SOMATIX THERAPY CORPORATION, 10-K, 1995-09-27

SOMATIX THERAPY CORPORATION
10-K, 1995-09-27
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________________ to
______________________________

Commission file number: 0-14758

SOMATIX THERAPY CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-2762045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.

850 MARINA VILLAGE PARKWAY, ALAMEDA, CALIFORNIA 94501-1034
(Address of Principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (510) 748-3000

Securities registered pursuant to Section 12(b) of the Act: None

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 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 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 amendments to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of September 18, 1995, was
approximately $141,749,975 based upon the closing sale price of the
registrant's Common Stock as reported on the NASDAQ National Market
System on such date. The number of outstanding shares of the
Registrant's Common Stock as of September 18, 1995 was 22,679,996.

DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by
reference into Parts III and IV of this Form 10-K Report:
The Proxy Statement for the Registrant's Annual Meeting of
Stockholders scheduled to be held on November 16, 1995.

<PAGE>

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1995

TABLE OF CONTENTS

PAGE

PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Business. . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . 18
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a
Vote of Security Holders. . . . . . . . . . . . 18
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters. . . . . 20
Item 6. Selected Financial Data . . . . . . . . . . . . . 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . 21
Item 8. Financial Statements and Supplementary Data . . . 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . 40
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . 41
Item 11. Executive Compensation. . . . . . . . . . . . . . 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . 41
Item 13. Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . . . 41
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . 42

<PAGE>

PART 1

ITEM 1. BUSINESS

The Company

Somatix Therapy Corporation ("Somatix" or the "Company") is
a leader in the field of in vivo and ex vivo gene therapy. The
Company has established a substantial scientific and intellectual
property position in the broadly enabling technology of gene
transfer through the merger and acquisition of four companies:
Hana Biologics, Inc., Somatix Corporation, GeneSys Therapeutics
Corporation and Merlin Pharmaceutical Corporation, as well as
through internal development. Somatix is applying its core
scientific expertise to the research and development of novel
treatments for cancer, neurological diseases, and certain genetic
diseases.

In February 1995, Somatix acquired Merlin Pharmaceuticals
Corporation, a gene therapy company developing adeno-associated
viral vectors (AAV) and adenoviral vectors (AV) for in vivo gene
therapy. In addition to acquiring important intellectual property
in these vector systems, Somatix executed exclusive consulting
relationships with two leading researchers in the gene transfer
field: Richard Samulski, Ph.D. and Thomas Shenk, Ph.D. Combined
with extensive existing vector biology research ongoing at the
Company under the direction of Richard Mulligan, Ph.D., Chief
Scientific Officer, this acquisition has accelerated the Company's
development of multiple vector systems for both in vivo and ex vivo
gene therapy.

With the exception of fiscal year 1990 when the Company sold
its cell biology and diagnostic product line, the Company's
operations have been unprofitable since its inception, and will
continue to be so, as its research and development programs expand.

Background of Gene Therapy

Gene therapy is the genetic modification of cells for
therapeutic benefit. Cells can either be removed from a patient,
genetically modified and transplanted back into the patient (ex
vivo gene therapy) or cells can be modified in the body through the
administration of a vector that delivers the gene into certain
cells (in vivo gene therapy). The product of the inserted gene is
a protein which can act directly as a drug, such as proteins now
injected into circulation, or indirectly as an inhibitor of a
disease mechanism or as a vaccine to prevent and treat disease.

Gene transfer vectors are the transport vehicles by which
genes can be inserted into cells. While considerable research
efforts are ongoing in novel vector systems in both academic and
institutional laboratories, most commonly used approaches fall into
two categories: viral-based vectors and non-viral or synthetic
vectors. Each system has unique characteristics. These
differences may be important in evaluating the clinical utility of
each approach.

Different cell types may be selected or targeted for
modification based on their ability to secrete proteins
systemically or locally, their capability to integrate into the
tissue at the site of delivery, and their life spans. As a result,
particular cell types may be better suited than others for the
delivery of a specific protein or for the treatment of a specific
disease. Researchers in the field of gene therapy are primarily
working with seven major cell types as candidates for genetic
modification: epithelial cells, fibroblasts, endothelial cells,
hepatocytes, myoblasts, hematopoietic stem cells, and lymphocytes.
These are all somatic cells, which differ from germ cells in that
the genetic information contained in them is not passed on to
future generations (offspring).

Gene therapy approaches to treating disease are still in the
development stage. A number of scientific challenges must be met
before the therapeutic potential of gene therapy is realized and
gene therapy products are

<PAGE>

commercially available. These challenges include attaining
sufficient production of the desired gene transfer vectors,
controlling or regulating the amount of the desired protein
produced, targeting specific cell types for modification and
demonstrating the safety and efficacy of any given approach in
human clinical trials. In addition to its as yet unproven
therapeutic effectiveness, gene therapy may cause unintended side
effects. Because with certain gene transfer methods, the desired
gene may be randomly inserted into a cell's genetic material, it is
theoretically possible that a disease-causing gene could be
activated. The Company believes that this is very unlikely and
that other events besides gene activation must occur in order for
such a disease to develop. Another issue is the possibility that a
disabled virus could theoretically reassemble and become virulent.
The Company believes that its process for disabling viruses
provides sufficient safeguards against such an event and that
current testing procedures further reduce this risk. Additional
research with respect to such unintended consequences will be
necessary, however, before gene therapy products can be
commercialized.

Core Science and Clinical Development Programs

Core Science

Somatix has built, through several carefully selected
mergers and acquisitions as well as substantial internal development
activities, a broad-based, multiple gene transfer technology
platform. The Company has active research and development efforts
in several major gene transfer areas including retroviral, adeno-
associated virus, adenoviral and synthetic vector systems.

Led by the Company's founder and Chief Scientific Officer,
Richard Mulligan, Ph.D., Somatix has established extensive internal
research programs in vector biology. While the Company has
historically had interests in several vector systems, the most
advanced programs have been in retroviral vectors. With the
acquisition of Merlin Pharmaceutical in February 1995, the addition
of Richard Samulski, Ph.D. and Thomas Shenk, Ph.D. as core
scientific consultants to the Company and the expansion of the
Company's intellectual property base, Somatix has significantly
augmented and expedited its research efforts in adenoviral and
adeno-associated viral vectors. More recently, the Company has
initiated a distinct synthetic vector development program utilizing
expertise from the entire vector biology group.

Another area of Somatix core science has focused on
hematopoietic stem cell gene therapy. Genetic modification of
hematopoietic stem cells offers a fundamental approach for the
systemic delivery of proteins as well as the protection of certain
blood cells from infectious diseases or toxic drugs. The Company's
initial clinical application is in the treatment of chronic
granulomatous disease (CGD). In collaboration with Harry Mallech,
M.D. at the National Institutes of Health (NIH), the Company has
started a Phase I clinical trial using gene therapy to treat this
inherited disease. This is the Company's first clinical trial
involving the genetic modification of hematopoietic stem cells.
Future applications may include ADA-deficiency hemophilia,
Gaucher's disease, and multi-drug resistance.

