered by an issued patent and patent applications
that have been filed in the U.S. and in foreign countries.
Under this agreement, we agreed to pay New York University license fees
through the completion of the first full year of sales of licensed product
which, if made through the year 2002, would aggregate up to $225,000, (of
which $125,000 was paid as of December 31, 1998). If we pursue development
of licensed products under this agreement, we could be obligated to pay up to
an aggregate amount of $1.8 million (of which $250,000 has been paid as of
December 31, 1998) for each product in milestone payments. In addition,
beginning in the year in which we complete one full year of sales of licensed
products and continuing thereafter until the agreement terminates or expires,
we could also be obligated to pay minimum annual royalty fees of up to
$500,000 which may be offset against annual royalty fees based on net sales
of licensed products during each calendar year. We are also funding a
three-year research program directed by us using the technology covered by
the patents and applications.
Under the terms of this agreement, we are required to satisfy certain
due diligence provisions with respect to the timely development and
commercialization of products covered by patents under the terms of the
agreement. Failure to meet any due diligence requirements could result in
the termination of the agreement unless we and New York University mutually
agree otherwise or we pay New York University an additional fee to extend the
due diligence deadline. New York University may terminate the agreement upon
a failure to pay any amounts due under the agreement which remains uncured
for 30 days or upon any other material breach of the agreement by us which
remains uncured for 60 days. On April 28, 1998, we amended this agreement
with New York University to expand the scope of the research conducted under
this agreement and pay additional funds to New York University. In
connection with this research program, we are obligated to pay up to $675,000
in research funding, of which $475,000 had been paid as of December 31, 1998.
AMRAD DEVELOPMENT PTY LTD. AND LUDWIG INSTITUTE FOR CANCER RESEARCH LICENSE
AGREEMENT
In March 1997, we entered into an agreement with AMRAD Development Pty Ltd.
and Ludwig Institute for Cancer Research. Under this agreement AMRAD and Ludwig
granted to us an exclusive worldwide license to certain technology relating to
our use of certain VEGF genes. This agreement was terminated in 1998.
Under this agreement, we paid AMRAD and Ludwig a one-time license fee of
$1.15 million. If we had pursued development of products incorporating
technology licensed under this agreement, we would have been obligated to pay
up to an aggregate amount of $4.75 million in milestone payments and $1.0
million for each additional medical indication. In addition, on January 1,
2002, and upon each successive anniversary, we could have been obligated to
pay a license fee of up to $1.5 million to be offset against any annual
royalties based on net sales of licensed products payable to AMRAD under the
agreement.
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DIMOTECH LTD. AND TECHNION RESEARCH & DEVELOPMENT FOUNDATION LICENSE
AGREEMENT
In October 1996, we entered into an agreement with Dimotech Ltd., a
wholly-owned subsidiary of Technion Research and Development Foundation,
located at the Gutwirth Science Based Industries Center in Haifa, Israel, and
the inventor of the licensed technology, who is employed by Technion Research
and Development Foundation. Under this agreement, we have an exclusive
worldwide license with the right to sublicense to make, use and sell products
for the treatment of cardiovascular diseases, including coronary artery
disease, peripheral vascular disease and congestive heart failure, covered by
any patents that may issue with claims to VEGF-145, a vector comprising
VEGF-145 or the use of VEGF-145. To date, no such patents have issued.
If we pursue development of products or processes incorporating
technology licensed under this agreement, then, in addition to a $16,000 paid
license fee we would be obligated to pay up to an aggregate of $450,000 (of
which $125,000 had been paid as of December 31, 1998). Milestone payments
are paid on a per product or process basis upon successful achievement of
certain product development benchmarks. In addition, beginning the later of
(a) the year 2004 or (b) the issuance in the U.S. and/or the European Union
of a patent covering certain patentable material licensed under the
agreement, we could be obligated to pay minimum annual royalties up to an
aggregate amount of $1.2 million through the year 2008. In each succeeding
calendar year after 2008, we could be obligated to pay a minimum annual
royalty of $500,000 for the life of the agreement. These minimum annual
royalties may be offset against annual royalty fees payable by us based on
net sales of any products covered by any patents that may issue.
Under the terms of this agreement, we are required to satisfy certain due
diligence provisions with respect to the timely development and
commercialization of products covered by any patents under the agreement. If
the due diligence deadlines are not met, we may extend the due diligence
deadline for 12 months upon payment of an additional fee. As of December 31,
1998 we have paid $50,000 for one extension of these deadlines. Technion may
terminate the agreement in the event of a material breach of the agreement by us
which remains uncured for 60 days. We may terminate the agreement at our
option upon 60 days written notice and payment of a termination fee.
VETERANS MEDICAL RESEARCH FOUNDATION RESEARCH AGREEMENTS
Since 1995, we have contracted with the Veterans Medical Research
Foundation located in San Diego, California and operating at the Veterans'
Affairs Medical Center to conduct certain research activities. In March
1998, we entered into another one-year agreement with the Veterans Medical
Research Foundation. Under this agreement, Dr. Hammond, who serves as the
investigator for the related studies, and the Veterans Medical Research
Foundation agree to utilize their best efforts to conduct studies in the
field of cardiovascular disease. In consideration for such services, we have
agreed to pay the Veterans Medical Research Foundation monthly fees based on
the overall level of expenditures for research and development, plus certain
administrative overhead charges. We are considering extending this agreement.
This agreement requires Dr. Hammond and the Veterans Medical Research
Foundation to assign to us all ideas, developments and inventions as a result
of studies conducted under it. To the extent that U.S. government resources
are used in connection with the work done, the U.S. government may have
certain rights as defined by U.S. law and may choose to exercise those rights.
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UNIVERSITY OF WASHINGTON RESEARCH AGREEMENT
In April 1997, we entered into an agreement with the University of
Washington, Seattle, School of Medicine, Department of Pathology to conduct
discovery research directed by us into the study of repair of damage
resulting from a heart attack. The discovery research uses therapeutic genes
to initiate and control regeneration of heart muscle tissue. Under this
agreement, we have a right of first negotiation to enter into an agreement
with the University of Washington to exclusively license all technology that
may result from such research. On June 19, 1998, we amended this agreement
to extend the term of this agreement through April 30, 1999. Either party
may terminate this agreement at any time upon 30 days prior written notice.
Under this agreement, we were obligated to pay an aggregate amount of
$286,642 all of which has been paid as of December 31, 1998.
UNIVERSITY OF MISSOURI SPONSORED RESEARCH CONTRACT
In October 1997, we entered into an agreement with the Curators of the
University of Missouri-Columbia under which the University of Missouri would
conduct discovery research directed by us into the study of collateral blood
flow as it relates to peripheral vascular disease. Under this agreement, we
agreed to provide the University of Missouri with funding for this research
and paid an aggregate funding amount of $76,083. This agreement was
terminated on December 31, 1998. In 1998, we entered into additional
agreements for ongoing discovery research into the study of collateral blood
flow as it relates to peripheral vascular disease. Under these agreements we
could be obligated to pay up to an aggregate funding amount of $150,221, of
which $91,277 has been paid as of December 31, 1998.
MEDICAL COLLEGE OF WISCONSIN INVESTIGATOR AGREEMENT
In November 1998, we entered into an agreement with the Medical College of
Wisconsin. Under this agreement, Dr. Philip Clifford is to conduct discovery
research into the study of blood flow and locomotor function as it relates to
peripheral vascular disease. We have agreed to provide the Medical College with
research funding for work done under this agreement. This agreement grants us
the right to all inventions, discoveries and developments generated under the
study. The term of this agreement is October 15, 1998 to April 15,1999. Either
party may terminate this agreement upon 30 days prior written notice. Under
this agreement, we could be obligated to pay up to an aggregate amount of
$183,108 in funding support, of which $109,865 has been paid as of December 31,
1998. We are considering extending this agreement.
ADDITIONAL COLLABORATIONS FOR GENE DELIVERY VECTORS
Consistent with our efforts to broaden our proprietary methods of gene
therapy, we are evaluating additional gene delivery vectors.
TARGETED GENETICS CORPORATION BIOLOGICAL MATERIALS AGREEMENT. In
January 1998, we entered into a biological materials transfer agreement with
Targeted Genetics Corporation for purposes of evaluating Targeted Genetics'
recombinant adeno-associated viral vector for application in the field of
cardiovascular gene therapy. Under the terms of this agreement, we and
Targeted Genetics each have the option to collaborate further to use Targeted
Genetics' recombinant adeno-associated viral vector to treat congestive heart
failure. In such event, Targeted Genetics would be responsible for
constructing and manufacturing the vector and we would be responsible for,
among other things, funding the costs of the future collaboration. Either
party may terminate this agreement at any time upon 30 days prior written
notice.
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CELL GENESYS COLLABORATIVE RESEARCH AGREEMENT. In November 1998, we
entered into a collaborative research agreement with Cell Genesys, Inc. for
purposes of evaluating Cell Genesys' second-generation recombinant adenoviral
vectors for application in the field of cardiovascular gene therapy. Under this
agreement, we and Cell Genesys have options to negotiate the terms of licenses
for the use of such second-generation recombinant adenoviral vectors. The
agreement is for one year but may be terminated at an earlier date by either
party upon 60 days prior written notice.
PATENTS AND PROPRIETARY RIGHTS
Our core technologies depend on the use of genes which regulate biological
activity in the cardiovascular system. We have either discovered or exclusively
licensed certain genes for use in our gene therapy products. Our gene portfolio
includes both issued patents and pending patent applications.
Our current methods of gene therapy use a replication-deficient adenovirus
gene delivery vector. We are also seeking to refine and enhance our proprietary
methods of gene therapy to include other gene delivery vectors, and to broaden
the applications of our methods of gene therapy. For more specific information
regarding our patent portfolio, please see "--Our Core Technologies."
As of December 31, 1998, we had rights to technology covered by two U.S.
patents and more than 10 U.S. patent applications, as well as certain
corresponding foreign patent applications. Our policy is to file patent
applications to protect technology, inventions and improvements to inventions
that are considered important to the development of our business. We also rely
on trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Our business success will depend on our ability and the ability of our
licensors:
- to obtain patent protection of our technologies, both in the U.S. and
in foreign countries,
- to defend patents once obtained,
- to maintain trade secrets and operate without infringing upon the
patents and proprietary rights of others, and
- to obtain appropriate licenses to patents or proprietary rights held
by others, if any, that may relate to our technology, both in the U.S.
and in foreign countries.
For more detailed information regarding the importance of our proprietary
rights and related risks, please see "Risks Related to Our Business--Risks
Related to Patents and Proprietary Information."
GOVERNMENT REGULATION
All of our potential products will require regulatory approval by U.S. or
foreign governmental agencies prior to commercialization. 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 extensive regulatory authority over all
facets of our products, from development through commercialization. Government
agencies in foreign countries have similar authority. In some cases, local and
state requirements also apply.
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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 regulatory approval for our products is likely to
take several years, if it is ever obtained, and is likely to involve substantial
expenditures. If approval is obtained, ongoing compliance with applicable
requirements can also require substantial resources. We may encounter
difficulties or unanticipated costs in our efforts to secure necessary
governmental approvals, which could delay or prevent us from marketing our
products.
The activities required before a new therapeutic agent may be marketed in
the U.S. begin with preclinical pharmacology and toxicology testing.
Preclinical testing includes laboratory evaluation and requires 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, 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 clinical protocol must be submitted to
the FDA as part of the new drug application. The FDA's review or approval of a
study protocol does not necessarily mean that a successful trial would
constitute proof of efficacy or safety for product approval. Further, each
clinical trial must be approved by and conducted under an independent
institutional review board at the institution at which the trial will be
conducted. The institutional review board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution. The institutional review board is also responsible for continuing
oversight of the approved protocols in active trials. An institutional review
board may require changes in a protocol and there can be no assurance that an
institutional review board 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 1, gene therapy clinical trials
generally are conducted with a small number of subjects, who may or may not
have a specific disease, to determine the preliminary safety profile. In
Phase 2, clinical trials are conducted with larger groups of patients who
have a specific disease. The purpose of this phase is to determine
preliminary efficacy and optimal dosages and to obtain expanded evidence of
safety. In Phase 3, large-scale, multicenter, comparative clinical trials
are conducted with patients who have a target disease. The purpose of this
phase is 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. 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 treated in the clinical trials.
FDA marketing approval must be obtained after completion of clinical trials
of a new product. We expect that our products will be regulated as biological
products. Our products are also subject to the drug provisions of the Federal
Food, Drug, and Cosmetic Act. However, 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 us to submit to the
FDA a marketing application, which must be approved by the FDA before commercial
marketing is permitted. The marketing application must include results of
product development activities, preclinical studies and clinical trials, in
addition to detailed manufacturing information. FDA approval of the marketing
application generally takes at least one year but could take substantially
longer. The FDA may also request additional data relating to safety and
efficacy. Even if this data is submitted, the FDA may ultimately decide that a
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marketing application does not satisfy its regulatory criteria for approval.
The FDA may modify the scope of the desired claims or require the addition of
warnings or other safety-related information. The FDA may also require
additional clinical tests following approval based upon product safety data.
Such products remain subject to continual review, and to later discovery of
previously unknown problems. This may result in restrictions on marketing, or
withdrawal of the product from the market, as well as possible civil or criminal
sanctions.
The FDA requires that product manufacturers comply with current Good
Manufacturing Practices regulations as a condition for performing clinical
studies and for product approval. In complying with current Good Manufacturing
Practices requirements, manufacturers must expend resources 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 result in 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, we are 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. Our research and
development activities involve the controlled use of hazardous materials,
chemicals, biological materials and radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
with the standards prescribed by local, state and federal laws and regulations,
the risk of contamination or injury from these materials cannot be eliminated.
In such an event, we could be held liable for any resulting damages, and any
such liability could exceed our resources.
For further information regarding the impact of various government
regulations please see "Risks Related to Our Business--Our products may not
successfully complete clinical trials required for commercialization.", "We may
not be able to successfully manufacture our products.", and "We may incur
substantial cost related to our use of hazardous materials." Please also see
"Risks Related to Our Industry--We are subject to extensive government
regulation in our industry and may fail to achieve regulatory approval."
COMPETITION
We are aware of a number of companies and institutions that are developing
or considering the development of potential gene therapy, cell therapy
treatments and therapies infusing proteins which promote or enhance
angiogenesis. These organizations include early-stage gene therapy companies,
fully-integrated pharmaceutical companies, universities, research institutions,
governmental agencies and others.
Additionally, there are a number of medical device companies which are
developing innovative surgical procedures. These include laser-based systems to
stimulate coronary angiogenesis, as well as surgical devices and catheter based
treatments, including balloon angioplasty, atherectomy and coronary stenting.
In addition, our potential products will be required to compete with existing
pharmaceutical products, or products developed in the future, that are based on
new or established technologies. For further information regarding competition
in our industry, please see "Risks Related to Our Industry--We face intense
competition."
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MANUFACTURING
Schering AG is responsible for all activities relating to the
manufacture of products developed under our agreement with Schering AG. We
do not have manufacturing capacity and currently plan to establish
relationships with others for the manufacture of clinical trial material and
the commercial production of our other products. We may not be able to
establish relationships with manufacturers on commercially acceptable terms.
In addition, we cannot be sure that Schering AG or others will be able to
manufacture products in commercial quantities under Good Manufacturing
Practices as required by the FDA on a cost-effective basis. For further
information regarding risks related to manufacturing, please see "Risks
Related to Our Business-- "Risks Related to Our Reliance on Collaborative
Relationships and Licensing Arrangements." and "We may not be able to
successfully manufacture our products."