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The following table summarizes the current status of the
Company's research and development programs:

======================================================================
Product Indication Status Partner

GVAX(TM) cancer vaccine renal cell carcinoma *PI completed --
melanoma *PI/II dose --
escalation
melanoma *PI/II dose --
scheduling
prostate *PI/II --
colorectal preclinical --

Autologous fibroblasts Parkinson's preclinical --
genetically altered to
produce TH

Autologous stem cells chronic granulomatous *PI Baxter
genetically altered to disease
produce the p47phox
gene

Allogeneic cell line hemophilias A & B preclinical Baxter
modified to produce
factor VIII or IX,
implanted in membrane
device
======================================================================

* PI and PII refer to Phase I and Phase II clinical trial studies
in humans.

Disease Indications

Cancer

Cancer, the second leading cause of death in the United
States, is a disease in which certain cells grow uncontrolled by
the body's normal self-regulatory mechanisms. Over 1.2 million new
cases of cancer are diagnosed each year in the United States.
While there are several dozen forms of cancer, Somatix's initial
targets are renal cell carcinoma (RCC or kidney cancer), melanoma,
prostate and colorectal cancers. Hundreds of thousands of patients
are newly diagnosed with these cancers each year in the United
States.

The GVAXTM <F1> Cancer Vaccine. Somatix's lead therapeutic
program is the GM-CSF transduced autologous tumor cell vaccine, or
GVAX cancer vaccine. The GVAX cancer vaccine is composed of the
patient's own (autologous) tumor cells which have been genetically
modified to secrete the immune-stimulating protein granulocyte-
macrophage colony stimulating factor (GM-CSF). Cytokine-transduced
(e.g. IL-2, IL-4, gamma interferon, etc.) tumor cell vaccines have
shown antitumor activity in several murine studies. Richard
Mulligan (Chief Scientific Officer and Director, Somatix) and
colleagues were the first to systematically compare the efficacy of
several genetically modified cancer vaccines differing only in the
molecule being secreted from the engineered tumor cell. The
Mulligan studies showed the GM-CSF transduced tumor vaccine to be
the most potent inducer of systemic antitumor immunity against
challenge with live tumor cells. The study also demonstrated that
lethally irradiated, GM-CSF transduced tumor cells were as
effective as live tumor cells in the induction of antitumor
immunity. The immune response was shown to be dependent on both
CD4+ and CD8+ T cells, and long lasting, as mice survived challenge
with high doses of live tumor cells several months after
vaccination. The failure of nontransduced tumor vaccines,
formulated with soluble recombinant GM-CSF, to induce protective
immunity proved the necessity of local cytokine delivery over many
days. The generality of the GVAX concept was demonstrated in
several murine tumor models including the colon carcinoma CT-26,
the renal carcinoma RENCA, the fibrosarcoma CMS-5, the Lewis lung
carcinoma, and the
____________________
<1> GVAX is a trademark of Somatix Therapy Corporation.

<PAGE>

Dunning rat prostate model. The GM-CSF transduced tumor cell
vaccine was more potent than the nontransduced vaccine in every
model tested.

Based on this preclinical data and using its pilot
manufacturing facility for ex-vivo gene therapy, the Company
received FDA clearance to start Phase I clinical trials. The first
trial began at the Johns Hopkins University in RCC in late 1993.
In May 1994, a second Phase I clinical trial started at the
Netherlands Cancer Institute (NKI) using the GVAX cancer vaccine in
advanced melanoma patients. A second Phase I advanced melanoma
trial at the Dana Farber Cancer Institute started in March of 1995.
Both of these cancers have shown responsiveness to immunotherapy
approaches in these preliminary trials. The Company may initiate
two other GVAX trials in the near future, one in colorectal cancer
and the other in prostate cancer. The colorectal clinical trial
will be funded by an outside party through Phase I/II.

The Company will evaluate these trials to determine if the
GVAX cancer vaccine has stimulated an immune response as determined
by a test of the skin's reaction to an injection of irradiated
tumor cells from the patient's tumor (a delayed type
hypersensitivity or DTH test). In addition, in selected trials,
the patients' peripheral blood will be analyzed for the presence of
an immune response, including but not limited to the presence of
tumor-specific cytotoxic T-lymphocytes (CTLs). While preliminary
data are encouraging, it is too early to draw conclusions as to
efficacy. The Company expects to begin a Phase II/III clinical
trial in oncology in 1996.

The Central Nervous System

The central nervous system ("CNS") is an important target
for new drug development. The brain controls most bodily functions
but is one of the most difficult to treat with drugs since the blood-
brain barrier prevents many drug molecules and most proteins from
getting through to areas of the brain requiring treatment. Despite
this latter limitation, drugs to treat CNS diseases are the second
largest drug expenditure category behind cardiovascular drugs.
Another limitation to CNS drug development is that the brain, a
highly complex, inaccessible organ in which drug side effects can
significantly limit their usefulness, has not lent itself easily to
unlocking its biological secrets. In particular, the brain, while
a single organ like the heart, liver etc., operates with many
distinct regions as if they were separate organs tied together in a
communications network, not unlike the complex computer networks of
today. Therefore, even if drugs could be made to get through the
blood-brain barrier, it is highly desirable to deliver them locally
to the tissues in the specific region requiring therapy in order to
avoid debilitating side effects. Biotechnology has made major
inroads in understanding the biological mechanisms of the brain and
gene therapy, in particular, appears to offer the greatest long
term promise of being able to deliver drugs derived from this new
understanding to tissues in specific regions of the brain. Gene
therapy is also particularly well suited to neurological diseases
because most are chronic in nature requiring constant long term
therapy. Because of the lack of adequate drug therapy for major
neurodegenerative diseases such as Alzheimer's and Parkinson's,
this is a major priority for Somatix.

Parkinson's Disease

Gene therapy of Parkinson's disease is the Company's most
advanced CNS program.

Although the cause of the neurodegeneration that leads to
Parkinson's is not known, it is known that a consequence of this
degeneration, the loss of dopamine expression in the striatum of
the brain, causes the debilitating symptoms of Parkinson's.
Dopamine can be delivered to the brain through administering L-
dopa, a precursor that is converted in the brain to dopamine, and
it significantly alleviates the symptoms of Parkinson's. However,
L-dopa's efficacy is sharply attenuated after multiple years of
therapy in a majority of patients because of side effects of the
drug thought to relate to the global exposure of the brain to the
drug, the increased dosing required to overcome continued
degeneration of dopaminergic neurons and the unnatural frequency of
dosing. Therefore, Somatix is evaluating the use of gene therapy
to transduce cells to produce a continuous and efficacious supply
of dopamine in the striatum, possibly in conjunction with low doses
of timed oral L-dopa administration. The gene required for
transduction is the tyrosine hydroxylase gene (TH). An accurate
preclinical disease model exists for Parkinson's Disease. This
came about when in 1982 drug addicts took heroin containing the
chemical MPTP that was found to cause symptoms and pathology
indistinguishable from severe Parkinson's Disease. MPTP
preclinical models prepared by Somatix and its investigators
respond clinically and pharmacologically similar to humans with the
naturally occurring disease. While no animal model can be an exact
duplicate of the human, the MPTP model appears to date to be a most
reasonable facsimile.

<PAGE>

Another scientific reason why Parkinson's is an important
opportunity for Somatix to focus on is due to the belief that
administration of neurotrophic factors in the substantia nigra
region of the brain where the majority of these dopaminergic
neurons reside, may retard their degeneration and keep natural
dopamine production at therapeutic levels for a significantly
longer period of time. Recent preclinical data has strongly
suggested that neurotrophic factors may have efficacy that could be
both specific and potent for these particular dopaminergic neurons.
Somatix may have to license certain genes for these factors in
order to exploit fully a combination therapy.