SALES AND MARKETING
We do not plan to develop our own sales and marketing capability for our
products. We plan to rely solely upon strategic partners to market and sell
our products. Schering AG is responsible for all activities relating to the
marketing and sale of products developed under our agreement with Schering
AG. For further information regarding factors impacting our ability to sell
and market our products, please see "Risks Related to Our Business--Risks
Related to Our Reliance on Collaborative Relationships and Licensing
Arrangements." and "We may not be able to successfully market and sell our
products."
HUMAN RESOURCES
As of December 31, 1998, we had 44 full-time employees, including 26 in
research and development and 18 in finance and administration. Of these
employees, 19 hold advanced degrees, of which 12 are M.D.s or Ph.D.s. Our
success will depend in large part on our 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. We may not be able to retain our existing personnel or advisors,
or attract additional qualified employees. For further information regarding
our key personnel please see "Risks Related to Our Business--We may not be able
to attract and retain key personnel and advisors."
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(Cautionary Statements Under the Private Securities Litigation Reform Act
of 1995)
Our disclosure and analysis in this report and in our 1998 Annual Report
to Stockholders may contain forward-looking statements. Forward-looking
statements give our current expectations or forecasts of future events. You
can identify these statements by the fact that they do not relate strictly to
historical or current facts. They may use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these include statements
relating to future actions, prospective products or product approvals, future
performance or results of current and anticipated products, sales efforts,
expenses, and financial results. From time to time, we also may provide oral
or written forward-looking statements in other materials we release to the
public.
Any or all of our forward-looking statements in this report, in the 1998
Annual Report and in any other public statements may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in the discussion
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below, for example, regulatory approval and proprietary protection of our
gene therapy products, and their market success relative to alternative
products, will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we
provide the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that we
think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also
adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
RISKS AND UNCERTAINTIES
RISKS RELATED TO OUR BUSINESS
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY NEVER BE
SUCCESSFULLY COMMERCIALIZED.
All of our potential products are in the early stages of development.
Even if they advance in development we cannot be sure that we or our partners
could obtain regulatory product approvals. Before we can sell our products,
we must undertake the time-consuming and costly process of developing,
testing and obtaining regulatory approval for each product. To date, only
one of our products, GENERX-Trademark-, has advanced to clinical trials. To
date, regulatory authorities have not reviewed or approved any of our
products.
After developing, testing and obtaining regulatory product approval, we,
alone or with others, must market and sell our products to achieve profitable
operations. We do not expect our products to be available for sale for a number
of years, if at all. There are many reasons that we may fail in our efforts to
develop our products, including the possibility that:
- our products will be ineffective, toxic or will not receive regulatory
clearances,
- our products will be too expensive to manufacture or market or will
not achieve broad market acceptance,
- others will hold proprietary rights that will prevent us from
marketing our products, or
- others will market equivalent or superior products.
The success of our business depends on our ability to successfully develop and
market our products.
OUR PRODUCTS MAY NOT SUCCESSFULLY COMPLETE CLINICAL TRIALS REQUIRED FOR
COMMERCIALIZATION.
THE CLINICAL TRIALS PROCESS IS COMPLEX AND UNCERTAIN. We cannot be
certain that we will successfully complete clinical trials necessary to
receive regulatory product approvals. This process is lengthy and expensive.
To obtain regulatory approvals, we must demonstrate through preclinical
studies and clinical trials that our products are safe and effective for use
in at least one medical indication. Promising results in preclinical studies
and initial clinical trials do not ensure successful results in later
clinical trials, which test broader human use of our products. Many
companies in our industry have
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suffered significant setbacks in advanced clinical trials, despite promising
results in earlier trials. Clinical trials may not result in a marketable
product.
Other factors may adversely affect clinical trials. For example, clinical
trials are often conducted with patients who have the most advanced stages of
disease. During the course of treatment, these patients can die or suffer other
adverse conditions for reasons that may not be related to the proposed product
being tested. These reactions may nevertheless adversely affect our clinical
trial results and our business.
In addition, our ability to complete clinical trials depends on many
factors, including, obtaining adequate clinical supplies and having a sufficient
rate of patient recruitment. For example, patient recruitment is a function of
many factors, including:
- the size of the patient population;
- the proximity of patients to clinical sites; and
- the eligibility criteria for the trial.
Even if patients are successfully recruited, we cannot be sure that they
will complete the treatment process. Delays in patient enrollment or treatment
in clinical trials may result in increased costs, program delays or both, which
could adversely affect us.
With respect to foreign markets, we or our partner will also be subject to
foreign regulatory requirements governing clinical trials. Even if we complete
clinical trials, we may not be able to submit a marketing application. If we
submit an application, the regulatory authorities may not review or approve it
in a timely manner, if at all.
OUR COLLABORATORS MAY CONTROL ASPECTS OF OUR CLINICAL TRIALS. Our
collaborative partners may have or acquire rights to control aspects of our
product development and clinical programs. For example, Schering AG has certain
rights to control the planning and implementation of product development and
clinical programs related to angiogenic gene therapy products. As a result, we
may not be able to conduct these programs in the manner we currently
contemplate.
If we fail to demonstrate adequately the safety and effectiveness of a
product, the FDA may delay or withhold product approval, which would adversely
affect our business. In addition, the FDA may require additional clinical
trials, which could result in increased costs and significant development
delays.
OUR PRODUCTS MAY HAVE UNACCEPTABLE SIDE EFFECTS. Possible side effects
of gene therapy technologies may be serious and life-threatening. For
example, possible serious side effects of viral vector-based gene transfer
include viral infections resulting from contamination with
replication-competent viruses and inflammation or other injury to the heart
or other parts of the body. In addition, the development of cancer in a
patient is a possible side effect of all methods of gene transfer.
Furthermore, there is a possibility of side effects or decreased
effectiveness associated with an immune response toward any viral vector or
gene used in our treatments. The possibility of such response may increase
if there is a need to deliver the viral vector more than once. The
occurrence of any unacceptable side effects during or after preclinical and
clinical testing of our potential products could delay approval of our
products and adversely affect our business.
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WE HAVE INCURRED LOSSES SINCE INCEPTION AND MAY NEVER BE PROFITABLE.
We formed our company in 1995 and have only a limited operating history
to review in evaluating our business and prospects. We have incurred
operating losses since our inception in 1995. As of December 31, 1998, our
accumulated deficit was approximately $7.1 million. We expect to incur
additional losses for the foreseeable future. We also expect our losses to
increase as our research and development efforts and clinical trials
progress.
To date, we have not generated any revenue from product sales. We do
not expect to generate any revenue from our products for a number of years,
if at all. If we, alone or with our collaborators, do not successfully
develop, manufacture and commercialize our products, we may never achieve
profitability. Even if we do achieve profitability, we cannot predict the
level of such profitability.
RISKS RELATED TO PATENTS AND PROPRIETARY INFORMATION.
OUR BUSINESS SUCCESS DEPENDS UPON OUR PATENTS AND PROPRIETARY
INFORMATION. Our business success will depend in part on our ability and that
of our licensors to:
- obtain patent protection for our methods of gene therapy, therapeutic
genes and/or gene-delivery vectors both in the U.S. and in foreign
countries,
- defend patents once obtained,
- maintain trade secrets and operate without infringing upon the patents
and proprietary rights of others, and
- obtain appropriate licenses to patents or proprietary rights held by
others with respect to our technology, both in the U.S. and in foreign
countries.
WE MAY NOT HAVE ADEQUATE PATENT PROTECTION FOR OUR PRODUCTS. We cannot
be certain that we or our collaborators will have adequate patent protection
for our products. We intend to file additional applications for patents
covering our methods of gene therapy, therapeutic genes and gene delivery
vectors. To date, we exclusively license rights covered by two U.S. issued
patents. We have also filed or have licensed rights to more than 10
currently pending patent applications in the U.S. relating to our technology,
as well as foreign counterparts of certain of these applications. We cannot
be certain that patents will issue from any of these applications. Even if
patents are issued to us or to our licensors, these patents may be
challenged, held unenforceable, invalidated or circumvented. In addition,
the rights granted may provide insufficient proprietary protection or
commercial advantage.
The patent positions of pharmaceutical and biotechnology companies,
including our own, are often uncertain and involve complex legal and factual
questions. In addition, the coverage claimed in a patent application can be
significantly reduced before, and in some cases after, a patent is issued. We
do not know whether any patent applications will result in the issuance of
patents. If any patents are issued, we do not know whether the patents will be
subjected to further proceedings limiting their scope, whether they will provide
significant proprietary protection or will be held unenforceable, circumvented
or invalidated. Patent applications in the U.S. are maintained in secrecy until
patents issue. Patent applications in other countries generally are not
published until up to 18 months after they are first filed. Further,
publication of discoveries in scientific or patent literature often lags behind
actual discoveries.
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As a result, we cannot be certain that we were or any licensor was the first
creator of inventions covered by our patents or applications or that we were
or our licensor was the first to file such patent applications. Changes in
patent laws may also adversely affect our operations.
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 our business.
Some of these technologies, applications or patents may conflict with our
technologies or patent applications. A conflict could limit the scope of the
patents, if any, that we may be able to obtain or result in denial of our or our
licensor's patent applications. In addition, if patents that cover our
activities are issued to other companies, we cannot be sure that we could
develop or obtain alternative technology.
In addition, some of our products rely on patented inventions developed
using U.S. government resources. The U.S. government retains certain rights in
such patents, and may choose to exercise its rights.
WE MAY NOT BE ABLE TO SUCCESSFULLY RESOLVE A CONFLICT REGARDING PATENT
RIGHTS. As the biotechnology industry expands and more patents are issued, the
risk increases that our processes and potential products may give rise to claims
that they infringe on the patents of others. Others could bring legal actions
against us claiming damages and seeking to stop clinical testing, manufacturing
and marketing of the affected product or use of the affected process.
Litigation may be necessary to enforce our proprietary rights or to determine
the enforceability, scope and validity of proprietary rights of others. If we
become involved in litigation, it could be costly and divert our efforts and
resources. If there were an adverse outcome of any litigation, our business
could be adversely affected.
In addition, if any of our competitors file patent applications in the
U.S. claiming technology also invented by us, we may participate in
interference proceedings held by the U.S. Patent and Trademark Office to
determine priority of invention and the right to a patent for the technology.
Like litigation, interference proceedings can be lengthy and often result in
substantial costs and diversion of resources.
Besides potential liability for significant damages, we could be
required to obtain a license to continue to make or market the affected
product or use the affected process. Costs of a license may be substantial
and could include ongoing royalties. We may not be able to obtain such a
license on acceptable terms.
WE MAY NOT HAVE ADEQUATE PROTECTION FOR OUR UNPATENTED PROPRIETARY
INFORMATION. We also rely on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
our competitive position. However, others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology. To protect our
trade secrets, we require confidentiality agreements upon beginning
employment, consulting or collaboration with us. Agreements with employees
also provide that all inventions resulting from work performed by them while
in our employ will be our exclusive property. However, these agreements may
not provide meaningful protection of our trade secrets or adequate remedies
in the event of unauthorized use or disclosure of such information.
Likewise, our trade secrets or know-how may become known through other means
or be independently discovered by our competitors. Any of these events could
adversely affect our business.
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RISKS RELATED TO OUR RELIANCE ON COLLABORATIVE RELATIONSHIPS AND LICENSING
ARRANGEMENTS.
WE MAY NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MAINTAIN COLLABORATIVE
AND LICENSING ARRANGEMENTS. Our strategy for the development, testing,
manufacturing and commercialization of our potential products relies on our
establishing and maintaining collaborations with corporate partners,
licensors, licensees and others. At present we have a collaboration with
Schering AG. We may not be able to maintain or expand this collaboration or
establish additional collaborations or licensing arrangements necessary to
develop and commercialize potential products based on our technology. If we
are successful in establishing additional collaborations or licensing
arrangements, they may not be on favorable terms. The collaborations or
licensing arrangements also may not ultimately be successful. Any failure to
enter into additional collaborative or licensing arrangements on favorable
terms would adversely affect our business.
Under our current strategy, and for the foreseeable future, we will rely
on our collaborative partners to develop or market our products. As a
result, we will depend on collaborators to perform the following activities:
- fund preclinical studies,
- fund clinical development,
- obtain regulatory approval, and
- manufacture and market any successfully developed products.
We may not be able to control the amount and timing of resources our
current and future collaborators devote to our programs or potential products.
For example, manufacturers of our products may have significant discretion over
whether or not to pursue development activities with us. We also cannot be
certain that our collaborators will not pursue alternative technologies, on
their own or with others, to develop competitive gene therapy products. If our
collaborators develop competitive products, they may withdraw support for our
programs. Our collaborative partners also may breach or terminate our
agreements or otherwise fail to conduct their collaborative activities
successfully. As a result, our product development could be delayed or
terminated, which would adversely affect our business. In addition, revenues we
receive from marketed products under our collaborations may depend on the
marketing and sales efforts of our collaborators.
Disputes may arise with our collaborators about who has ownership rights to
any technology developed. These disputes could have the following results:
- delay achievement of milestones or receipt of milestone payments,
- adversely affect collaborative research, development and
commercialization of certain potential products or
- lead to litigation or arbitration.
Any of these results could be time consuming, expensive and adversely affect our
business.
WE FACE ADDITIONAL RISKS RELATED TO OUR AGREEMENT WITH SCHERING AG. We
have entered into a research and development collaboration with Schering AG
in the field of angiogenic gene therapy.
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Under this agreement, Schering AG has the following rights that could
adversely affect the development of potential products under our
collaboration:
- discretion to pursue or not to pursue any development programs with
us,
- the right to terminate the agreement at any time if we materially
breach the agreement or on 60 days written notice subject to the
payment of a termination fee, and
- the right to terminate the agreement upon 90 days written notice,
without payment of a termination fee, if a competitor of Schering AG
or us acquires substantially all of our assets or 49% or more of our
voting stock.
We cannot be certain that this collaboration will continue or will be
successful.
We also intend to rely on our collaboration with Schering AG for
significant continued funding of our angiogenic gene therapy research
efforts. We cannot be certain Schering AG will continue to fund this
research, especially if they develop competitive products. If they reduce or
terminate this funding, we may have to fund clinical trials, product
development and commercialization ourselves by using additional resources or
by scaling back or terminating other research and development programs. In
addition, the rights to terminate could discourage interested buyers and impact
the value of our business. We also may need to seek alternative
collaborations or financing sources or sell or license rights to some of our
proprietary technology. If Schering AG withdraws support for our programs,
it could have a material adverse effect on our business.
WE WILL NEED ADDITIONAL FUNDS TO CONTINUE OUR OPERATIONS IN THE FUTURE.
We will need substantial additional resources to develop our products. Our
future capital requirements will depend on many factors, including:
- the pace of scientific progress in our research and development
programs,
- the magnitude of our research and development programs,
- the scope and results of preclinical studies and clinical trials,
- the time and costs involved in obtaining regulatory approvals,
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims,
- the costs involved in any potential litigation,
- competing technological and market developments,
- our ability to establish additional collaborations,
- changes in existing collaborations,
- our dependence on others for development and commercialization of our
potential products,
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- the cost of manufacturing and
- the effectiveness of our commercialization activities.
We believe that our cash and anticipated sources of funding, including
Schering AG, the net proceeds of our initial public offering and future debt or
equity financings will be adequate to satisfy our anticipated capital needs
through the second quarter of 2000. We intend to seek any additional capital
needed to fund our operations through new collaborations, the extension of our
existing collaboration or through public or private equity or debt financings.
However, additional financing may not be available on acceptable terms or at
all. Any inability to obtain additional financing could adversely affect our
business.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We expect that our operating results will fluctuate from quarter to
quarter based on when we incur expenses and receive revenues from our
collaborative arrangements and other sources. The level of funding by
Schering AG may vary or they may withdraw funding altogether from one or more
of our products. If Schering AG were to withdraw funding, it could have a
material adverse affect on our business. We believe that some of these
fluctuations may be significant and could affect our stock price.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANUFACTURE OUR PRODUCTS.
We cannot be certain that we will be able to successfully manufacture our
products. We do not have internal manufacturing capabilities. Our current
strategy is to establish relationships with our collaborators and others to
manufacture our products for clinical trials and commercial sales. To date, we
have established a manufacturing relationship as part of our collaboration with
Schering AG. The agreement provides that Schering AG is solely responsible for
manufacturing gene therapy products developed under our collaboration. We
cannot be certain, however, that we will be able to maintain our relationship
with Schering AG or establish relationships with other manufacturers on
commercially acceptable terms. Any failure to do so would adversely affect our
business.
Further, our manufacturers may experience a variety of problems in
manufacturing our products, including:
- an inability to manufacture commercial quantities of our products on a
cost-effective basis,
- non-compliance with Good Manufacturing Practices mandated by the FDA
or by any foreign regulatory authority,
- manufacturing or quality control problems, or
- an inability to maintain the governmental licenses and approvals
required to continue manufacturing our products.
Any of these events could adversely affect our profitability and our ability to
develop and commercialize products on a timely and competitive basis.
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WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS.
Our success will depend on the market acceptance of our products. The
degree of market acceptance will depend upon a number of factors, including:
- the receipt and scope of regulatory approvals,
- the establishment and demonstration in the medical community of the
safety and effectiveness of our products and their potential
advantages over other treatments, and
- reimbursement policies of government and healthcare payors.
In the past, parts of the medical community have been concerned with the
potential safety and effectiveness of gene therapy products derived from
disease-causing viruses such as adenoviruses, which we use in our proposed gene
therapy products. Physicians, patients, payors or the medical community in
general may not accept our products as safe or may not use any product that we
may develop. Failure to achieve or maintain significant market acceptance would
adversely affect our business.
We do not have internal marketing and sales capabilities and may not be
able to successfully market and sell our products. Our current strategy is to
market and sell our products through our collaborative partners. For example,
our collaboration with Schering AG provides that they will be solely responsible
for marketing and selling gene therapy products we develop together. We cannot
be certain, however, that we will be able to maintain our relationship with
Schering AG or establish relationships with other drug or healthcare companies
with distribution systems and direct sales forces on commercially acceptable
terms. If we are required to market and sell our products directly, we will
need to develop a marketing and sales force with technical expertise and
distribution capability. Creating a marketing and sales infrastructure is
expensive and time-consuming and thus could divert resources from other aspects
of our business. In addition, to the extent we enter into co-promotion or other
licensing arrangements, any revenues we receive will be dependent on the efforts
of others, and we cannot be certain that their efforts will be successful.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND ADVISORS.
Our success depends on the key members of our scientific and management
staff. The loss of one or more of these key members could impede our
development objectives. We do not have employment agreements with our
scientific or management staff. Certain key scientific staff members have
entered into scientific advisory consulting agreements with us. However, these
agreements may be terminated at any time by either party.
Our future success also depends on recruiting additional qualified
management, operations and scientific personnel. To pursue our research and
development programs, we will need to hire additional qualified scientists and
managers. There is intense competition for these qualified personnel among
numerous pharmaceutical and biotechnology companies, universities and other
research institutions. We may not be able to continue to attract and retain the
personnel necessary to develop our business. Any failure to attract and retain
key personnel could adversely affect our business
In addition, we rely on the members of our scientific advisory board to
help formulate our research and development strategy. All of our scientific
advisors are employed by others and may have
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commitments to, or consulting contracts with, other entities that may limit
their availability to us. Each scientific advisor has agreed not to perform
services for us that might conflict with services the advisor performs for
another entity. However, a conflict of interest could result from these
services and could adversely affect our business.
WE MAY NOT HAVE ADEQUATE PROTECTION AGAINST PRODUCT LIABILITY.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacture and sale of human healthcare products.
We have limited product liability insurance for our Phase 1/2 human clinical
trial for GENERX-Trademark-. As it becomes necessary, we intend to expand
our insurance coverage to include clinical trials of other products under
development and the manufacture and commercial sale of our potential
products. We may be unable to obtain additional product liability insurance
on commercially acceptable terms. Failure to obtain product liability
insurance or to otherwise protect against product liability claims could
prevent or delay the commercialization of our products. Without insurance or
with inadequate insurance, a successful product liability claim or series of
claims could adversely affect our business. In addition, a product recall
could adversely affect our business.
WE MAY INCUR SUBSTANTIAL COST RELATED TO OUR USE OF HAZARDOUS MATERIALS.
We use hazardous materials in our research and development activities.
As a result, we are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials. The risk of contamination or injury from our activities exists.
For example, if an accident occurs, we could be responsible for any damages
and the amount of the damages could exceed our resources. In addition, we
may incur significant costs to comply with environmental laws and regulations
in the future. Any of these events could adversely affect our business.
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT FLUCTUATIONS.
The market prices and trading volumes for securities of emerging companies
in our industry have historically been highly volatile and have experienced
significant fluctuations. Often, these fluctuations have been unrelated or
disproportionate to the operating performance of companies. The market price of
our common stock may be affected by announcements regarding:
- results of research,
- development testing,
- technological innovations,
- new commercial products,
- government regulation,
- developments concerning proprietary rights,
- litigation,
- public perception regarding the safety of our products or
- securities analysts' expectations.
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Since our common stock is thinly traded, its price can also fluctuate
significantly as a result of large stock transactions. These fluctuations
could adversely affect our profitability and our ability to raise additional
capital and may delay commercialization of our products.
OUR CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO STOCKHOLDERS.
Our charter and bylaws restrict certain actions by our stockholders.
For example:
- Our stockholders can act at a duly called annual or special
meeting but they may not act by written consent;
- Special meetings can only be called by our chief executive officer,
president, or chairman of the board or by our president or secretary
at the written request of a majority of the board of directors; and
- Stockholders also must give advance notice to the secretary of any
nominations for director or other business to be brought by
stockholders at any stockholders' meeting.
Some of these restrictions can only be amended by a super-majority vote of
members of the board and/or the stockholders. These and other provisions of our
charter and bylaws, as well as certain provisions of Delaware law, could prevent
changes in our management and discourage, delay or prevent a merger, tender
offer or proxy contest, even if the events could be beneficial to our
stockholders. These provisions could also limit the price that investors might
be willing to pay for our stock.
In addition, our charter authorizes our board of directors to issue shares
of undesignated preferred stock without stockholder approval on terms that the
board may determine. The issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to our other stockholders or
otherwise adversely affect their rights and powers, including voting rights.
Moreover, the issuance of preferred stock may make it more difficult for another
party to acquire, or may discourage another party from acquiring, voting control
of us.
IF WE FAIL TO BE YEAR 2000 COMPLIANT IT COULD HARM OUR BUSINESS.
We have not fully completed tests to assure that our information technology
systems will function properly in the year 2000. If any key information
technologies or embedded microprocessor technology systems related to our
business and operations are not year 2000 compliant, there could be a material
adverse effect on our business. For further information regarding the status of
our ongoing investigations, related risks, contingency plans and expenses,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Impact of the Year 2000 or Y2K."
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
In light of the intense competition in our industry, we may not
successfully manufacture and market any potential products. We compete with
several different types of entities, including early-stage gene therapy
companies, fully-integrated pharmaceutical companies, universities, research
institutions, governmental agencies and other healthcare providers, as well as
medical device companies.
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A number of companies and institutions are developing technologies,
therapies and/or products that could compete with our potential products. For
example, there are a number of potential gene therapy, cell therapy treatments
and angiogenic protein infusion therapies which could compete with our potential
products. Our products could also compete with drugs or other pharmaceutical
products. In addition, a number of new surgical procedures could compete with
our potential products, including:
- laser-based systems to stimulate angiogenesis in the heart, and
- catheter-based treatments including balloon angioplasty, atherectomy
and coronary stenting.
Many of our competitors have larger research and development staffs and
substantially more financial and other resources. These competitors also have
more experience and capability in researching, developing and testing products
in clinical trials, in obtaining FDA and other regulatory approvals and in
manufacturing, marketing and distribution.
In addition, the competitive positions of other early-stage companies may
be enhanced significantly through their collaborative arrangements with large
pharmaceutical companies, biotechnology companies or academic institutions,
which may be more beneficial than our collaborative arrangements. Our
competitors may succeed in developing, obtaining patent protection for,
receiving regulatory approvals for, or commercializing products at a more rapid
pace. If we are successful in commercializing our products, we will be required
to compete with respect to manufacturing efficiency and marketing capabilities,
areas in which we have no experience.
We also compete with others in acquiring products or technology from
research institutions, universities or others. Our competitors may develop or
acquire new technologies and products that are available for sale before our
potential products or are more effective than our potential products.
Any of these developments could render our potential products less
competitive or obsolete, and could have a material adverse effect on our
business. Further, gene therapy in general is a new and rapidly developing
technology. We expect this technology to undergo significant change in the
future. If there is rapid technological development, our current and future
products or methods may become obsolete before we can successfully commercialize
them.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION IN OUR INDUSTRY AND MAY FAIL
TO RECEIVE REGULATORY APPROVAL.
We and our collaborators are subject to extensive government regulation.
The FDA and foreign regulatory authorities require rigorous preclinical testing,
clinical trials and other product approval procedures. Numerous regulations
also govern the manufacturing, safety, labeling, storage, record keeping,
reporting and marketing of our drug products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
greatly from country to country. The process of obtaining these approvals and
complying with applicable government regulations is time consuming and
expensive. The time required to complete testing and obtain approvals is
uncertain, and approval may not be obtained. If product modification is needed,
the test period could be substantially extended which could adversely affect our
business.
In addition, changes in regulatory policy or additional regulations adopted
during product development could also result in delays or rejections. For
example, gene therapy is relatively new and is
33
<PAGE>
only beginning to be extensively tested in humans. Regulatory authorities
may significantly modify the requirements governing gene therapy.
Even after substantial time and expense, we may not be able to obtain
regulatory product approval by the FDA or any equivalent foreign authorities.
Moreover, the regulatory authorities may require us or our partners to
demonstrate that our products are improved treatments relative to other
therapies. If we obtain regulatory product approval, the approval may limit the
uses for which we may market the product. After regulatory approval is
obtained, our product, its manufacturer and related manufacturing facilities
will be subject to continual review and periodic inspections. Any subsequent
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.
We are 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 present and potential future
federal, state or local laws and regulations. We or our partners may also be
subject to similar regulations in other countries. Failure to comply with such
regulatory requirements or to obtain product approvals could impair our ability
to market our products and adversely affect our business.
RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTY REIMBURSEMENT.
Our commercial success will depend heavily upon whether consumers will be
reimbursed for the use of our products. Third-party payors, such as government
and private insurance plans, may not authorize or otherwise budget reimbursement
for our products. Additionally, third-party payors, including Medicare, are
increasingly challenging the prices charged for medical products and services.
We may be required to provide substantial cost-benefit analysis data to
demonstrate that our products are cost-effective. Third-party payors may not
pay the prices set for our products or reimburse consumers for the use of our
products.
Federal and state regulations also affect the reimbursement to healthcare
providers of fees and capital equipment costs in connection with medical
treatment.
HEALTHCARE REFORM MAY ADVERSELY IMPACT THE COMMERCIALIZATION OF OUR PRODUCTS.
The efforts of governments and third-party payors to contain or reduce the
cost of healthcare will continue to affect our business and financial condition
as a biotechnology company. In foreign markets, pricing or profitability of
medical products and services may be subject to government control. In the
U.S., we expect that there will continue to be federal and state proposals for
government control of pricing and profitability. In addition, increasing
emphasis on managed healthcare has increased pressure on pricing of medical
products and will continue to do so. These cost controls may have a material
adverse effect on our revenues and profitability and may affect our ability to
raise additional capital.
In addition, cost control initiatives could adversely affect our business
in a number of ways, including:
- decreasing the price we, or any of our partners or licensees, receive
for any of our products,
- preventing the recovery of development costs, which could be
substantial, and
- minimizing profit margins.
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<PAGE>
Further, our commercialization strategy depends on our collaborators. As a
result, our ability to commercialize our products and realize royalties may be
hindered if cost control initiatives adversely affect our collaborators.
ITEM 2. PROPERTIES.
During the fiscal year ended December 31, 1998, we occupied approximately
6,000 square feet of administrative facilities in San Diego, California. The
lease for these facilities expired on December 31, 1998. We currently occupy
approximately 17,000 square feet of administrative office space in San Diego,
California. This lease has a six-year term with one five-year renewal option.
In addition, we completed construction of and are currently conducting research
in a new 11,000 square foot preclinical research center in San Diego,
California. This lease has an initial five-year term with two five-year renewal
options. We believe our facilities are adequate to meet our near-term space
requirements. There is currently no reason to believe that suitable additional
space will not be available to us, when needed, on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of filing of this report on Form 10-K, we are not a party to
any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
No matters were submitted to a vote of securities holders during the fourth
quarter of the fiscal year ended December 31, 1998.
OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES
As of March 23, 1999, the following executive officers hold the office
indicated until their successors are chosen and qualified after the next
annual meeting of shareholders
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jack W. Reich, Ph.D......................... 50 Director, President and Chief Executive
Officer and Co-Founder
Christopher J. Reinhard..................... 45 Director, Chief Operating and Chief Financial
Officer and Co-Founder
Tyler M. Dylan, Ph.D., J.D. ................ 37 General Counsel and Corporate Secretary
Jeffrey Friedman, M.D. ..................... 52 Vice President, Development
H. Kirk Hammond, M.D........................ 49 Director, Vice President, Research and
Co-Founder
Victoria E. Lea ............................ 31 Controller
Kathleen E. Rooney.......................... 50 Vice President, Administration
Ruth Wikberg-Leonardi....................... 58 Vice President, Regulatory Affairs and
Quality Assurance
</TABLE>
Jack W. Reich, Ph.D.
Dr. Reich is a cofounder and has served as a director and as President
and Chief Executive Officer since April 1995. In May 1995, Dr. Reich
cofounded MyoTech, Inc., a newly established venture based upon a novel
clinical service model and drug therapy to treat chronic muscle injury, which
was sold in November 1996. From October 1994 to January 1995, Dr. Reich was
Senior Vice President of Enterprise Partners, a Southern California based
venture capital firm that has played a key role in developing biotechnology
and medical technology companies. From September 1987 to October 1994, Dr.
Reich was Vice President, Regulatory Affairs and Quality Operations of
Gensia, Inc., a biopharmaceutical company formed to discover, develop,
manufacture and market novel pharmaceutical products for the diagnosis and
treatment of human disease. Dr. Reich received a B.A. in Biology from
Washington and Jefferson College, a B.S. in Pharmacy from Creighton
University, an M.S. in Hospital Pharmacy Administration from Temple
University and a Ph.D. in Pharmaceuticals-International Pharmaceutical
Administration from Temple University.