Parkinson's represents a significant commercial opportunity.
There are approximately 750,000 people diagnosed with Parkinson's
disease in the United States. Of these, approximately 600,000 have
idiopathic disease, and approximately 390,000 are in the middle
stages of Parkinson's disease. Of this population of 390,000, the
Company believes that approximately 100,000 could potentially
benefit from a gene therapy which could substantially improve their
quality of life and keep them self-sufficient longer than L-dopa
maintenance therapy. The typical patient with Parkinson's disease
is diagnosed between 55 and 60 years of age, and lives 14 years
postdiagnosis. The Company believes that the market potential for
a safe and effective gene therapy for Parkinson's disease could be
well over $1 billion annually in the United States alone.

Developing both an ex vivo and in vivo approach to
Parkinson's

Somatix's initial approach to Parkinson's uses ex vivo gene
therapy technology. The main advantage of this approach is the
high level of control it affords because the cell population is
well characterized and assured of gene expression (protein
production) levels before implantation and because dopamine
production is confined to just the striatum implant area requiring
therapy. While pre-clinical evidence suggests the duration of the
implants may prove to be acceptable in humans there is some risk
that the TH production of the transplanted cells falls off or
ceases prematurely. The potential safety risks of the in vivo
approach are that the adeno associated virus (AAV) vector Somatix
uses could elicit immune responses that destroy transduced cells or
that the vector finds its way to other regions of the brain
transducing cells and compromising normal neurotransmitter
function. The Company is in the process of conducting experiments
that are intended to be more conclusive regarding immunogenicity
and the extent of vector diffusion, and is developing cell specific
gene expression and targeting technology intended to limit gene
expression in unwanted cells.

Encouraging primate experiment results

Ex vivo. The Company, in 1994, began a primate experiment
with the MPTP model. Certain animals were control animals and
certain animals received transduced autologous cell (fibroblast)
implants. They were scored on a clinical rating scale composed of
eight variables. All the implants were healthy, well vascularized
within a reformed blood-brain barrier at the time of sacrifice with
minimal reactions around the implants. All of the TH transduced
animals showed immediate clinical improvement that lasted until
they were sacrificed four months later. None of the animals that
did not receive a TH transduced implant showed any clinical
improvement for the time they remained alive although one that
received a non-transduced implant showed a transient improvement in
the first month following implantation. The fibroblast implants
were vital at the time of sacrifice and all TH transduced animals
showed clinical improvement supported by evidence of TH production
in their brains, suggesting that the clinical improvement was
caused by the TH production in the implant. These results will be
confirmed and expanded on in an ongoing larger controlled primate
experiment. The protocol for this experiment was finalized after a
meeting with the FDA and its results, if confirmatory, are expected
to lead to an IND filing to initiate human clinical trials in 1996.

In vivo. In early 1994, collaborators of Merlin (acquired
by Somatix in February 1995) completed a rodent experiment that
demonstrated that in vivo injection of its AAV/TH vector in MPTP
lesioned rats resulted in three to four month expression of TH
prior to sacrifice and significant improvement in function. Later
in the year these investigators confirmed these results in an MPTP
primate model developed at Yale University that is somewhat
different than Somatix's MPTP primate model. Gene expression was
confirmed in all monkeys and no toxicity was observed. For the two
and one-half months prior to sacrifice all the AAV/TH monkeys with
severe symptoms of Parkinson's disease had partial behavioral
recovery. Somatix is preparing to test these results in its own
primate models in late 1995.

<PAGE>

Potential Competitive Risks in Parkinson's

Beyond L-dopa therapy, there are two surgical approaches to
Parkinson's disease which may be competitive with gene therapy:
fetal cell transplantation and pallidotomy. Neither approach has
been fully tested in well-controlled clinical trials. Both have
modest and uneven efficacy in addition to other drawbacks.
Approximately 4-10 aborted fetuses are required to supply the
necessary cellular material for fetal cell transplantation making
it impractical for large scale use. There are some approaches to
reducing this requirement but scientific and ethical hurdles
remain. Pallidotomy attempts to destroy minute portions of the
brain that control movement thereby ameliorating the rigidity,
jerkiness and freezing in place experienced by later stage
patients. The scientific hypothesis behind the procedure is that
cells in the globus pallidus region of the brain that fire signals
for movement are controlled by dopamine production and when it
drops below a threshold level, these cells fire uncontrollably
creating the abnormal movements that are a hallmark of Parkinson's.
Blindness and paralysis are potential side-effects of the
treatment. It also appears that some patients experience long term
relief of their symptoms but many patients who experience immediate
relief relapse quickly back to their original state, or worse.
Both fetal cell transplantation and pallidotomy are considered to
be the practice of medicine and therefore not regulated by the FDA.
Gene therapy, by contrast, will be regulated by the FDA and
ultimately stands to benefit by the requirement for well-controlled
clinical studies to prove its safety and efficacy.

Alzheimer's Disease

Alzheimer's disease, a condition characterized by
progressive dementia, affects over 4 million Americans. The function
of degenerating nerve cells which cause this disease could be enhanced
by administration of nerve growth factor ("NGF"). Since NGF does
not cross the blood-brain barrier, and the current method of using
a catheter to deliver this chemical is impractical, Somatix is
studying the use of NGF-modified cells for its delivery. This
method involves genetically modifying a patient's own non-neural
cells ex vivo with the gene for NGF, then implanting the cells into
a specific area in the brain.

Hemophilia

Hemophilia A, a blood coagulation disorder resulting from
the deficiency of the blood clotting protein factor VIII, may affect
up to 25,000 Americans. Severe cases, approximately 70% of this
patient population, are characterized by frequent and sometimes
fatal episodes of internal bleeding into the soft tissues, joints,
and intracranial space. The direct costs of treating severe
Hemophilia A range from $80,000 to $130,000 per year.

In November 1993, the Company entered into a collaborative
development and license agreement with Baxter Healthcare
Corporation for the treatment of hemophilia through the use of
genetically modified non-autologous cells. Pursuant to the
agreement, the Company will develop and supply Baxter with a
genetically modified cell line designed to over-produce the human
blood clotting proteins factor VIII or factor IX, and Baxter will
incorporate these transduced cells into their proprietary membrane
device for in vivo production and delivery of these clotting
factors. The agreement provides that Somatix shall develop and
supply Baxter with all preclinical and initial clinical supplies of
its transduced cell lines required for completion of the first
clinical trial in humans. Baxter shall be responsible for
conducting all preclinical and clinical trials, obtaining all
regulatory approvals, manufacturing and supplying its implantable
semipermeable and biocompatible membrane device to deliver the
genetically modified cells, and ultimately establishing and
maintaining a marketing and sales force.

Baxter shall receive exclusive worldwide marketing rights
with respect to such products, subject to non-exclusivity for failure
to use diligent efforts. In addition to collaborating with Somatix on
certain research and manufacturing at Somatix, Baxter shall pay
Somatix a license fee, certain milestone payments, and royalties
based on the sale of any products resulting from the collaboration.
The parties have agreed to negotiate as to responsibility for
manufacturing the necessary quantity of transduced cells for use in
clinical trials and for commercial production. In addition,
Somatix has agreed to provide Baxter with a right of first
negotiation to certain other approaches for the treatment of
hemophilia A and B.