Christopher J. Reinhard
Mr. Reinhard is a cofounder and has served as a director and as Chief
Financial Officer since April 1995. He has also served as Chief Operating
Officer since July 1997. From 1990 to 1995, Mr. Reinhard was President of the
Colony Group Inc., a business and corporate development company, and Reinhard
Associates, an investor relations consulting company. From 1986 to 1990, Mr.
Reinhard served as Vice President and Managing Director of the Henley Group,
a diversified industrial and manufacturing group, and as Vice President of
various public and private companies created by the Henley Group, including
Fisher Scientific Group, a leading international distributor of laboratory
equipment and test apparatus for the scientific community, Instrumentations
Laboratory, IMED Corporation, a medical device company, Wheelabrator
Technologies, an energy and environmental services company, and Henley
Properties Inc., a real estate company. From 1980 to 1985, prior to the
formation of the Henley Group, Mr. Reinhard was Assistant Treasurer of the
Signal Companies Inc., which in 1986 was merged with Allied Corporation to
form AlliedSignal, a diversified manufacturing company. Mr. Reinhard received
a B.S. in Finance and an M.B.A. from Babson College.
Tyler M. Dylan, Ph.D., J.D.
Dr. Dylan joined us in November 1998 as General Counsel and was
appointed Corporate Secretary in December 1998. From July 1992 to November
1998, Dr. Dylan was a member of the law firm of Morrison & Foerster LLP and
held positions including Associate, Senior Associate and Partner. Dr. Dylan
has extensive legal experience related to the development, acquisition and
enforcement of intellectual property rights, as well as related business
and transactional issues. In addition, he has a strong scientific
background and in depth experience working with scientists and business
management in biotech and pharmaceutical industries. Dr. Dylan received a
B.Sc. in Molecular Biology from McGill University, Montreal, Canada, a
Ph.D. in Biology from the University of California, San Diego, where he
performed research at the Center for Molecular Genetics, and a J.D. from
the University of California, Berkeley.
Jeffrey Friedman, M.D.
Dr. Friedman joined us in September 1998 as Vice President of
Development. From April 1997 to September 1998, Dr. Friedman was Senior
Director Cardiovascular/Internal Medicine at Knoll Pharmaceutical Company.
From 1992 to 1997 Dr. Friedman held various positions at Gensia, Inc.,
including Division Vice President of Clinical Development and Corporate
Medical Director. Before joining Gensia he held various positions in clinical
research and product development at E.R. Squibb & Sons, Inc. and Wyeth-Ayerst
Research. Dr. Friedman was on the faculty at Cornell University Medical
College prior to joining industry. Dr. Friedman earned a B.S. Degree from the
University of Michigan and an M.D. from the Albert Einstein College of
Medicine.
H. Kirk Hammond, M.D.
Dr. Hammond, our chief scientist, is a cofounder and has served as a
director since April 1995 and as Vice President, Research since April 1995.
Since July 1994, Dr. Hammond has been Associate Professor of Medicine at
UCSD. From 1987 to June 1994, Dr. Hammond was Clinical Assistant Professor of
Medicine at UCSD. Since 1983, Dr. Hammond has been an active basic research
scientist and cardiologist at the San Diego Veterans' Affairs Healthcare
System. Dr. Hammond's laboratory at UCSD has recently focused on the
development of gene therapy to treat cardiovascular disease and Dr. Hammond
was the primary coinventor of the technology that served as the basis for the
formation of Collateral. Dr. Hammond received an M.D. from Indiana University
in 1980 and is board certified in internal medicine (1983) and cardiovascular
diseases (1987).
Victoria E. Lea
Ms. Lea joined us in March 1999 as Controller. From August 1995 to March
1999, she was Finance Manager at Mycogen Corporation, a diversified
agribusiness and biotechnology company. From November 1993 to June 1995, Ms.
Lea was Audit Manager at O'Sullivan Hicks, CPA's. From April 1992 to October
1993, she was Senior Accountant at Price Waterhouse. Ms. Lea is a Certified
Public Accountant and received a Bachelor of Business Administration Degree
with a concentration in accounting from the University of Washington.
Kathleen E. Rooney
Ms. Rooney has served as Vice President, Administration since August
1996. From November 1995 to August 1996, Ms. Rooney was Director of Project
Planning at Sequana Therapeutics Inc., a genomics company focused on
positional cloning and functional assessment of human genes. From October
1987 to November 1995, Ms. Rooney was Director of Project Planning and
Administration at Gensia, coordinating the discovery, development and
manufacturing of several novel drug candidates from preclinical research
through to the submission of NDAs with the FDA. From 1975 to 1987, Ms. Rooney
held various positions at the Scripps Clinic and Research Foundation
including Chief Medical Technologist, Administrative Director of Pathology
Services and Ancillary Services Administrator. Ms. Rooney received a B.S. in
Medical Technology from the University of Wisconsin and an M.B.A. from San
Diego State University.
Ruth Wikberg-Leonardi
Ms. Wikberg-Leonardi has served as Vice President, Regulatory Affairs
and Quality Assurance since May 1996. From March 1991 to May 1995, Ms.
Wikberg-Leonardi was Director of Regulatory Affairs at Gensia. Ms.
Wikberg-Leonardi has 30 years of experience in the pharmaceutical industry,
including 15 years at Kabi, a Swedish pharmaceutical company, with
responsibilities in pharmaceutical drug development and pilot plant
production of tablets, small volume parenterals and oral liquids. Ms.
Wikberg-Leonardi's regulatory affairs responsibilities in Sweden included
work with conventional biologics and drugs such as plasma products, growth
factors and thrombolytics, subsequently working with recombinant DNA products
such as monoclonal antibodies and growth hormone. In the United States, Ms.
Wikberg-Leonardi has spent more than 10 years working in the regulatory area
with recombinant proteins and conventional drugs, obtaining approvals for
products both in Europe and the United States through filing of Marketing
Applications, PLAs and NDAs. Ms. Wikberg-Leonardi received a B.S. in Pharmacy
from Royal Pharmaceutical Institute, Stockholm.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Our common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol CLTX. Our common stock began trading on
July 2, 1998.
Set forth below is the range of high and low closing sale prices for our
common stock for each quarter in the last fiscal year following the July 2, 1998
completion of our initial public offering, as regularly quoted in the Nasdaq
National Market. Such quotations represent inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions. Prior to the initial public offering on July 2, 1998, there was
no established published trading market for our common stock.
<TABLE>
High Low
<S> <C> <C>
Q3 FY 98 $ 8.000 $ 3.750
Q4 FY 98 $ 9.750 $ 2.875
</TABLE>
As of March 12, 1999, there were approximately 700 beneficial
stockholders of our common stock including 75 holders of record. No
dividends have been paid on the common stock since our inception, and we do
not anticipate paying any dividends in the foreseeable future.
(b) We incurred total expenses in our July 8, 1998 public offering of
our common stock of approximately $2,960,000, of which $1,115,400 represented
underwriting discounts and commissions and approximately $1,844,600
represented other expenses. Other expenses include approximately $561,000
that was paid to our general counsel firm. A partner to the general counsel
firm is a member of our board of directors and is a stockholder. Except for
our payment to our general counsel firm, all of such expenses were direct or
indirect payments to entities or persons other than directors, officers or
greater than 10% owners of our equity securities or our affiliates. Our net
offering proceeds after deducting the total expenses were $13.0 million.
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<PAGE>
Since the completion of the public offering in July 1998, the net
offering proceeds have been applied to: approximately $2.6 million in working
capital and general corporate expenditures (including research and
development and loan payments) and towards an approximately $1.9 million
purchase of machinery, equipment and leasehold improvements, $1.0 million of
which was paid by an equipment bank loan. We have temporarily invested the
$9.5 million balance of the offering proceeds in cash equivalents and
short-term investments. The cash equivalents consist primarily of high
credit quality debt instruments of corporations and financial institutions
with maturities of three months or less when purchased. All of the payments
indicated above were direct or indirect payments to entitles or persons other
than: directors, officers, or greater than 10% owners of our equity
securities or our affiliates.
Item 6. Selected Financial Data
The following information has been summarized from the financial
statements included elsewhere in this report and should be read in
conjunction with such financial statements and the related notes (in
thousands except per share amounts):
36
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1995
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1998 1997 1996 1995
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Collaborative revenues from related party:
Ongoing research support....................... $5,403 $3,647 $1,679 $ --
Milestone payments............................. -- 2,000 -- --
Total operating expenses....................... 10,795 6,933 2,094 669
Net loss....................................... (4,904) (1,119) (390) (679)
Net loss per share (Basic and diluted)......... (0.62) (0.24) (0.11) (0.38)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995
-------- --------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments...................................... $15,261 $5,605 $2,430 $107
Working capital.................................. 13,123 7,026 1,917 (175)
Total assets..................................... 19,267 8,070 2,616 122
Long term portion of note payable to related
party including accrued interest................. -- 588 550 511
Long term portion of note payable to bank........ 722 -- -- --
Accumulated deficit.............................. (7,092) (2,188) (1,069) (679)
Total stockholders' equity (deficit)............. 15,887 6,732 1,459 (677)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following comments should be read in conjunction with the Financial
Statements and Notes contained therein. See "Risks and Uncertainties"
regarding certain factors known to the Company that could cause reported
financial information not to be necessarily indicative of future results,
including discussion of the risks related to regulatory approval and
proprietary protection of the Company's gene therapy products, and their
market success relative to alternative products.
OVERVIEW
Collateral is focused on the discovery, development and commercialization
of non-surgical gene therapy products for the treatment of cardiovascular
diseases, including coronary artery disease, peripheral vascular disease,
congestive heart failure and heart attack. The Company believes that its
products under development hold the potential to revolutionize the treatment of
cardiovascular diseases and become a new standard of care by offering patients
simpler, more cost-effective and lower-risk alternatives to currently available
treatments, such as coronary artery bypass surgery, angioplasty and certain
drug therapy. The Company's initial gene therapy products are designed to
promote and enhance angiogenesis, a natural biological process which results in
the growth of additional blood vessels, to restore adequate levels of blood flow
to oxygen-deprived tissues.
The Company entered into a Collaboration, License and Royalty Agreement
dated May 6, 1996 with Schering AG, Germany for angiogenic gene therapy
products. Under this collaboration, Schering AG has made equity investments and
provided loans to the Company. In addition, the collaboration
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<PAGE>
provides for Schering AG, subject to certain conditions, to pay research
support through April 2001, to make additional payments upon satisfying
certain research, development and commercialization milestones and, when and
if angiogenic gene therapy products developed under the collaboration are
commercialized, to make royalty payments to the Company based on worldwide
net sales of such products.
This collaboration has been structured to provide the Company with
financial resources and product development support to enable the Company to
determine the safety and efficacy of certain angiogenic gene therapy
products. However, the timing and amounts of such payments cannot be
predicted with certainty and may not occur if product development milestones
are not achieved. Schering AG has the unilateral right to terminate the
Schering Agreement on 60 days prior written notice to the Company. Upon such
notice, Schering AG is required to pay the Company a termination fee. In
addition, Schering AG would be required to provide the Company with copies of
all Investigational New Drug applications or any other such submissions that
had been filed by Schering AG with all regulatory health authorities with
respect to products covered under the Schering Agreement. The Company would
have the right to reference all such documents.
The Company's revenue to date is primarily attributable to its
collaboration with Schering AG entered into in May 1996. Under this
collaboration, the Company has received aggregate research funding of $12.9
million from May 1996 through December 31, 1998, which included $2.0 million
for the achievement of a milestone relating to the development of
GENERX-Trademark- and $164,000 which was not earned prior to December 31,
1998. From the Company's incorporation in 1995 through December 31, 1998,
collaboration revenues for ongoing research support have trended upward.
Ongoing research revenues for the years ended 1998, 1997 and 1996 were $5.4
million, $3.6 million (excluding the $2.0 million milestone) and $1.7
million, respectively. Related operating expenses have trended upward, since
inception, due to accelerated research and development efforts as the Company
broadened its research in the field of angiogenic gene therapy to include two
additional angiogenic gene therapy products (GENEVX-Trademark- and
GENVASCOR-Trademark-).
Since inception, the Company has also conducted research in the area of
non-surgical cardiovascular gene therapy that is not funded by its collaboration
with Schering AG; accordingly, the Company's operating expenses have exceeded
revenues each year since inception. Losses have resulted principally from costs
incurred in research and development activities related to the Company's efforts
to develop its technologies in the area of non-surgical cardiovascular gene
therapy and from administrative costs required to support such efforts, to the
extent such costs were not covered by the Schering AG collaboration. Losses for
the years ended 1998, 1997 and 1996 were $4.9 million, $1.1 million and
$390,000, respectively.
The Company's losses through December 31, 1998 have been primarily funded
by the Company's initial public offering (with net proceeds of $13.0 million),
the raising of $10.3 million through the private sale of equity securities and
receipt of loans, including $5.7 million in equity investments and $500,000 in
loans from Schering AG, $3.1 million in equity provided by other private
investors, and $1.0 million borrowed from a bank. The Company's ability to
achieve profitability is dependent on its ability to successfully develop its
products and thereafter successfully market such products through current or
future collaborative partners. There can be no assurance that the Company will
be able to achieve profitability at all, or on a sustained basis.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In 1998, the Company completed its initial public offering of 2,200,000
shares of the Company's common stock, providing the Company with proceeds, net
of underwriting fees and offering expenses, of $13.0 million. Through December
31, 1998, the Company financed its operations primarily through the public
offering, private offerings of its equity securities, collaborative research
revenues and loans from Schering AG, a bank loan and from interest income. From
inception through December 31, 1998, the Company raised $13.0 million in net
proceeds from the public offering, an aggregate of $10.3 million through private
sales of equity securities and receipt of loans, including $5.7 million in
equity investments and $500,000 in loans from Schering AG, $3.1 million in
equity provided by other private investors, and $1.0 million borrowed from a
bank. The bank loan was originally entered into on April 6, 1998 to borrow up
to $400,000, and was amended on September 14, 1998 to allow the Company to
borrow up to $1.0 million. The Company began making installment payments under
the agreement in November 1998. The installment payments consist of monthly
principal payments of $18,500 plus accrued interest, and extend through April
2003. The loan bears interest at prime plus 1.25% (9% at December 31, 1998) and
is secured by the equipment and furniture acquired. The loan is subject to
certain covenants including minimum working capital levels and the requirement
that the Company must obtain the lender's consent for certain additional
indebtedness. The $500,000 in loans from Schering AG consists of two promissory
notes issued in 1995 to fund operations. The notes bear interest at 1% below
the prime rate (6.75% at December 31, 1998). Such notes are secured by the
assets of the Company (with the exception of certain equipment purchased from
February 15, 1998 through December 31, 1998, which is pledged on a first
priority basis under the Company's bank loan referred to above). Principal and
interest on these notes are due and payable upon demand on or after June 30,
1999.
In September 1998, the Company announced the termination of its license
agreement with AMRAD Development Pty Ltd, Australia, and The Ludwig Institute
for Cancer Research covering the use of certain VEGF genes. Collateral
determined that its portfolio of angiogenic genes was sufficient to conduct
further research and development of the Company's currently envisioned
non-surgical cardiovascular gene therapy products. By terminating the
agreement the Company eliminated possible future obligations to make
milestone, license, and other payments.