In November 1993, Somatix entered into another agreement
with Baxter Healthcare Corporation for the supply of gene transfer
vectors to treat Chronic Granulomatous Disease (CGD). This disease
is caused by a hereditary defect which results in a patient's
inability to kill certain bacterial fungi. This condition is
marked by increased susceptibility to infection, which can lead to
death. The collaboration envisages Somatix and Baxter

<PAGE>

working with Dr. Harry Malech of The National Institutes of Health
to replace the defective gene in white blood cells. The
collaborators' approach will be to attempt to correct the gene
defect in stem cells, the precursor of all blood cells which can be
isolated from patient blood using proprietary stem cell selection
technology.

Commercial Development

Somatix believes that the near-term potential of gene
therapy for the disease indications it is pursuing lies in the ex vivo
genetic modification of cells. In the United States, gene therapy
will be regulated by the FDA's Center for Biologics Evaluation and
Research ("CBER"). For ex vivo gene therapy, CBER regulation
places a statutory emphasis on manufacturing; that is, the genetic
modification and processing of cells. To ensure compliance with
FDA/CBER regulation, Somatix will carry out the ex vivo
modification and processing of cells at facilities under its own
control. Somatix is pioneering the development of the regulatory
and manufacturing systems needed for adherence to biologics
regulation as it applies to ex vivo gene therapy. Somatix has
established a pilot cell processing capability which is designed to
comply with Good Manufacturing Practices (GMP). The production of
genetically modified cells is intensive in its requirements of
labor, materials, and facilities. The scale-up of Somatix's cell
processing capabilities will therefore require a significant
investment in both the regulatory and manufacturing infrastructure.

The Company intends to market and sell some of its products
directly, while relying on sales and marketing expertise of
potential corporate partners for other programs. The decision to
market products directly or through corporate partners will be
based on a number of factors, including market size and
concentration, the size and expertise of the partner's sales force
in a particular market, and the Company's overall strategic
objectives. The Company is currently engaged in discussions with
potential partners.

Competition

The Company is aware of several development stage and
established enterprises, including prominent pharmaceutical and
biotechnology firms, which are exploring the field of human gene
therapy or are actively conducting research in areas of gene
insertion using retroviral vectors and other methods. The Company
may also experience competition from other companies which have
acquired or may in the future acquire technology from universities
and other research institutions. As these companies develop, they
may build or acquire proprietary positions involving certain
aspects of gene therapy. Competitors have been acquired by
Companies with greater resources than the Company has available.

Some disease indications included in Somatix's gene therapy
program focus are already being treated. In some cases the
treatment is expensive, and not completely successful. While
Somatix believes that gene therapy has the potential to provide
more effective treatment than these current therapies, there is no
assurance that other companies will not develop treatments superior
to Somatix's gene therapy.

Patents, Proprietary Rights and Licenses

The Company's proprietary position includes rights under
patents and patent applications covering genetically modified
cells, methods of transferring foreign genes into such cells, and
the use of these cells to treat certain diseases. Patent positions
in the field of biotechnology are generally highly uncertain and
involve complex legal and scientific questions. To date, no
consistent policy has been developed in the U.S. Patent and
Trademark Office regarding the breadth of claims allowed in
biotechnology patents. Accordingly, there can be no assurance that
patent applications licensed to the Company will result in the
issuance of patents, or that, if issued, patents will afford the
Company protection against competitors with similar technology.
The Company also relies upon unpatented proprietary technology. No
assurance can be given that the Company can meaningfully protect
its rights with regard to such unpatented proprietary technology or
that competitors will not duplicate or independently develop
substantially equivalent technology.

The Company believes that there may be a significant amount
of litigation in the industry involving patent and other intellectual
property rights in the gene therapy area. If the Company were
involved, regardless of the outcome, a substantial expenditure of
the Company's financial and human resources might be required to
defend the Company's intellectual property. The Company's
processes and products may be the subject of infringement actions
if they are thought to infringe patents which have been granted to
competitors or research institutions. In the event infringement
actions were filed against the Company, damages would be sought,
and

<PAGE>

certain research and products might be enjoined, if such patents
were found by a court of competent jurisdiction to be valid,
infringed, and enforceable. If such an action were successful, in
addition to any potential liability for damages, the Company could
be required to obtain a license in order to continue to use the
affected process or manufacture the affected product, or to cease
using such process or product. There can be no assurance that the
Company would prevail in such litigation, or that any required
license would be made available on acceptable terms, or at all. In
addition to the defense of infringement actions, the Company could
incur substantial costs in lawsuits in which the Company's patents
may be asserted by it against another party for that party's
infringing activities.

One of the Company's competitors has been granted an
exclusive license to a United States patent issued to the National
Institute of Health covering ex vivo gene therapy. While the Company
has licensed two U.S. patents covering the ex vivo modification of
epithelial cells and one U.S. patent covering the ex vivo
modification of cells to treat diseases of the central nervous
system, and while all three patents' filing dates are earlier than
the filing date of the competitor's licensed patent, there can be
no assurance that the competitor's patent will not prevail and that
if it prevails, that any rights under such will be available to the
Company on commercially reasonable terms, or at all.

In addition, the Company is aware that a competitor has
licensed pending patent applications relating to certain types of
genetically modified cells. For example, the Company is aware of a
pending application covering certain genetically modified
endothelial cells and their use in gene therapy. The patent
application is assigned to the U.S. government, and the Company
believes that it is exclusively licensed to a competitor. However,
this application has a filing date later than the filing date of
the endothelial cell patent rights licensed to the Company. Rights
to endothelial cells and their use are undetermined, and may not be
determined for some time. European patent rights for endothelial
cells have been granted to the Company, and no opposition has been
filed against these rights.

Because patent applications in the United States are
maintained in secrecy, and because publication of discoveries in
the scientific literature lags behind the actual discoveries,
Somatix cannot be certain that its licensors were the first
creators of inventions covered by its pending patent applications
or that they were the first to file such applications.

In order to manufacture and market its products, the Company
may be required to obtain licenses to patents or other proprietary
rights of third parties. There can be no assurance that the
Company will be able to obtain a license to any third party
technology which it may require to conduct its business or that, if
obtainable, such technology can be licensed at a reasonable cost.
If the Company does not obtain such licenses, it could encounter
delays in introducing any such potential products while it attempts
to design around such patents, or it could find that the
development, manufacture or sale of such products is foreclosed.
Failure by the Company to obtain a license to a technology which it
may require to commercialize its technologies or products may have
a material adverse effect on the Company.

Somatix's policy is to file, where appropriate, patent
applications based on its own research to protect technology,
inventions, and improvements which are important to the development
of its business. For example, the Company has filed several patent
applications on inventions related to the engineering of viral gene
therapy vectors and non-viral gene therapy vectors. The Company
also relies on trade secrets, expertise, continuing technological
innovations, and licensing opportunities to develop and maintain
its competitive position. Somatix intends to continue to
aggressively pursue patent applications to issuance and to defend
its patents against third parties.

To date, Somatix's proprietary position also includes
patents and patent applications licensed-in from academic institutions
and a corporation. The Company's licensed-in proprietary position
includes:

Gene Transfer Methodology. Somatix and the Whitehead
Institute jointly own patent applications which have been filed in
the United States, Europe, Japan, Canada, and several other
countries. These applications cover modified disabled retroviruses
used to transfer genes into cells which the Company is developing
in its programs.

<PAGE>

Somatix also has an exclusive license from The Whitehead
Institute to patent applications in the United States, Europe, and
Japan that cover packaging cell lines used to produce vectors,
methods of construction, and methods of use for introducing DNA
into cells.