Through December 31, 1998, the Company had acquired an aggregate of $3.8
million in laboratory and office equipment and tenant improvements. The Company
made substantial increases in purchases of property and equipment in 1998
compared to 1997 and prior years. In the second quarter of 1998, the Company
began to occupy a new preclinical research center. In the fourth quarter of
1998, following completion of construction and leasehold improvements, the
Company took occupancy of a larger administrative facility to support
Collateral's expanded research and development activities. The Company expects
capital expenditures to decrease substantially in 1999 compared to 1998 because
the new facilities were completed in 1998. Rent expense related to the
Company's research and administrative facilities has increased substantially
compared to 1997 and prior years, and is expected to continue to increase in
1999. The new preclinical research center is leased for a five-year term with
two five-year renewal options. Rent expense related to the research center is
expected to average $275,000 per year over the initial term. The new
administrative facility is leased for a six-year term with one five-year renewal
option. Rent expense related to the administrative facility is expected to
average approximately $460,000 per year over the initial term.
At December 31, 1998, cash, cash equivalents, and short-term investments
were $15.3 million compared to $5.6 million at December 31, 1997. Increases in
cash included: (1) net proceeds received from the public offering; (2) receipt
of a $2.0 million milestone payment from Schering AG which was
39
<PAGE>
earned by the Company in 1997 upon the achievement of a milestone relating to
the development of GENERX-Trademark- and collected in 1998; (3) net proceeds
from the Company's $1.0 million bank loan used for the purchase of equipment
and furniture for the Company's new preclinical research center and
administrative facilities; and (4) interest income. Increases in cash were
partially offset by purchases of equipment and tenant improvements for the
Company's new preclinical research center and administrative offices, and
were further offset by research and development, and general and
administrative expenses not funded under the Company's collaboration with
Schering AG. The Company generally invests its excess cash in high credit
quality debt instruments of corporations and financial institutions, and in
U.S. government securities. Working capital increased to $13.1 million as of
December 31, 1998, from $7.0 million at the end of 1997, primarily due to the
net proceeds received upon the completion of the Company's offering in July
1998.
The Company has entered into certain technology license agreements in
addition to the Schering Agreement related to the Company's technology portfolio
covering methods of gene therapy, therapeutic genes, and gene delivery vectors.
To retain certain licensing rights under these cancellable agreements, the
Company anticipates that it may be required to make aggregate payments of
approximately $625,000 in 1999.
The Company's core technologies are focused on the development of
non-surgical cardiovascular gene therapy products that promote angiogenesis,
enhance myocardial adrenergic signaling or effect heart muscle regeneration.
The Company has in-licensed certain technology covering proprietary methods
of gene therapy and a portfolio of therapeutic genes for use with such
methods of gene therapy. The Company evaluates on an ongoing basis the
safety, efficacy and commercialization of the therapeutic genes it has
licensed and, based on such evaluations, the Company designates certain genes
for use in the development of each of the Company's non-surgical
cardiovascular gene therapy products. While research is continuing, the
Company has currently designated one gene, fibroblast growth factor-4 ,
licensed from New York University, for use in the development of two
angiogenic gene therapy products: (1) GENERX-Trademark-, a non-surgical
angiogenic gene therapy product as a treatment for patients with stable
exertional angina due to coronary artery disease, and (2)
GENVASCOR-Trademark-, a non-surgical angiogenic gene therapy treatment for
patients with peripheral vascular disease. These are the only angiogenic
gene therapy products currently in development by the Company for which a
specific gene has been designated. Upon any successful commercialization of
these two angiogenic gene therapy products using this designated gene, the
total financial milestone obligations, licensing fees and other related
amounts payable by the Company pursuant to license agreements with New York
University, covering the use of the fibroblast growth factor-4 gene, and the
University of California, covering certain technology relating to methods of
gene therapy, could total up to $5.0 million, including $1.1 million which
has already been paid by the Company as of December 31, 1998. In addition,
upon any successful commercialization of such products, the Company would be
required to make, pursuant to the terms of the license agreements, royalty
payments on worldwide net sales of products that utilize such gene. However,
the Company may, in its sole discretion, change such designated gene at any
time and the license agreement covering such designated gene could be
terminated by the Company and all future financial obligations with respect
to such gene would cease.
In addition to GENERX-Trademark- and GENVASCOR-Trademark-, the Company
has two other non-surgical angiogenic gene therapy products,
GENEVX-Trademark- and GENECOR-Trademark-, which are progressing through the
Company's pre-clinical research. The angiogenic genes to be designated by
the Company for use in development of GENEVX-Trademark- and
GENECOR-Trademark- will not be finalized until the Company has progressed
further in its evaluation process. Based on the Company's currently existing
agreements covering in-licensed technology, including methods of gene therapy
and therapeutic genes, and the successful
40
<PAGE>
commercialization of its non-surgical cardiovascular gene therapy products,
the Company's total financial obligations pursuant to licensing agreements
with respect to all four of its products which are currently beyond the
research stage could range from between $6.9 million to $8.2 million, of
which $2.7 million has been paid through December 31, 1998, depending on the
selections of therapeutic genes for use in the Company's angiogenic gene
therapy products, GENEVX-Trademark- and GENECOR-Trademark-. However, such
amounts could be significantly increased or decreased depending on the
outcome of the Company's research and commercialization activities pursuant
to the collaboration with Schering AG and/or the outcome of the Company's
internally funded research. In addition, the Company would be required to
pay a royalty on worldwide net sales of products that utilize in-licensed
technology. The information set forth above with respect to potential fees
payable by the Company for in-licensed technology involves many variables and
is subject to a high degree of potential variation. The Company may be
required to secure the license rights to certain other methods of gene
therapy, therapeutic genes and vectors based on the Company's product
development and commercialization requirements.
Through December 31, 1998, all revenue received by the Company has been
from its collaboration with Schering AG, and the Company expects that
substantially all revenue for the next several years will continue to come
from the Schering AG and other future collaborations. Under the Schering
agreement, the Company may receive: (i) research and development funding
pursuant to the Schering agreement for an initial product, which amount may
be adjusted to support research and development for additional products
within the field of angiogenic gene therapy, (ii) milestone payments for the
initial product and for each new product based on the Company's achievement
of milestones pertaining to certain regulatory filings and the development
and commercialization of products under the Schering agreement; and (iii)
royalty payments based on worldwide net sales of each product and an
additional supplemental royalty based on worldwide net sales of each product
and the product's cost of goods, up to a maximum specified royalty rate.
There can be no assurance that the Company will be able to establish
additional collaborations on acceptable terms, if at all, or that current or
future collaborations will be successful and provide adequate funding to meet
the Company's needs. Schering AG currently reimburses the Company for all of
its research and development expenses in the angiogenic gene therapy field as
it relates to three angiogenic gene therapy products (GENERX-TM, GENEVX-TM,
and GENVASCOR-TM) and for certain related administrative expenses. The
Company expects to incur increases in operating expenses over the next 24
months as it accelerates its research and development activities consistent
with product development programs and other collaborations into which the
Company may enter. Increases in operating expenses will include, but are not
limited to, increased personnel costs, rent, supplies and other costs which
will result from operating its new facilities. To the extent such costs are
incurred in fields other than angiogenic gene therapy or are otherwise not
reimbursable under the current arrangement with Schering AG, the Company
intends to use proceeds from the public offering completed in July 1998 and
future debt or equity financings to cover such expenses.
Based on the Company's business strategy, the development of
non-surgical cardiovascular gene therapy products will require the continued
commitment of substantial resources by the Company to conduct research,
preclinical studies and clinical trials, and to augment quality control,
regulatory and administrative capabilities. The future capital requirements
of the Company will depend on many factors, including the pace of scientific
progress in its research and development programs, the magnitude of these
programs, the scope and results of preclinical testing and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, competing technological and market developments, the Company's
dependence on third parties for activities related to the development and
commercialization of its potential products (including the ability to
establish additional collaborations and changes to its existing collaboration
with Schering AG), the cost of third-party manufacturing arrangements and the
effectiveness of the Company's commercialization activities. The Company
believes that its available
41
<PAGE>
cash and anticipated sources of funding, including Schering AG, together with
the net proceeds of the public offering, would be adequate to satisfy its
anticipated capital requirements through the second quarter of 2000. The
Company expects that it will seek any additional capital needed to fund its
operations through new collaborations, the extension of its existing
collaboration, or through public or private equity or debt financings. There
can be no assurance that additional financing will be available on acceptable
terms or at all. Any inability to obtain additional financing could have a
material adverse effect on the Company. In addition, so long as certain debt
remains outstanding, the Company must obtain the creditors' consent for
certain additional indebtedness of the Company.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
The Company's total collaborative revenue was $5.4 million for 1998
compared to $5.6 million for 1997. All revenue was derived from the Company's
research and development agreement with Schering AG. Revenue for ongoing
research support increased to $5.4 million in 1998 compared to $3.6 million for
1997. The increase was due to increased costs reimbursable to the Company
resulting from accelerating research and development activities. For 1997,
revenues under the Schering Agreement included $2.0 million that was earned
by the Company upon achievement of a milestone. Research and development
expenses increased to $7.5 million for 1998 compared to $5.2 million for 1997.
The increase resulted from expenses associated with additional research and
development personnel, operation of the Company's new preclinical research
center, amortization of deferred compensation related to stock options, and
increased use of outside research institutions and consultants, partially offset
by reduced license fees incurred by the Company. General and administrative
expenses increased to $3.3 million for 1998 compared to $1.8 million for 1997;
the increase resulted from increased market research and educational materials,
increased expenses for personnel to support expanded research efforts, and
amortization of deferred compensation related to stock options. Interest income
increased to $624,000 for 1998 compared to $205,000 for 1997. The increase was
primarily due to higher average cash balances as a result of the Company's
public offering in July 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company's collaborative revenue was $5.6 million for 1997 compared to
$1.7 million for 1996. Revenue in 1997 and 1996 was derived from the Company's
research and development agreement with Schering AG, which was entered into in
May 1996. Such revenue increased in 1997 compared to 1996 due to (i) $2.0
million earned by the Company upon the achievement of a milestone, (ii)
increased costs reimbursable to the Company resulting from substantially
accelerating research and development activities and (iii) the reimbursement of
costs under the Schering Agreement for a full 12 months. For 1997, research and
development expenses increased to $5.2 million from $1.1 million in 1996. The
increase was due to greater amounts due under license agreements, increased use
of outside research institutions and consultants, additions of research and
development personnel to support expanded research and development programs, and
amortization of deferred compensation related to stock options. General and
administrative expenses increased to $1.8 million in 1997 from $1.0 million in
1996. The increase was primarily attributable to additions to personnel and
related expenses to support expanded research and development programs, and
amortization of deferred compensation related to stock options. Interest income
increased to $205,000 in 1997 from $63,000 in 1996 due to higher average cash
balances.
42
<PAGE>
IMPACT OF THE YEAR 2000 OR Y2K
The Y2K issue refers to the inability of certain date-sensitive computer
chips, software and systems to accept other than two-digit entries in the date
field. As a result, in the Y2K, many systems could mistake "00" for 1900 or any
other incorrect year, resulting in system failures or miscalculations. These
failures or miscalculations could disrupt operations, including manufacturing,
the processing of transactions and other normal business activities. This is a
significant issue for most, if not all companies. The ramifications cannot be
predicted with any degree of certainty. Our failures or the failures of any of
our collaborators, clinical trial sites, suppliers or any other third parties'
computers systems could have a material adverse impact on our operations.
STATE OF READINESS. We recognize the need to minimize the potential
adverse impact of Y2K issues on our operations. We anticipate completing our
efforts in this regard by the end of the first quarter of 1999. We have
developed a three-phase program for Y2K systems compliance. The first phase is
to assess our key systems for Y2K readiness. This phase includes assessing the
impact of third parties whose systems may not be Y2K compliant. The second
phase involves the testing of key systems for Y2K deficiencies. The final phase
involves the development of contingency plans for unresolved Y2K deficiencies,
such as our suppliers and service providers failing to adequately address their
Y2K problems.
ASSESSMENT. Since we are a relatively new company, the majority of our
information technology and non-information technology systems were acquired
during 1998. We have purchased only well-known hardware and software believed
to be Y2K compliant. We do not develop or customize any key software. To
further confirm the readiness of critical systems, we obtained documentation
from hardware and software manufacturers. This documentation indicated that all
such systems were Y2K compliant. Our main systems do not interface directly
with those of third parties. We have contacted and will continue to contact key
suppliers of goods and services to assess their readiness. However, we are
unable to control whether our current and future collaborative partners',
clinical trial sites', or suppliers' systems are Y2K compliant. The assessment
phase is expected to be complete at the end of the first quarter of 1999.
TESTING. We are testing our workstations in a Y2K environment to ensure
systems perform properly. However, we do not intend to test recently
purchased software and hardware that have been certified as Y2K compliant by
the manufacturers. The testing phase of our Y2K evaluation is expected to
be fully complete at the end of the first quarter of 1999.
COSTS TO ADDRESS OUR Y2K ISSUES. We are expensing Y2K compliance costs as
incurred. We do not expect these costs to be material to our financial position
or results of operations. To date the costs related to Y2K issues have been
minimal, consisting only of time spent by existing personnel to review systems,
to obtain documentation, and to carry out other procedures discussed above. We
have not needed to incur capital expenditures to address Y2K problems. We
expect our total cost of reviewing and obtaining Y2K compliance to be less than
$25,000. This estimate is based on currently available information and will be
updated as we continue our assessment of third party relationships, proceed with
our testing and implementation, and design contingency plans.
THE RISKS OF OUR Y2K ISSUES. If any key information technologies or
embedded microprocessor technology systems are overlooked, there could be a
material adverse effect on our business. For example, our operations could be
adversely affected to the extent that our suppliers, collaborators, or clinical
trial sites are adversely affected by Y2K.
43
<PAGE>
Further, if our vendors or the suppliers of our necessary energy,
telecommunications and transportation needs fail to provide us with (1) the
materials and services which are necessary to develop our products, (2) the
electrical power and other utilities necessary to sustain our operations, or (3)
reliable means of transporting supplies to us, such failure could have a
material adverse effect on our business.
OUR CONTINGENCY PLAN. Our contingency plan includes identifying
alternatives for all key laboratory suppliers and services. Further, we
maintain a short-term back-up power generation system for key scientific
equipment at our preclinical research center. The back-up power system is
expected to be adequate to sustain our preclinical research center for at
least several days. However, we do not maintain a back-up power generation
system for our administrative office. Although our contingency plan is
essentially complete, we intend to update it on an ongoing basis as needed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements on page F-1 below for a list of the
financial statements being filed herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required by this item, with the exception of information on
our executive officers, is incorporated by reference from the Proxy Statement
in the sections entitled "Election of Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934". The balance of the response to
this item regarding information on our executive officers is contained in the
discussion entitled "Executive Officers and Key Employees" in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Executive Compensation and Other
Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Proxy Statement in the section entitled "Ownership of Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Certain Relationships and Related
Transactions."
44
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) See Index to Financial Statements on page F-1 below for a
list of the financial statements being filed herein.
(a)(2) Index to Financial Statements
None required.
(a)(3) See Exhibits below for all Exhibits being filed or incorporated
by reference herein.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---------- ---------------------------------------------------------------
<S> <C>
3.1 (1) Our Second Restated Certificate of Incorporation.
3.2 (2) Our Restated Bylaws.
4.1 (2) Form of the Certificate for common stock.
10.1 (2) Form of Restricted Stock Issuance Agreement between the Company
and certain individuals listed on the attached schedule.