In connection with its acquisition of Merlin Pharmaceutical
Corporation in February 1995, the Company has obtained licenses to
alternative gene transfer methodology from DNX, Inc., the
University of Pittsburgh, Yale University and the State University
of New York. Under these licenses, the Company has exclusive
rights to several important inventions and patent applications for
novel adeno-associated virus (AAV) vectors, for the production and
use of those vectors for gene therapy applications.

Cell Types. Somatix has an exclusive license from The
Whitehead Institute to two U.S. patents covering genetically
modified epithelial cells and methods for creating; an additional
application is pending. Additionally, a European patent and an
Israeli patent have been granted and are exclusively licensed to
the Company.

Somatix has an exclusive, worldwide license from The
Whitehead Institute to patent applications for other cell types useful
in gene therapy. These applications have been filed in the United
States, Canada, Europe, and Japan and cover transduced fibroblasts,
hepatocytes and endothelial cells, as well as methods for their
creation and use in gene therapy.

Somatix has an exclusive, worldwide license from The Salk
Institute to a U.S patent application covering genetically modified
fibroblasts for implantation in patients.

Gene Therapy Applications. Somatix has an exclusive,
worldwide license from the University of California to an issued
patent covering methods for treating diseases of the central
nervous system using genetically modified cells.

Somatix has an exclusive, worldwide license from The Johns
Hopkins University and the University of Texas to a patent
application for the use of genetically modified cells for cancer
vaccines.

Additionally, the Company is negotiating additional
exclusive rights to related technology including other viral vectors
for certain gene therapy applications which may be useful in the
Company's programs.

The Company has acquired significant proprietary rights
under license agreements which permit the licensors to terminate those
agreements in the event of certain material breaches by the
Company. Although the Company has no reason to believe it is
currently in default under any of these agreements, there can be no
assurance that such defaults will not occur in the future. Should
a default occur, and should any of those agreements be terminated,
the Company could lose the right to continue to develop one or more
of its potential products.

Access to Proprietary Genes

Some of the genes used by the Company in its gene therapy
products are or may become patented by third parties. As a result,
the Company may be required to obtain licenses under such patents
in order to conduct certain research or to manufacture or market
products that contain proprietary genes. There can be no assurances
that these licenses will be granted. For example, the Company is
aware of a United States patent for a factor VIII gene sequence
which has been licensed to a competitor for exclusive use in
certain cell types. These patent rights, however, are believed to
be involved in a multi-party interference in the USPTO, whereby the
patent rights licensed to the competitor were awarded to another
party to the interference. The Company does not currently believe
that the license will materially impact its ability to
commercialize its planned therapy for hemophilia patients. The
Company is also aware that the European rights to the gene for
human GM-CSF have been granted to a competitor. Following an
Opposition proceeding, this patent was confirmed by the European
Patent Office's Opposition Division. However, this award is
currently on appeal, and the European Technical Board of Appeals is
allowing new technical information to be introduced by the
appellants. In addition, the European PTO has granted another
patent which purportedly covers the gene for murine and human GM-
CSF. An Opposition to invalidate this patent has been filed by
another company. A resolution of this Opposition is not likely to
occur for the next one to three years. The Company is also aware
that the U.S. rights to the gene for GM-CSF have not been
determined. Accordingly, it is uncertain whether the Company

<PAGE>

will need to obtain rights to the use of the GM-CSF gene or, if
needed, that the Company will be able to obtain rights on
reasonable commercial terms.

Government Regulation

The Company's potential products will be subject to
regulation by the FDA and will require FDA approval before being
commercially marketed for human therapeutic use in this country.
Similar regulatory approval is also required in foreign countries.
The Company believes that its potential products will be regulated by
the FDA as biologic products. In order to initiate the clinical
trials needed to obtain supporting data for marketing approval, the
Company must file an IND with the FDA. An IND includes the results
of preclinical studies, details of the manufacture of product and a
detailed description of the proposed plan for clinical trials. If
the FDA finds deficiencies in the proposed plan, or otherwise
concludes that it would not be reasonably safe to proceed with the
planned studies, it may require changes in the IND before allowing
the clinical studies to begin.

Clinical trials are usually conducted in three phases that
may take several years to complete. The initial Phase I clinical
studies are primarily conducted to establish safety; however, some
Phase I clinical studies that involve terminal diseases may include
preliminary efficacy evaluations as well. Phase I studies may last
from six months to over one year, and usually involve 15-50 people.
Once safety parameters are established, Phase II studies are
initiated to determine therapeutic activity, as well as optimal
dosing and route of administration. Phase II studies may involve
20 to 100 people or more. Phase III studies are conducted to
demonstrate therapeutic efficacy in a statistically significant
manner at the optimal dose, route and schedule of administration.
These studies may include 200 to 1,000 patients. During all phases
of clinical trails, the FDA must be given periodic progress reports
and must be notified regarding adverse reactions, clinical
protocol changes and product changes. The FDA may suspend clinical
studies if clinical data indicate that patients are being subjected
to unreasonable risks. The uncertainty of the regulatory and
clinical research process could adversely affect the Company's
ability to clinically test, manufacture or market products.

Once clinical trials are completed, the product must receive
FDA marketing approval. The Company must submit a Product License
Application (PLA) and Establishment License Application (ELA).
Generally, the FDA takes between one and five years to review these
applications, and once approved, continues to monitor the effects
of the treatment. Even if a product is made commercially
available, the FDA has the power to limit or prevent further
production, based on findings of its surveillance program.

Additionally, the NIH has established guidelines for
research involving recombinant DNA molecules, which Somatix uses. The
Company now complies with, and intends to continue to comply with
these guidelines. Current guidelines state that proposals to
conduct clinical research involving gene therapy must be reviewed
by the NIH's Recombinant DNA Advisory Committee. Somatix's renal
cell carcinoma and U.S. melanoma protocols have been approved by
this body.

As discussed, gene therapy is a novel approach to treating
disease. Since it has not been tested extensively in humans,
regulatory requirements governing its testing are subject to
review. The uncertainty of these requirements may result in
extensive delays in initiating clinical trials and in the
regulatory approval process. Regulatory requirements ultimately
imposed could adversely affect the Company's ability to test,
manufacture or market products.

On October 25, 1993, the vaccines and related biological
products advisory committee to the Center for Biologics Evaluation
and Research ("CBER") of the FDA met to review issues related to
gene therapy, including the use of retroviruses and adenoviruses.
The committee did not recommend limiting the use of viral vectors
in gene therapies and made certain recommendations that will be
incorporated into a revision of the FDA's 1991 "Points to Consider"
document related to gene therapies and somatic cell therapies.

Compliance with Environmental Laws

10.

<PAGE>

The Company is unable to estimate the extent and impact of
regulation in the biotechnology field resulting from such future
federal, state or local legislation or administrative action.

11.

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RISK FACTORS

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

The Company anticipates that its existing cash, together
with the net proceeds of this private placement and interest income,
will be adequate to satisfy its capital requirements for at least
the next twelve months. The Company's future capital requirements
will depend on many factors, including the progress of the
Company's research and development, the scope and results of
preclinical studies and clinical trials, the cost of obtaining
regulatory approvals, the rate of technological advances,
determinations as to the commercial potential of the Company's
products under development, the status of competitive products and
the establishment of manufacturing capacity. The Company
anticipates that it will be required to raise substantial
additional funds, including funds raised through collaborative
relationships and public or private financings. Because of the
Company's significant long-term capital requirements, it may seek
to access the public equity markets whenever conditions are
favorable, even if it does not have an immediate need for
additional capital at that time. No assurance can be given that
additional financing will be available on acceptable terms, or at
all. If adequate funds are not available, the Company will be
required to curtail significantly its research and development
programs or may be required to discontinue its programs in their
entirety and liquidate its assets.

EARLY STAGE OF DEVELOPMENT; NO DEVELOPED OR APPROVED PRODUCTS

Somatix's potential gene therapy products are in research
and development. No revenues have been generated from the sale of any
of such products, nor are any such revenues expected for at least
the next several years. The products currently under development
by the Company will require significant additional research and
development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There
can be no assurance that the Company's research and development
efforts will be successful, that any of the Company's potential
gene therapy products will prove to be safe and effective in
clinical trials or that any commercially successful products will
ultimately be developed by the Company. Even if developed, these
products may not receive regulatory approval or be successfully
introduced and marketed at prices that would permit the Company to
operate profitably.

TECHNOLOGICAL UNCERTAINTY

Gene therapy is a new technology, and existing preclinical
and clinical data on the safety and efficacy of gene therapy are very
limited. Data relating to the Company's specific gene therapy
approaches are even more limited. The Company's GVAX cancer
vaccine product is being tested in Phase I human clinical trials
primarily to determine its safety; none of the other products under
development at the Company are in human clinical trials. The
results of preclinical studies do not predict safety or efficacy in
humans. Possible serious side effects of gene therapy include
viral infections, the initiation of cancers and possible autoimmune
diseases in the patient. There can be no assurance that
unacceptable side effects will not be discovered during preclinical
and clinical testing of the Company's potential products or
thereafter. There are many reasons that potential products that
appear promising at an early stage of research or development do
not result in commercialization. Although the Company is testing
one of its proposed products in Phase I clinical trials, there can
be no assurance that the Company will be permitted to undertake
human clinical trials for any of its other products or that the
results of such testing will demonstrate safety or efficacy. Even
if clinical trials are successful, there is no assurance that the
Company will obtain regulatory approval for any indication, or that
an approved product can be produced in commercial quantities at
reasonable costs, or be successfully marketed. The Company has
also recently begun development of in vivo approaches to gene
therapy that will target specific cells. There can be no assurance
that the desired specificity will be attained or that such products
will not have serious side effects.

OPERATING LOSS AND ACCUMULATED DEFICIT

The Company has incurred net losses since its inception. At
June 30, 1995, the Company's accumulated deficit was approximately
$149.5 million. Such losses have resulted principally from
expenses incurred in the Company's research and development
programs, the acquisition of new technology, and to a lesser
extent, from general and administrative expenses. The Company
incurred a loss of $39.1 million in fiscal 1995 and expects to
incur substantial and increasing losses for at least the next
several years due primarily to

12.

<PAGE>

the expansion of its research and development programs, including
preclinical studies, clinical trials and manufacturing. The
Company expects that losses will fluctuate from quarter to quarter
and that such fluctuations may be substantial. There can be no
assurance that the Company will successfully develop,

commercialize, manufacture or market its products or ever achieve
or sustain product revenues or profitability.

VOLATILITY OF STOCK PRICE

The market prices for securities of biopharmaceutical and
biotechnology companies (including the Company) have historically
been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies.
Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic
products by the Company or its competitors, governmental
regulation, developments in patent or other proprietary rights,
public concern as to the safety of products developed by the
Company or others and general market conditions may have a
significant effect on the market price of the Common Stock.

UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL
PROCESS

Because gene therapy is a relatively new technology and has
not been extensively tested in humans, the regulatory requirements
governing gene therapy products are uncertain and may be subject to
substantial further review by various regulatory authorities in the
United States and abroad. These uncertain requirements may result
in extensive delays in initiating clinical trials and in the
regulatory approval process. Regulatory requirements ultimately
imposed could adversely affect the Company's ability to clinically
test, manufacture or market products.

The Company believes that its potential products will be
regulated by the FDA as biologics. Each potential product for a
specific disease application may be subject to regulation as a
separate biologic, depending on its intended use and FDA policy.
The regulatory process for new therapeutic products, including the
required preclinical and clinical testing, is lengthy and
expensive, and there can be no assurance that FDA approvals will be
obtained in a timely manner, if at all. Future United States or
foreign legislative or administrative actions could also prevent or
delay regulatory approval of the Company's products. There can be
no assurance that the Company will be able to obtain the necessary
authorizations to initiate clinical trials or approvals to market
any of its potential products. Even if FDA regulatory approvals
are obtained, a marketed product is subject to continual review.
Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in product
marketing restrictions or withdrawal of the product from the
market, as well as possible civil or criminal sanctions. In
addition, many academic institutions and companies doing research
in the gene therapy field are using a variety of approaches and
technologies. Any adverse results obtained by such researchers in
preclinical or clinical studies could adversely affect the
regulatory environment for gene therapy products generally,
possibly leading to delays in the approval process for the
Company's potential products.

The Company's business is subject to regulation under state
and federal laws regarding environmental protection and hazardous
substances control. The Company believes that its efforts to
comply with these laws have had no adverse impact upon its capital
expenditures, results of operations or competitive position, but
there can be no assurance that this situation will continue.
Federal and state agencies and congressional committees have
expressed interest in further regulation of biotechnology. The
Company is unable to estimate the extent and impact of regulation
in the biotechnology field resulting from any future federal, state
or local legislation or administrative action.

13.

<PAGE>

DEPENDENCE UPON KEY PERSONNEL AND COLLABORATIVE RELATIONSHIPS

The Company's success is highly dependent on the retention
of principal members of its management and scientific staff and the
recruitment of additional qualified personnel. The loss of key
personnel or the failure to recruit necessary additional qualified
personnel could have an adverse effect on the operations of the
Company. There is intense competition from other companies,
research and academic institutions and other organizations for
qualified personnel in the areas of the Company's activities.
There is no assurance that Somatix will be able to continue to
attract and retain the qualified personnel necessary for the
development of its business. These activities are expected to
require the addition of new personnel with expertise in the areas
of clinical testing, manufacturing, marketing and distribution and
the development of additional expertise by existing personnel. The
failure to acquire such personnel or develop such expertise could
adversely affect prospects for the Company's success.

The Company has entered into consulting arrangements with
former Merlin Pharmaceutical Corporation founders for their
services with respect to adenoviral vector and adeno-associated
viral vector technologies. While the Agreement and Plan of
Reorganization with Merlin calls for a substantial reduction in
shares to be issued to former Merlin stockholders if the founders
do not exclusively work on Somatix projects for the first 18 months
after the Merger, there can be no assurance that they will stay
during the period or will continue to be associated with the
Company once the 18 month period has been completed in August 1996.

The Company has clinical trial arrangements with The Johns
Hopkins University covering a Phase I clinical trial to treat
kidney cancer patients, now in progress, and a Phase I/II clinical
trial to treat prostate cancer patients for which RAC approval has
been obtained, but for which no patients have yet been enrolled.
The Company has additional arrangements with the Netherlands Cancer
Institute and the Dana Farber Cancer Center to treat melanoma
patients in two separate Phase I clinical trials. Both trials are
currently in progress. In the event that any of these
relationships are terminated, the completion and evaluation of
clinical trials could be adversely affected. In addition, the
Company has an arrangement with the Parkinson's Institute of Santa
Clara, California to provide animal facilities, animals and
consulting services in connection with preclinical testing of its
gene therapy product for Parkinson's disease. If the relationship
were terminated, progress of preclinical testing would be adversely
affected.