10.2 (2) Form of Stock Issuance Agreement between the Company and
certain individuals listed on the attached schedule.
10.3 (2) Preferred Stock Purchase Agreement between the Company and
Schering AG Berlin Venture Corp., dated May 7, 1996.
10.4 (2) Series C Preferred Stock Purchase Agreement by and among the
Company and the investors listed on Schedule A thereto, dated
June 30, 1997.
10.5 (2) Amended and Restated Investors' Rights Agreement by and among
the Company and the investors listed on Schedule A thereto,
dated June 30, 1997.
10.6 (2) Amended and Restated Co-Sale Agreement by and among the Company
and the individuals listed on Schedule A thereto, dated
June 30, 1997.
10.7 (2) Security Agreement between the Company and Schering AG Berlin
Venture Corp., dated August 16, 1995.
10.8 (2) Amended and Restated Promissory Note between the Company and
Schering AG, dated August 16, 1995, as amended May 16, 1996.
10.9 (2) Amended and Restated Promissory Note between the Company and
Schering AG, dated October 12, 1995, as amended May 16, 1996.
10.10 (2) Side Letter between the Company and Schering AG Berlin Venture
Group, dated May 6, 1996.
10.11 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Angiogenesis Gene
Therapy, dated September 27, 1995, as amended.
10.12 (2) Collaboration, License and Royalty Agreement between Schering
AG and the Company, dated May 6, 1996.
10.13 (2) License Agreement by and among Dimotech Ltd., Gera Neufeld and
the Company, dated October 17, 1996.
10.14 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Gene Therapy for
Congestive Heart Failure, dated January 22, 1997.
10.15 (2) Agreement between New York University and the Company, dated
March 24, 1997, as amended.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ---------------------------------------------------------------
<S> <C>
10.16 (2) License Agreement by and among AMRAD Developments Pty. Ltd.,
Ludwig Institute for Cancer Research and the Company, dated
March 25, 1997.
10.17 (2) Research Agreement between the University of Washington and the
Company, dated April 21, 1997, as amended.
10.18 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Angiogenic Gene
Therapy for Congestive Heart Failure, dated June 18, 1997.
10.19 (2) Letter Agreement between the Company and Veterans Medical
Research Foundation, dated August 13, 1997.
10.20 (2) Sponsored Research Contract between the Curators of The
University Of Missouri and the Company, dated October 22, 1997,
as amended.
10.21 (2) Biological Materials Agreement between Targeted Genetics
Corporation and the Company, dated January 26, 1998.
10.22 (2) Research Agreement between The Regents of the University of
California and the Company, dated February 23, 1998.
10.23 (2) Letter Agreement between the Company and Veterans Medical
Research Foundation, dated March 20, 1998.
10.24 (2) Sublease Agreement between the Company and Gensia, Inc., dated
June 15, 1995, as amended.
10.25 (2) Standard Industrial/Commercial Multi-Tenant Lease-Modified Net
between the Company and ARE 11025 Roselle Street, LLC, dated
November 24, 1997, as amended.
10.26 (2) Torrey Reserve Office Lease between Pacific Torrey Reserve
Holding, L.P. and the Company dated April 7, 1998.
10.27 (2) Form of Scientific Advisor Consulting Agreement between the
Company and certain individuals listed on the attached
schedule.
10.28 (2) Form of Scientific Advisory Board Agreement between the Company
and certain individuals listed on the attached schedule.
10.29 (2) Form of Consulting Agreement between the Company and certain
individuals listed on the attached schedule.
10.30 (2)(3) 1995 Stock Option/Stock Issuance Plan.
10.31 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.32 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Stock Option
Agreement.
10.33 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.34 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock
Issuance Agreement.
10.35 (2)(3) 1998 Stock Incentive Plan.
10.36 (2)(3) 1998 Stock Incentive Plan Form of Notice of Grant.
10.37 (2)(3) 1998 Stock Incentive Plan Form of Stock Option Agreement.
10.38 (2)(3) 1998 Stock Incentive Plan Form of Stock Issuance Agreement.
10.39 (2)(3) 1998 Employee Stock Purchase Plan.
10.40 (2)(3) Form of Indemnification Agreement between the Company and each
of its directors.
10.41 (2)(3) Form of Indemnification Agreement between the Company and each
of its officers.
10.42 (2)(4) Credit Agreement between the Company and Imperial Bank, dated
April 30, 1998, as amended on September 14, 1998 (Exhibit 10.1).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ---------------------------------------------------------------
<S> <C>
10.43 (4)(3) Employment Offer Letter for at will employment of Jeffrey
Friedman, to be effective September 1998 (Exhibit 10.2).
10.44 (3) Employment Offer Letter for at will employment of Tyler Dylan,
to be effective November 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included under the caption "Signatures").
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to exhibits filed with our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, filed on August 6, 1998.
(2) Incorporated by reference to the same numbered exhibits (unless otherwise
indicated) filed with our Registration Statement on Form S-1, File
No. 333-51029, as amended.
(3) Management contract or compensation plan.
(4) Incorporated by reference to the exhibits set forth above filed with our
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
filed on November 10, 1998.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this Item are listed
under Item 14(a)(2).
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.
COLLATERAL THERAPEUTICS, INC.
<TABLE>
<S> <C>
By: /s/ JACK W. REICH Date: March 31, 1999
-------------------------
Chief Executive Officer
By: /s/ CHRISTOPHER J. REINHARD Date: March 31, 1999
-------------------------------------
Chief Operating and Chief Financial
Officer
</TABLE>
47
<PAGE>
POWER OF ATTORNEY
Know all men by these present, that each person whose signature appears below
constitutes and appoints Jack W. Reich or Christopher J. Reinhard, his
attorney-in-fact, with power of substitution in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
the attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JACK W. REICH Director, President March 31, 1999
--------------------------- and Chief Executive
(Jack W. Reich) Officer (Principal
Executive Officer)
/s/ CHRISTOPHER J. REINHARD Director, Chief March 31, 1999
--------------------------- Operating and Chief
(Christopher J. Reinhard) Financial Officer
(Principal Financial
and Accounting Officer)
/s/ CRAIG S. ANDREWS Director March 31, 1999
---------------------------
(Craig S. Andrews)
/s/ ROBERT L. ENGLER Director March 31, 1999
---------------------------
(Robert L. Engler)
/s/ H. KIRK HAMMOND, M.D. Director, Vice March 31, 1999
--------------------------- President, Research
(H. Kirk Hammond, M.D.)
/s/ ELISE G. KLEIN Director March 31, 1999
---------------------------
(Elise G. Klein)
/s/ DAVID E. ROBINSON Director March 31, 1999
---------------------------
(David E. Robinson)
/s/ DAVID F. HALE Director March 31, 1999
---------------------------
(David F. Hale)
</TABLE>
48
<PAGE>
COLLATERAL THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F - 2
Statements of Operations F - 3
Balance Sheets F - 4
Statement of Stockholders' Equity F - 5
Statements of Cash Flows F - 6
Notes to Financial Statements F - 7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Collateral Therapeutics, Inc.
We have audited the accompanying balance sheets of Collateral Therapeutics,
Inc. as of December 31, 1998 and 1997 and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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 evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Collateral Therapeutics,
Inc. at December 31, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 12, 1999
F-2
<PAGE>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues under collaborative research and
development agreement with a related party:
Ongoing research support $5,403,481 $3,647,189 $1,679,462
Milestone payments - 2,000,000 -
Expenses:
Research and development 7,451,307 5,164,982 1,142,669
General and administrative 3,343,260 1,767,632 951,239
---------- ---------- ----------
Total operating expenses 10,794,567 6,932,614 2,093,908
---------- ---------- ----------
Loss from operations (5,391,086) (1,285,425) (414,446)
Interest income 624,259 204,570 63,188
Interest expense (75,475) (37,741) (38,750)
Other expense (62,087) - -
---------- ---------- ----------
Net loss $(4,904,389) $(1,118,596) $(390,008)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share (Basic and diluted) $(0.62) $(0.24) $(0.11)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares used in
computing net loss per share
(Basic and diluted) 7,968,260 4,651,094 3,599,371
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
COLLATERAL THERAPEUTICS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,041,777 $5,605,361
Short-term investments 1,219,385 -
Milestone receivable from a related party - 2,000,000
Prepaid expenses and other current assets 519,848 170,951
----------- ----------
Total current assets 15,781,010 7,776,312
Restricted cash - noncurrent 72,600 -
Property and equipment, net 3,413,127 293,447
----------- ----------
$19,266,737 $8,069,759
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 858,819 $476,111
Accrued expenses 787,917 119,348
Notes payable to a related party,
including accrued interest 624,385 -
Note payable to bank, current portion 222,222 -
Deferred revenue 164,232 155,043
----------- ----------
Total current liabilities 2,657,575 750,502
Note payable to bank, net of current portion 722,222 -
Notes payable to a related party, including
accrued interest - 587,553
Stockholders' equity:
Preferred Stock, par value $.001; 5,000,000 shares authorized at
December 31, 1998, no shares issued and outstanding................. - -
Series A Convertible Preferred Stock, par value $.001; 0 and 374,532
shares authorized, issued and outstanding at December 31, 1998
and 1997, respectively.............................................. - 375
Series B Convertible Preferred Stock, par value $.001; 0 and 374,532
shares authorized, issued and outstanding at December 31, 1998
and 1997, respectively.............................................. - 375
Series C Convertible Preferred Stock, par value $.001; 0 and 472,476
shares authorized, issued and outstanding at December 31, 1998
and 1997, respectively.............................................. - 472
Common Stock, par value $.001; 40,000,000 shares authorized;
10,521,903 and 5,971,647 shares issued and outstanding at
December 31, 1998 and 1997, respectively............................ 10,522 5,972
Additional paid-in capital 24,124,429 9,900,789
Deferred compensation (986,062) (838,206)
Note receivable secured by common stock (165,000) (150,000)
Accumulated other comprehensive loss (4,487) -
Accumulated deficit (7,092,462) (2,188,073)
----------- ----------
Total stockholders' equity 15,886,940 6,731,704
----------- ----------
$19,266,737 $8,069,759
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
COLLATERAL THERAPEUTICS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------- -------------------------
Shares Amount Shares Amount
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........................... - $ - 5,215,120 $5,215
Issuance of Series A Convertible
Preferred Stock.................................... 374,532 375 - -
Issuance of Common Stock............................. - - 206,530 207
Stock options exercised.............................. - - 467,400 467
Net Loss............................................. - - - -
---------- -------- ---------- ---------
Balance at December 31, 1996........................... 374,532 375 5,889,050 5,889
Issuance of Series B Convertible
Preferred Stock.................................... 374,532 375 - -
Issuance of Series C Convertible
Preferred Stock net of expenses of $76,539......... 472,476 472 - -
Stock options exercised.............................. - - 82,597 83
Deferred compensation related
to stock options................................... - - - -
Amortization of deferred compensation................ - - - -
Note receivable secured by Common Stock.............. - - - -
Net Loss............................................. - - - -
---------- -------- ---------- ---------
Balance at December 31, 1997........................... 1,221,540 1,222 5,971,647 5,972
Conversion of Preferred Stock to Common Stock........ (1,221,540) (1,222) 2,320,926 2,321
Common Stock issued in Initial Public Offering....... - - 2,200,000 2,200
Stock options exercised.............................. - - 29,330 29
Deferred compensation related to stock options....... - - - -
Amortization of deferred compensation................ - - - -
Interest on note receivable secured by Common Stock.. - - - -
Net loss............................................. - - - -
Unrealized loss on short-term investments............ - - - -
Comprehensive loss................................... - - - -
---------- -------- ---------- ---------
Balance at December 31, 1998........................... - $ - 10,521,903 $ 10,522
---------- -------- ---------- ---------
---------- -------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Other Total
Additional Note Receivable Comprehensive Stockholders'
Paid-in Deferred Secured by Income Accumulated Equity
Capital Compensation Common Stock (Loss) Deficit (Deficit)
----------- ------------ --------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......... $(2,470) $ - $ - $ - $(679,469) $(676,724)
Issuance of Series A Convertible
Preferred Stock................... 2,499,625 - - - - 2,500,000
Issuance of Common Stock............ 880 - - - - 1,087
Stock options exercised............. 24,133 - - - - 24,600
Net Loss............................ - - - - (390,008) (390,008)
----------- ---------- --------- ------- ---------- ----------
Balance at December 31, 1996.......... 2,522,168 - - - (1,069,477) 1,458,955
Issuance of Series B Convertible
Preferred Stock................... 2,499,625 - - - - 2,500,000
Issuance of Series C Convertible
Preferred Stock net of expenses
of $76,539........................ 3,702,797 - - - - 3,703,269
Stock options exercised............. 18,789 - - - - 18,872
Deferred compensation related
to stock options.................. 1,157,410 (1,157,410) - - - -
Amortization of deferred
compensation...................... - 319,204 - - - 319,204
Note receivable secured
by Common Stock................... - - (150,000) - - (150,000)
Net Loss............................ - - - - (1,118,596) (1,118,596)
----------- ---------- --------- ------- ---------- ----------
Balance at December 31, 1997.......... 9,900,789 (838,206) (150,000) - (2,188,073) 6,731,704
Conversion of Preferred Stock to
Common Stock...................... (1,099) - - - - -
Common Stock issued in
Initial Public Offering........... 12,988,754 - - - - 12,990,954
Stock options exercised............. 7,675 - - - - 7,704
Deferred compensation related
to stock options.................. 1,228,310 (1,228,310) - - - -
Amortization of deferred
compensation...................... - 1,080,454 - - - 1,080,454
Interest on note receivable
secured by Common Stock........... - - (15,000) - - (15,000)
Net loss............................ - - - - (4,904,389) (4,904,389)
Unrealized loss on short-term
investments....................... - - - (4,487) - (4,487)
----------
Comprehensive loss.................. - - - - - (4,908,876)
----------- ---------- --------- ------- ---------- ----------
Balance at December 31, 1998.......... $24,124,429 $ (986,062) $(165,000) $ (4,487) $ (7,092,462) $15,886,940
----------- ---------- --------- ------- ---------- ----------
----------- ---------- --------- ------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,904,389) $(1,118,596) $(390,008)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 369,954 144,107 14,299
Amortization of deferred compensation 1,080,454 319,204 -
Changes in operating assets and liabilities:
Milestone receivable from a related party 2,000,000 (2,000,000) -
Prepaid expenses and other current assets (348,897) (76,378) (88,912)
Accounts payable and accrued expenses 1,088,108 240,953 143,254
Deferred revenue 9,189 (59,689) 214,732
Restricted cash (72,600) - -
Other 46,061 - -
----------- ----------- ---------
Net cash used in operating activities (732,120) (2,550,399) (106,635)
INVESTING ACTIVITIES:
Purchases of property and equipment (3,574,824) (346,038) (96,504)
Purchases of short-term investments (1,219,385) - -
Other 19,642 - -
----------- ----------- ---------
Net cash used in investing activities (4,774,567) (346,038) (96,504)
FINANCING ACTIVITIES:
Proceeds from common stock, net 12,990,954 - 1,087
Issuance of Series A convertible preferred stock - - 2,500,000
Issuance of Series B convertible preferred stock - 2,500,000 -
Issuance of Series C convertible preferred stock - 3,703,269 -
Proceeds from exercise of stock options 7,704 18,872 24,600
Proceeds from note payable to bank 1,000,000 - -
Payments on note payable to bank (55,555) - -
Issuance of note receivable secured by
common stock - (150,000) -
----------- ----------- ---------
Net cash provided by financing activities 13,943,103 6,072,141 2,525,687
----------- ----------- ---------
Net increase in cash
and cash equivalents 8,436,416 3,175,704 2,322,548
Cash and cash equivalents at
beginning of the year 5,605,361 2,429,657 107,109
----------- ----------- ---------
Cash and cash equivalents at end of the year $14,041,777 $5,605,361 $2,429,657
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Collateral Therapeutics, Inc. (the "Company") is focused on the
discovery, development and commercialization of non-surgical gene therapy
products for the treatment of cardiovascular diseases, including coronary
artery disease, peripheral vascular disease, congestive heart failure and
heart attack. The Company intends to focus on research and development of
products while leveraging its technology through the establishment of product
development, manufacturing and marketing collaborations with select
pharmaceutical and biotechnology companies. The Company was incorporated in
California on April 3, 1995 and reincorporated in Delaware on May 28, 1998.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid debt instruments.