The Company depends in part on the continued availability of
outside scientific collaborators performing research, which may be
funded by the Company, in certain areas relevant to the Company's
research. These relationships generally may be terminated at any
time by the collaborator, typically by giving 30 days' notice to
the Company. The Company's scientific collaborators are not
employees of the Company. As a result, the Company has limited
control over their activities and can expect that only limited
amounts of their time will be dedicated to Company activities. The
Company's agreements with these collaborators as well as those with
the Company's scientific consultants provide that any rights the
Company obtains as a result of the research efforts of these
individuals will be subject to the rights of the research
institutions in such work. In addition, some of these
collaborators have consulting or other advisory arrangements with
other entities that may conflict with their obligations to the
Company. For these reasons, there can be no assurance that
inventions or processes discovered by the Company's scientific
collaborators or scientific consultants will become the property of
the Company.

PATENTS, PROPRIETARY RIGHTS AND LICENSES

Patent positions in the field of biotechnology are generally
highly uncertain and involve complex legal and scientific
questions. To date, there has emerged no consistent policy
regarding the breadth of claims allowed in biotechnology patents,
especially in the area of gene therapy. Accordingly, there can be
no assurance that patent applications and patents licensed to the
Company will result in patents being issued or that, if and when
issued, the patents will afford protection against competitors with
similar technology. The Company has licensed two U.S. patents
covering the ex vivo modification of cells to treat diseases of the
central nervous system, and all three patents have filing dates
earlier than the filing date of the competitor's patent. However,
there can be no assurance that the competitor's patent will not
remain in force, and if it does, that any rights under the patent
will be available to the Company on commercially reasonable terms.
The Company also relies upon unpatented proprietary technology. No
assurance can be given that the Company can meaningfully protect
its rights in such unpatented proprietary technology or that others
will not duplicate or independently develop substantially
equivalent technology.

14.

<PAGE>

The Company's processes and potential products may conflict
with patents which have been or may be granted to competitors,
academic institutions, universities or others. As the
biotechnology industry expands and more patents are issued, the
risk increases that the Company's processes and potential products
may give rise to claims that they infringe the patents of others.
Such other persons could bring legal actions against the Company
claiming damages and seeking to enjoin certain research,
manufacturing and marketing of the affected process or potential
product. If any such actions are successful, in addition to any
potential liability for damages, the Company could be required to
obtain a license in order to continue to use the affected process
or to manufacture or use the affected product or cease using such
product or process if enjoined by a court. There can be no
assurance that the Company would prevail in any such action or that
any license required under any such patent would be made available
on acceptable terms, or at all. The Company believes that there
may be significant litigation in the industry regarding patent and
other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion
of the Company's financial and human resources, regardless of the
outcome of such litigation.

In addition, the Company is aware of pending patent
applications which have been licensed to another competitor of the
Company relating to certain types of genetically modified cells.
For example, the Company is aware of a pending application covering
genetically modified endothelial cells and their use in gene
therapy. The patent application is assigned to the United States
Government, and it is believed that the patent application is
exclusively licensed to a competitor. There is no assurance that a
license to this or related patent applications will be available to
the Company. Furthermore, as gene therapy becomes more
established, others may enter the field who have patent rights to
genes and technology which may be used in gene therapy. If the
Company is unable to obtain licenses to such patents, its business
may be substantially and adversely affected. In addition, since
patent applications in the United States are maintained in secrecy
until patents issue, and since publication of discoveries in the
scientific or patent literature often lags behind actual
discoveries, Somatix cannot be certain that its licensors were the
first creators of inventions covered by its pending patent
applications or that they were the first to file patent
applications for such inventions.

In order to manufacture and market its products, the Company
may be required to obtain licenses to patents or other proprietary
rights of third parties. There can be no assurance that the
Company will be able to obtain a license to any third party
technology that it may require to conduct its business or that, if
obtainable, such technology can be licensed at a reasonable cost.
If the Company does not obtain such licenses, it could encounter
delays in introducing any such potential products while it attempts
to design around such patents, or it could find that the
development, manufacture or sale of such potential products could
be adversely effected. Failure by the Company to obtain a license
to any technology that it may require to commercialize its
technologies or potential products may have a material adverse
effect on the Company. In addition, the Company could incur
substantial costs in defending itself in lawsuits brought against
it on such patents or in lawsuits in which the Company's patents
may be asserted by it against another party.

A number of the DNA sequences which the Company expects to
use in its gene therapy products are or may become patented by third
parties. As a result, the Company may be required to obtain
licenses under such patents in order to conduct certain research,
to manufacture or to market products that contain proprietary
genes. There can be no assurance that such licenses will be
available on commercially reasonable terms, if at all. Although
the rights to the DNA Sequence for the Form of Factor VIII used by
the Company have not yet been determined, the Company is aware of
United States patents for factor VIII DNA sequences that have been
licensed to competitors for exclusive use in their gene therapy
programs. Unless the Company can similarly license such sequences
or other sequences, the Company may not be able to commercialize
its hemophilia program. The Company is aware of proceedings to
determine rights to the human GM-CSF cDNA sequence in the United
States and Europe. In the United States, in the most recent public
disclosure of which the Company is aware, the Board of Patent
Appeals and Interferences granted a motion by a third party in an
interference proceeding stating that the human GM-CSF CDNA sequence
is not patentable over the prior art. In Europe, an

15.

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Opposition proceeding initiated by a third party to invalidate a
European patent covering human GM-CSF CDNA was unsuccessful. The
decision by the European Patent Office Opposition Division
upholding the patent has been appealed by this third party. There
can be no assurance of the outcome of these proceedings or the
outcome of these proceedings on appeal, or that, if required, a
license of rights to the gene sequence will be available to the
Company on commercially reasonable terms, if at all.

The Company has acquired significant proprietary rights
under license agreements that permit the licensors to terminate those
agreements in the event of certain material breaches by the
Company. Although the Company is not currently in default under
any of these agreements, there can be no assurance that such
defaults will not occur in the future. Should a default occur, and
should any of those agreements be terminated in the future, the
Company could lose the right to continue to develop one or more of
these potential products.

COMMERCIALIZATION: LACK OF MANUFACTURING OR MARKETING EXPERIENCE

The Company intends to market and sell some of its potential
products directly, while relying on sales and marketing expertise
of potential corporate partners for other programs. The Company
has no experience in sales, marketing or distribution of
biopharmaceutical products and has not developed a specific sales
and marketing plan with respect to any of its potential products.
The decision to market products directly or through corporate
partners will be based on a number of factors including market size
and concentration, the size and expertise of the partner's sales
force in a particular market and the Company's overall strategic
objectives. The Company is currently engaged in various stages of
discussions with potential partners. There can be no assurance
that the Company will be able to establish such relationships on
acceptable terms and conditions, or at all.

The Company's current commercialization strategy is to sell
genetically modified cells to hospitals and clinics. The Company
will be required to operate facilities in which each patient's
cells are genetically modified, processed and tested in compliance
with the Good Manufacturing Practices published in the U.S. Code of
Federal Regulations. Currently, the Company can manufacture
genetically modified cells in quantities sufficient to meet its
needs for clinical testing but does not have the capability to
manufacture sufficient quantities to meet large-scale commercial
requirements. The Company believes that its processes can be
scaled-up efficiently to meet its anticipated future requirements,
but there can be no assurance that problems or delays will not
arise in such scale-up. The manufacture of sufficient quantities
of the Company's potential products can be an expensive, time-
consuming and complex process. If the Company is unable to develop
such manufacturing capabilities, the Company's ability to
commercialize its products will be adversely affected. This could
prevent or delay submission of products for regulatory approval and
initiation of new development programs, which would have a material
adverse effect on the Company.

COMPETITION

The gene therapy field is new and rapidly evolving, and it
is expected to continue to undergo significant and rapid technological
change. Rapid technological development could result in the
Company's potential products, services or processes becoming
obsolete before the Company recovers a significant portion of its
related research, development and capital expenditures. The
Company will experience competition both from other companies in
the field of gene therapy and from companies which have other forms
of treatment for the diseases targeted by the Company. The Company
is aware of several development stage and established enterprises,
including major pharmaceutical and biotechnology firms as well as
several major universities, which are exploring the field of human
gene therapy or are actively engaged in research and development in
areas including both retroviral vectors and other methods of gene
transfer. To the Company's knowledge, at least one of these
companies and several universities have participated in clinical
trials using retroviral vectors. The Company may also experience
competition from companies that have acquired or may acquire
technology from such universities and other research institutions.
As these companies develop their technologies, they may develop
proprietary positions in certain aspects of gene therapy. Certain
competitors and potential competitors of the Company have
substantially greater product development capabilities and
financial, scientific, marketing and human resources than the
Company, and other competitors of the Company may enter into
collaborative relationships with other companies having such
greater resources. Other companies may succeed in developing
products earlier than the Company, obtaining FDA approvals for such
products more rapidly than the Company, or developing products that
are more effective than those proposed to be developed by the
Company. There can be no assurance that research and development
by others will not render the Company's technology or products

16.

<PAGE>

obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by
the Company will be preferred to any existing or newly developed
technologies.

PRODUCT LIABILITY AND INSURANCE

Clinical trials or marketing of any of the Company's
potential products may expose the Company to liability claims
resulting from the use of such products. These claims might be made
directly by consumers, health care providers or by others selling such
products. The Company currently maintains product liability
insurance with respect to its former product lines and this
coverage includes clinical trials. The policy coverage is $5
million and is on a claims made basis. There can be no assurance
that the Company will be able to maintain such insurance or, if
maintained, that sufficient coverage can be acquired at a
reasonable cost. An inability to maintain insurance at acceptable
cost or at all could prevent or inhibit the clinical testing or
commercialization of products developed by the Company. A product
liability claim or recall could have a material adverse effect on
the business or financial condition of the Company.

HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS

The Company's research and development activities involve
the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. The Company is subject to federal,
state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations,
the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company. The
Company may be required to incur significant costs to comply with
environmental laws and regulations in the future. The Company's
operations, business or assets may be materially or adversely
affected by current or future environmental laws or regulations.

REIMBURSEMENT

In both domestic and foreign markets, sales of the Company's
potential products will depend in part upon coverage and
reimbursement from third-party payors, including health care
organizations, including government agencies, private health care
insurers and other health care payors such as health maintenance
organizations, self-insured employee plans and the Blue Cross/Blue
Shield plans. There is considerable pressure to reduce the cost of
drug products. In particular, reimbursement from government
agencies and insurers and large health organizations may become
more restricted in the future. The Company's potential products
represent a new mode of therapy, and, while the cost-benefit ratio
of the products may be favorable, the Company expects that the
costs associated with its products will be substantial. There can
be no assurance that the Company's proposed products, if
successfully developed, will be considered cost-effective by third
party payors, that insurance coverage will be available or, if
available, that such payors' reimbursement policies will not
adversely affect the Company's ability to sell its products on a
profitable basis. In addition, there can be no assurance that
insurance coverage will be provided by such payors at all or
without substantial delay, or, if such coverage is provided, that
the approved reimbursement will provide sufficient funds to enable
the Company to become profitable.

UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS

The future revenues and profitability of and availability of
capital for biotechnology companies may be affected by the
continuing efforts of governmental and third party payors to
contain or reduce the costs of health care through various means.
For example, in certain foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control. In
the United States, there have been, and the Company expects that
there will continue to be, a number of federal and state proposals
to implement similar government control. While the Company cannot
predict whether any such legislative or regulatory proposals will
be adopted, the announcement or adoption of such proposals could
have a material adverse effect on the Company's prospects.

17.

<PAGE>

Executive Officers of the Company

The following table sets forth certain information with
respect to the executive officers of the Company:

NAME AGE POSITION

David W. Carter 56 Chairman and Chief
Executive Officer

Richard C. Mulligan,
Ph.D. 40 Executive Vice
President, Research
and Chief Scientific
Officer

Jan I. Drayer, M.D.,
Ph.D. 49 Executive Vice President,
Gene Therapy Development

Edward O. Lanphier II 39 Executive Vice President,
Commercial Development

Mark N.K. Bagnall 38 Vice President, Finance
and Chief Financial
Officer

Mr. Carter has been Chief Executive Officer of the Company
since September 1991, and has served as a director of the Company
since 1988. From 1986 until joining Somatix in 1991, he was
President and Chief Operating Officer of Northfield Laboratories, a
company developing an artificial blood product. Mr. Carter is a
member of the board of directors of Northfield Laboratories.

Dr. Mulligan was a founder and director of Somatix
Corporation from its formation in January 1988 until the Merger with
Hana Biologics, Inc. in March 1991. Since that time, he has been a
director and consultant to the Company, and has served as Chairman
of the Scientific Advisory Board. Dr. Mulligan has been a member
of the faculty of the Massachusetts Institute of Technology since
1981, where he currently holds the position of Professor of
Molecular Biology. He is also a member of the Whitehead Institute
for Biomedical Research, a research affiliate of MIT.

Dr. Drayer joined Somatix in March 1995. Previously, he
served as senior vice president of scientific affairs at G.H.
Besselaar, a leading clinical research organization from 1990 to
1995, where he worked closely with Somatix in the areas of clinical
development and regulatory affairs. Dr. Drayer was also with
Boeringer Ingelheim as director of clinical research. He sits on
the editorial boards of several clinical development journals.

Mr. Lanphier joined the Company in July 1992 as Executive
Vice President, Commercial Development. He was most recently Senior
Vice President of Business Development and Marketing at Celtrix
Pharmaceuticals, Inc. from December 1991 to July 1992. From 1988
to 1991 he was President and Chief Executive Officer of BioGrowth,
Inc. Mr. Lanphier previously has held positions with
Biotherapeutics, Inc., Synergen, Inc. and Eli Lilly & Company.

18.

<PAGE>

Mr. Bagnall was named Vice President, Finance, and Chief
Financial Officer of Somatix in July 1992. From September 1990
until that time, Mr. Bagnall served as Treasurer and Secretary
after joining the Company as the controller in May 1988. Mr.
Bagnall remains Secretary of the Company. Prior to joining the
Company, Mr. Bagnall held positions in high technology companies as
well as Arthur Young and Company. Mr. Bagnall is a Certified
Public Accountant.

Officers are appointed to serve, at the discretion of the
board of Directors, until their successors are appointed. There
are no family relationships among executive officers of the
Company.

Employees

As of June 30, 1995, the