Management has classified the Company's short-term investments as
available-for-sale securities in the accompanying financial statements.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity. The Company considers instruments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company generally invests its excess cash in high credit quality
debt instruments of corporations and financial institutions, and in U.S.
government securities. Such investments are made in accordance with the
Company's investment policy, which establishes guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company has not realized any losses
on its cash, cash equivalents and short-term investments.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets, ranging from three years to five years,
using the straight-line method. Leasehold improvements are stated at cost
and amortized over the shorter of the estimated useful lives of the assets or
the lease term.
REVENUE RECOGNITION
The Company currently generates substantially all of its revenue through
a collaborative research and development agreement with a related party
(Note 3). Amounts received in advance for funding of research and development,
which are not refundable, are deferred. Such amounts are recognized as
revenue when the related reimbursable expenses are incurred and the Company
has no future performance obligations. The Company is also entitled to
milestone and royalty payments upon attaining contract specified conditions.
These amounts are recognized upon satisfaction of the specified conditions
when the Company has no further performance obligations.
F-7
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as
incurred. The Company generally expenses amounts paid to obtain patents or
acquire licenses, as the ultimate recoverability of the amounts paid is
uncertain.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS 123"), establishes the use of the fair value
based method of accounting for stock-based compensation arrangements, under
which compensation cost is determined using the fair value of stock-based
compensation determined as of the grant date, and is recognized over the
periods in which the related services are rendered. SFAS 123 also permits
companies to elect to continue using the implicit value accounting method
specified in Accounting Principles Board Opinion No. 25 to account for
stock-based compensation related to option grants and stock awards to
employees. The Company has elected to retain the implicit value based method
for such grants and awards, and has disclosed the pro forma effect of using
the fair value based method to account for its stock-based compensation (Note
6). Option grants to non-employees are valued using the fair value based
method prescribed by SFAS 123 and expensed over the period services are
provided.
NET LOSS PER SHARE
The Company computes net loss per common share in accordance with
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128").
SFAS 128 requires the presentation of basic and diluted income (loss) per
share amounts. Basic income (loss) per share is calculated based upon the
weighted average number of common shares outstanding during the period while
diluted income per share also gives effect to all potential dilutive common
shares outstanding during the period such as options, warrants, convertible
securities, and contingently issuable shares. All potential dilutive common
shares have been excluded from the calculation of loss per share as their
inclusion would be anti-dilutive.
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, SEGMENT INFORMATION
("SFAS 131").
SFAS 130 requires that all components of comprehensive income (loss),
including net income (loss), be reported in the financial statements in the
period in which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income and other comprehensive
income, including foreign currency translation adjustments, and unrealized
gains and losses on investments, shall be reported, net of their related tax
effect, to arrive at comprehensive income. The Company has included
unrealized losses on the Company's available-for-sale securities in
comprehensive loss, on its statement of stockholders' equity.
F-8
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS 131, are components of an
enterprise for which separate financial information is available and is
evaluated regularly by the Company in deciding how to allocate resources and
in assessing performance. The financial information is required to be
reported on the basis that is used internally for evaluating segment
performance. The Company operates in one business and operating segment and
adoption of SFAS 131 has not had an impact on the Company's financial
statements.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
2. BALANCE SHEET INFORMATION
SHORT-TERM INVESTMENTS
The Company classifies its investment securities as available-for-sale
and includes unrealized gains or losses as a component of stockholders'
equity.
The following is a summary of available-for-sale securities, all of
which are due in one year or less:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE
--------- ----------- -----------
<S> <C> <C> <C>
Corporate debt securities.......................... $1,223,872 $4,487 $1,219,385
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
Proceeds from the sales of available-for-sale securities and gross
realized gains and losses on available-for-sale securities were immaterial
during the year ended December 31, 1998.
F-9
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. BALANCE SHEET INFORMATION (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Laboratory equipment........................ $ 982,394 $ 110,908
Computer equipment.......................... 311,676 111,881
Furniture and office equipment.............. 1,095,092 178,067
Leasehold improvements...................... 1,457,574 52,440
----------- ---------
3,846,736 453,296
Accumulated depreciation
and amortization........................ (433,609) (159,849)
----------- ---------
$ 3,413,127 $ 293,447
----------- ---------
----------- ---------
</TABLE>
3. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT WITH RELATED PARTY
In May 1996, the Company entered into a collaboration, license and
royalty agreement (the "Schering Agreement") with Schering AG, Germany
("Schering AG") which established a strategic alliance covering the
development and commercialization of gene therapy products to promote
angiogenesis. Under the Schering Agreement, the Company agreed to conduct
research and development in the field of gene therapy to promote angiogenesis
solely with Schering AG during the term of the Schering Agreement. The
Company granted Schering AG an exclusive worldwide license to all rights to
the Company's technology in the field of angiogenic gene therapy and to
certain other rights to technology developed by the Company with funding
support from Schering AG during the five-year research and development
program under the Schering Agreement. In exchange for such rights, Schering
AG agreed to: (i) purchase up to $5.0 million of the Company's preferred
stock in 1996 and 1997; (ii) pay the Company up to $5.0 million annually to
support the Company's research and development pursuant to the Schering
Agreement for an Initial Product (as defined therein), which amount may be
adjusted to support research and development for additional products within
the field of angiogenic gene therapy; (iii) pay the Company milestone
payments totaling up to $20.5 million for the Initial Product and for each
New Product (each as defined therein) based on the Company's achievement of
milestones pertaining to certain regulatory filings and the development and
commercialization of products under the Schering Agreement; and (iv) pay the
Company a royalty based on worldwide net sales of each product and to pay an
additional supplemental royalty based on worldwide net sales of each product
and the product's cost of goods, up to a maximum specified royalty rate. To
date, substantially all revenue received by the Company has been from its
collaboration with Schering AG. Schering AG may terminate the collaborative
agreement upon 60 days' written notice and payment of a termination fee to
the Company.
F-10
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT WITH RELATED PARTY
(CONTINUED)
In 1998, 1997 and 1996 the Company's revenues under the agreement were
$5.4 million, $5.6 million (including $2.0 million for the achievement of a
milestone) and $1.7 million respectively, and the Company had $164,000,
$155,000 and $215,000 recorded as deferred revenue at December 31, 1998, 1997
and 1996, respectively.
In 1995, the Company entered into two promissory notes with Schering
totaling $500,000 to fund operations. Principal and interest on the notes are
due and payable upon demand on or after June 30, 1999. The notes bear
interest at 1% below the prime rate; at December 31, 1998, the notes bore
interest at 6.75%. Such notes are secured by the assets of the Company (with
the exception of certain equipment purchased from February 15, 1998 through
December 31, 1998 which is pledged on a first priority basis under the
Company's $1.0 million bank loan referred to in Note 5).
4. COMMITMENTS
LEASES
In April 1998, the Company entered into a multi-year operating lease for
administrative facilities, and lease payments commenced on occupancy of the
facilities in December 1998. Terms of the lease include renewal options,
payment of executory costs such as real estate taxes, insurance, and common
area maintenance, and escalation clauses. The Company previously leased its
administrative facilities under an operating lease which expired in December
1998.
In December 1997, the Company entered into a multi-year operating lease
for research facilities commencing April 15, 1998, terms of which include
renewal options, payment of executory costs such as real estate taxes,
insurance, and common area maintenance, and escalation clauses. Additionally,
the Company is required to maintain restricted cash balances totaling $72,600
on behalf of the landlord as rent deposits through the end of the lease term
(April 2003).
Annual future minimum lease obligations for operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31: LEASES
------------------------ -----------
<S> <C>
1999................................. $ 723,000
2000................................. 742,000
2001................................. 756,000
2002................................. 764,000
2003................................. 557,000
Thereafter 482,000
----------
Total $4,024,000
----------
----------
</TABLE>
F-11
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
COMMITMENTS (CONTINUED)
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$325,000, $106,000 and $91,000, respectively.
LICENSE AND RESEARCH AGREEMENTS
In connection with certain license and research agreements, the Company
recognized expenses of $2,023,000, $3,108,000 and $379,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The fees were charged
to research and development expense. The Company has future non-cancelable
commitments to pay fees totaling $200,000 in 1999 under a research and
development contract. Additionally, the Company is obligated to pay royalties
upon commercial sales, if any, of certain products.
5. NOTE PAYABLE
On April 6, 1998 the Company entered into a loan and security agreement
with a bank to borrow up to $400,000, which was amended on September 14, 1998
to allow the Company to borrow up to $1.0 million to acquire equipment and
furniture. The Company borrowed the full $1.0 million, and in accordance
with the agreement, began making installment payments in November 1998. The
installment payments consist of monthly principal payments of $18,500 plus
accrued interest, and extend through April 2003. The loan bears interest at
prime plus 1.25% (9% at December 31, 1998) and is secured by the equipment
and furniture acquired. The loan is subject to certain covenants including
minimum working capital levels and the requirement that the Company must
obtain the lenders' consent for certain additional indebtedness.
6. SHAREHOLDERS' EQUITY
REINCORPORATION AND STOCK SPLIT
On May 28, 1998, the Company reincorporated in Delaware. The number of
authorized shares of the new Delaware corporation are 40,000,000 shares of
common stock ($0.001 par value) and 5,000,000 shares of Preferred Stock
($0.001 par value). Additionally, on May 29, 1998, the Company effected a
1.9-for-one stock split of the Company's common stock. All shares and per
share amounts and stock option data have been retroactively restated in these
financial statements to give effect to the reincorporation and the stock
split.
COMMON STOCK
In connection with certain stock purchase agreements with employees and
consultants, and options exercised under the 1995 stock option plan, the
Company has the option to repurchase, at the original issue price, unvested
shares in the event of termination of employment or engagement. Shares
issued under these agreements generally vest over three or four years. At
December 31, 1998, 88,905 shares were subject to repurchase by the Company.
F-12
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
In May 1996, the Company issued 374,532 shares of Series A Preferred
Stock to Schering AG at $6.675 per share, for total proceeds of $2,500,000.
In June 1997, the Company issued 374,532 shares of Series B Preferred Stock
to Schering AG at $6.675 per share, for total proceeds of $2,500,000. Also in
June 1997, the Company issued 472,476 shares of Series C Preferred Stock,
including 84,976 to Schering AG, at $8.00 per share, for net proceeds of
$3,703,269.
In conjunction with the completion of the Company's initial public
offering on July 2, 1998, the Preferred Stock was converted, on a 1.9-for-one
basis, into shares of the Company's common stock.
EMPLOYEE STOCK PURCHASE PLAN
In April 1998, the Company adopted the 1998 Employee Stock Purchase
Plan. A total of 50,000 shares of common stock have been authorized and
reserved for issuance under this Purchase Plan. The Purchase Plan permits
all eligible employees to purchase common stock through payroll deductions
(which cannot exceed 10% of each employee's compensation) at the lower of 85%
of fair market value at the beginning of a twenty-four month offering period
or the end of each six-month purchase period. During 1998, no shares were
issued under the Purchase Plan.
STOCK OPTIONS
In November 1995, the Company adopted a stock option plan (the
"Predecessor Plan"), under which 1,011,248 shares of common stock were
reserved for issuance upon exercise of options granted by the Company. In
June 1997, the number of shares reserved for issuance under this plan was
increased to 1,346,832 shares. The stock option plan provides for the grant
of incentive and nonstatutory options. The exercise price of incentive stock
options must equal at least the fair value on the date of grant, and the
exercise price of nonstatutory stock options may be no less than 85% of the
fair value on the date of grant. The options are immediately exercisable for
a period of up to ten years after the date of grant and vest over either
three or four year periods from the date of grant. Unvested common shares
obtained upon early exercise of options are subject to repurchase by the
Company at the original issue price.
In April 1998, the Company adopted the 1998 Stock Incentive Plan (the
"1998 Plan") that serves as the successor equity incentive program to the
Predecessor Plan. A total of 2,296,835 shares of common stock have been
authorized for issuance under the 1998 Plan. Outstanding options and unvested
shares issued under the Predecessor Plan have been incorporated into the 1998
Plan, and no further option grants will be made under the Predecessor Plan.
The incorporated options will continue to be governed by their existing
terms, unless the Plan Administrator elects to extend one or more features of
the 1998 Plan to those options. After giving effect to the 1,743,770 options
granted and outstanding and the 29,330 options granted and exercised, 523,735
options remain available for future grant under the 1998 Plan.
F-13
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ------------
<S> <C> <C>
Balance at December 31, 1995....................... 278,350 $ .03
Granted....................................... 604,200 $ .13
Exercised..................................... (467,400) $ .05
Cancelled..................................... -- $ --
----------
Balance at December 31, 1996....................... 415,150 $ .14
Granted....................................... 330,600 $ .47
Exercised..................................... (82,597) $ .23
Cancelled..................................... (3,853) $ .10
----------
Balance at December 31, 1997....................... 659,300 $ .30
Granted....................................... 1,256,300 $ 5.03
Exercised..................................... (29,330) $ .26
Cancelled..................................... (19,000) $ .54
----------
Balance at December 31, 1998....................... 1,867,270 $ 3.48
----------
----------
</TABLE>
A summary of stock options outstanding at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE PRICE
RANGE OF OPTIONS REMAINING AVERAGE OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
--------------- ----------- ------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$.0005............ 123,500 6.80 $ .0005 123,500 $ .0005
$.05.............. 60,800 7.16 $ .05 60,800 $ .05
$.23-.28.......... 293,670 8.22 $ .26 293,670 $ .26
$.74.............. 182,400 8.98 $ .74 182,400 $ .74
$4.92 - $5.88..... 1,206,900 9.65 $ 5.20 311,875 $ 5.01
--------- -----------
1,867,270 9.09 $ 3.48 972,245 $ 1.83
--------- -----------
--------- -----------
</TABLE>
Included in the above tables are 123,500 shares that were granted
outside of the Predecessor Plan and the 1998 Plan.
F-14
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. SHAREHOLDERS' EQUITY (CONTINUED)
Adjusted pro forma information regarding net loss and net loss per share
is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant
using the minimum value option pricing model with the following assumptions
for 1996 and 1997: risk-free interest rates of 6.5%; dividend yield of 0%;
and a weighted-average expected life of the options of six years. The
assumptions for the period from January 1, 1998 through July 1, 1998 were:
risk-free interest rate of 5.5%; dividend yield of 0%; and a weighted
average expected life of the options of four years. The Black-Scholes option
pricing model was used for the period from July 2, 1998 (completion of the
Company's initial public offering) through December 31, 1998 with the
following assumptions: risk-free rates of 4.25% to 5.25%; dividend yield of
0%; volatility factor of 65%; and a weighted average expected life of the
options of four years.
For purposes of adjusted pro forma disclosures, the estimated fair value
of the options are amortized to expense over the vesting period. The
weighted-average fair value of options granted during 1998, 1997 and 1996 was
$2.40, $.16 and $.05, respectively. The Company's adjusted pro forma
information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Adjusted pro forma net loss......... $(5,327,880) $(1,125,255) $(390,683)
Adjusted pro forma net loss
per share (Basic and Diluted).. $(0.67) $(0.24) $(0.11)
</TABLE>
The pro forma effect on net loss for the periods presented may not be
representative of the pro forma effect on net loss in future years because
they reflect less than four years of vesting.
DEFERRED COMPENSATION
Through December 31, 1998, the Company recorded deferred compensation
for the difference between the exercise price of stock options granted and
the fair value of the Company's common stock at the date of issuance or
grant. The deferred compensation will be amortized over the vesting period of
the related options, which is generally four years. Gross deferred
compensation recorded during the years ended December 31, 1998 and 1997
totaled $1,228,310 and $1,157,410, respectively, and related amortization
expense totaled $1,080,454 and $319,204 in 1998 and 1997, respectively.
F-15
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. RELATED PARTY TRANSACTIONS
A partner of the Company's general counsel firm is a member of the
Company's Board of Directors and is a stockholder. The Company incurred
expenses from such firm totaling $695,373, $145,252 and $104,367 for the
years ended December 31, 1998, 1997 and 1996, respectively. The Company had
payables to the general counsel firm of $18,192, $5,000 and $9,000 at
December 31, 1998, 1997 and 1996, respectively.
In December 1997, the Company loaned $150,000 to a stockholder who is
also of counsel with the Company's lead patent attorneys. This loan bears
interest at ten percent per annum, is due in December 1999, and is secured by
the common stock of the Company owned by such stockholder.
During 1997, a stockholder and member of the Company's Board of
Directors was an executive officer of the landlord for the Company's
administrative facilities. The Company's lease of such facilities expired
December 31, 1998 (see Note 4).
8. INCOME TAXES
At December 31, 1998, the Company had federal and California income tax
net operating loss carryforwards of approximately $5,583,000 and $5,593,000,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2010 and 2003, respectively, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $36,000 and $74,000, respectively, which will begin to expire
in 2010, unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards may be
limited if cumulative changes in ownership of more than 50% occur during any
three year period.
Significant components of the Company's deferred tax assets are shown
below. A valuation allowance has been recognized to offset the deferred tax
assets as of December 31, 1998 as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 2,290,000 $ 720,000
Research and development credits........... 52,000 11,000
Other, net................................. 147,000 36,000
------------ ----------
Total deferred tax assets....................... 2,489,000 767,000
Valuation allowance for deferred tax assets..... (2,489,000) (767,000)
------------ ----------
Net deferred tax assets......................... $ -- $ --
------------ ----------
------------ ----------
</TABLE>
F-16
<PAGE>
COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. 401(k) PLAN
Effective October 1, 1996, the Company adopted a 401(k) defined
contribution plan that covers substantially all full time employees, as
defined, who meet certain length-of-service requirements. Employees may
contribute up to a maximum of 15% of their annual compensation (subject to a
maximum limit imposed by federal tax law).
F-17
<PAGE>
EXHIBIT INDEX
TO
FORM 10-K
COLLATERAL THERAPEUTICS, INC.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---------- ---------------------------------------------------------------
<S> <C>
3.1 (1) Our Second Restated Certificate of Incorporation.
3.2 (2) Our Restated Bylaws.
4.1 (2) Form of the Certificate for common stock.
10.1 (2) Form of Restricted Stock Issuance Agreement between the Company
and certain individuals listed on the attached schedule.
10.2 (2) Form of Stock Issuance Agreement between the Company and
certain individuals listed on the attached schedule.
10.3 (2) Preferred Stock Purchase Agreement between the Company and
Schering AG Berlin Venture Corp., dated May 7, 1996.
10.4 (2) Series C Preferred Stock Purchase Agreement by and among the
Company and the investors listed on Schedule A thereto, dated
June 30, 1997.
10.5 (2) Amended and Restated Investors' Rights Agreement by and among
the Company and the investors listed on Schedule A thereto,
dated June 30, 1997.
10.6 (2) Amended and Restated Co-Sale Agreement by and among the Company
and the individuals listed on Schedule A thereto, dated
June 30, 1997.
10.7 (2) Security Agreement between the Company and Schering AG Berlin
Venture Corp., dated August 16, 1995.
10.8 (2) Amended and Restated Promissory Note between the Company and
Schering AG, dated August 16, 1995, as amended May 16, 1996.
10.9 (2) Amended and Restated Promissory Note between the Company and
Schering AG, dated October 12, 1995, as amended May 16, 1996.
10.10 (2) Side Letter between the Company and Schering AG Berlin Venture
Group, dated May 6, 1996.
10.11 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Angiogenesis Gene
Therapy, dated September 27, 1995, as amended.
10.12 (2) Collaboration, License and Royalty Agreement between Schering
AG and the Company, dated May 6, 1996.
10.13 (2) License Agreement by and among Dimotech Ltd., Gera Neufeld and
the Company, dated October 17, 1996.
10.14 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Gene Therapy for
Congestive Heart Failure, dated January 22, 1997.
10.15 (2) Agreement between New York University and the Company, dated
March 24, 1997, as amended.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ---------------------------------------------------------------
<S> <C>
10.16 (2) License Agreement by and among AMRAD Developments Pty. Ltd.,
Ludwig Institute for Cancer Research and the Company, dated
March 25, 1997.
10.17 (2) Research Agreement between the University of Washington and the
Company, dated April 21, 1997, as amended.
10.18 (2) Exclusive License Agreement between The Regents of the
University of California and the Company for Angiogenic Gene
Therapy for Congestive Heart Failure, dated June 18, 1997.
10.19 (2) Letter Agreement between the Company and Veterans Medical
Research Foundation, dated August 13, 1997.
10.20 (2) Sponsored Research Contract between the Curators of The
University Of Missouri and the Company, dated October 22, 1997,
as amended.
10.21 (2) Biological Materials Agreement between Targeted Genetics
Corporation and the Company, dated January 26, 1998.
10.22 (2) Research Agreement between The Regents of the University of
California and the Company, dated February 23, 1998.
10.23 (2) Letter Agreement between the Company and Veterans Medical
Research Foundation, dated March 20, 1998.
10.24 (2) Sublease Agreement between the Company and Gensia, Inc., dated
June 15, 1995, as amended.
10.25 (2) Standard Industrial/Commercial Multi-Tenant Lease-Modified Net
between the Company and ARE 11025 Roselle Street, LLC, dated
November 24, 1997, as amended.
10.26 (2) Torrey Reserve Office Lease between Pacific Torrey Reserve
Holding, L.P. and the Company dated April 7, 1998.
10.27 (2) Form of Scientific Advisor Consulting Agreement between the
Company and certain individuals listed on the attached
schedule.
10.28 (2) Form of Scientific Advisory Board Agreement between the Company
and certain individuals listed on the attached schedule.
10.29 (2) Form of Consulting Agreement between the Company and certain
individuals listed on the attached schedule.
10.30 (2)(3) 1995 Stock Option/Stock Issuance Plan.
10.31 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.32 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Stock Option
Agreement.
10.33 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.34 (2)(3) 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock
Issuance Agreement.
10.35 (2)(3) 1998 Stock Incentive Plan.
10.36 (2)(3) 1998 Stock Incentive Plan Form of Notice of Grant.
10.37 (2)(3) 1998 Stock Incentive Plan Form of Stock Option Agreement.
10.38 (2)(3) 1998 Stock Incentive Plan Form of Stock Issuance Agreement.
10.39 (2)(3) 1998 Employee Stock Purchase Plan.
10.40 (2)(3) Form of Indemnification Agreement between the Company and each
of its directors.
10.41 (2)(3) Form of Indemnification Agreement between the Company and each
of its officers.
10.42 (2)(4) Credit Agreement between the Company and Imperial Bank, dated
April 30, 1998, as amended on September 14, 1998 (Exhibit 10.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ---------------------------------------------------------------
<S> <C>
10.43 (4)(3) Employment Offer Letter for at will employment of Jeffrey
Friedman, to be effective September 1998 (Exhibit 10.2).
10.44 (3) Employment Offer Letter for at will employment of Tyler Dylan,
to be effective November 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included under the caption "Signatures").
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to exhibits filed with our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, filed on August 6, 1998.
(2) Incorporated by reference to the same numbered exhibits (unless otherwise
indicated) filed with our Registration Statement on Form S-1, File
No. 333-51029, as amended.
(3) Management contract or compensation plan.
(4) Incorporated by reference to the exhibits set forth above filed with our
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
filed on November 10, 1998.
<PAGE>
EXHIBIT 10.44
September 28, 1998
Tyler M. Dylan, Ph.D., J.D.
12 Perry Lane
Menlo Park, CA 94025
Dear Tyler:
Collateral Therapeutics is pleased to offer you employment on the terms and
conditions stated in this letter. Collateral Therapeutics is offering you the
position of General Counsel. You will report to Christopher J. Reinhard, Chief
Operating and Financial Officer and your job duties will generally entail
overseeing all legal matters pertaining to the corporation. Your initial rate
of compensation will be $17,083.33 per month, payable bimonthly, which is
equivalent to an annualized rate of $205,000. You will also be eligible to
participate in the Company's Short-Term Incentive Program for the 1999 calendar
year. We would like you to begin work with Collateral Therapeutics on or before
November 15,1998.
You will also be paid a $15,000 hiring bonus on the effective date of your
employment. If you resign from your employment with Collateral Therapeutics
before completing one year of employment, you agree to repay to Collateral
Therapeutics such amount. By signing this offer letter, you specifically agree
that Collateral Therapeutics may withhold from your final paycheck any amounts
you owe the company, including but not limited to the hiring bonus. If your
final paycheck is insufficient to cover this amount, you agree to repay any
remaining indebtedness to Collateral Therapeutics within one month from the date
of cessation of your employment.
As part of our offer of employment, we will pay you, upon presentation of proper
documentation, for reasonable moving expenses, up to a maximum of $20,000, to
assist you with relocation to San Diego, California. In addition, Collateral
Therapeutics will pay a 30% gross up for reasonable moving expenses. Reasonable
moving expenses may include: movement of household goods, temporary housing,
storage of goods, travel and living expenses associated with trips to San Diego.
In addition, it will be recommended that the Board of Directors grant you an
option to purchase 60,000 shares of Common Stock of the Company at an exercise
price to be determined. The options will vest monthly over four years
(including a one year cliff) and will be subject to the terms and conditions
contained in a separate stock option agreement.
<PAGE>
You will be eligible for the following employee benefits:
- - Medical Insurance Coverage
- - Dental Insurance Coverage
- - Life and Accidental Death and Dismemberment Insurance Coverage
- - Long Term Disability Coverage
- - 401(k) Savings Plan covering employee contributions
- - Employee Stock Purchase Plan
Your employment with Collateral Therapeutics, should you accept this offer, will
not be for a specified term and may be terminated with or without cause and with
or without notice by you or by the Company at any time and for any reason. Any
contrary representations or agreements which may have been made to you are
superseded by this offer. The at will nature of your employment described by
this offer letter shall constitute the entire agreement between you and
Collateral Therapeutics concerning the nature and duration of your employment.
Although your job duties, title, compensation and benefits may change over time,
the at will term of your employment with Collateral Therapeutics can only be
changed in a writing signed by you and the Chief Executive Office of the
Company.
One of the conditions of your employment with Collateral Therapeutics is the
maintenance of the confidentiality of Collateral Therapeutics' proprietary and
confidential information. You will be required to execute the Company's
Proprietary Information and Inventions Agreement on your first date of
employment.
As an employee of Collateral Therapeutics, you will be required to comply with
all Company policies and procedures. In particular, you will be required to
familiarize yourself with, and to comply with, Collateral Therapeutics' policy
prohibiting harassment and discrimination and the policy concerning drugs and
alcohol. Violations of these policies may lead to immediate termination of
employment.
We are looking forward to having you join Collateral Therapeutics. If you wish
to accept this offer, please sign below and return the fully executed letter to
us within five (5) days. You should keep one copy of this letter for your own
records.
Sincerely,
Collateral Therapeutics
/s/ CHRISTOPHER J. REINHARD
- ---------------------------
Christopher J. Reinhard
Chief Operating and Financial Officer
<PAGE>
ACCEPTANCE OF EMPLOYMENT OFFER
I have read, understand and accept the foregoing terms and conditions of
employment. I further understand that while my job duties, title, compensation
and benefits may change over time without a written modification of this
agreement, the at will term of my employment, i.e., my right and Collateral
Therapeutics' right to terminate our employment relationship at any time, with
or without cause, is a term of employment which cannot be altered or modified
except in a writing signed by me and the Chief Executive Officer of Collateral
Therapeutics. I understand and agree that any contrary representations or
agreements which may have been made to me are superseded by this offer and my
acceptance of the same.
In consideration for the offer of employment with Collateral Therapeutics that
is contained in this offer letter and accepted by me, I acknowledge that the
Confidential Information of Collateral Therapeutics is a special, valuable and
unique asset of the Company. I agree at all times during my employment with
Collateral Therapeutics, and at all times after termination of such employment,
not to disclose for any purpose and to keep in strict confidence and trust all
of such Confidential Information. I agree during and after the period of my
employment with Collateral Therapeutics not to use, directly or indirectly, any
Confidential Information other than in the course of performing duties as an
employee of Collateral Therapeutics, nor will I directly or indirectly disclose
any Confidential Information or anything relating to it to any person or entity
except, with the Company's consent, as may be necessary for the performance of
my duties as an employee of Collateral Therapeutics. I will abide by Collateral
Therapeutics' written policies and rules established from time to time by it for
the protection of its Confidential Information. I will also execute and abide by
the terms of Collateral Therapeutics' Proprietary Information and
Confidentiality Agreement.
As further consideration for the offer of employment with Collateral
Therapeutics that is contained in this offer letter and accepted by me, I agree
that during the term of my employment and for one (1) year thereafter, I will
not encourage or solicit any employee of Collateral Therapeutics to leave the
Company for any reason. However, this obligation shall not affect any
responsibility I may have as an employee of the Company with respect to the bona
fide hiring and firing of Company personnel.
<TABLE>
<S> <C>
Date: ___________ /s/ TYLER DYLAN, Ph.D., J.D.
-----------------------------
Tyler Dylan, Ph.D., J.D.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-57741) of our report dated February 12, 1999, with respect to
the financial statements of Collateral Therapeutics, Inc., included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
------------------------
Ernst & Young LLP
San Diego, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,041,777
<SECURITIES> 1,219,385
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,781,010
<PP&E> 3,846,736
<DEPRECIATION> 433,609
<TOTAL-ASSETS> 19,266,737
<CURRENT-LIABILITIES> 2,657,575
<BONDS> 0
0
0
<COMMON> 10,522
<OTHER-SE> 15,876,418
<TOTAL-LIABILITY-AND-EQUITY> 19,266,737
<SALES> 0
<TOTAL-REVENUES> 5,403,481
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,794,567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,475
<INCOME-PRETAX> (4,904,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,904,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,904,385)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
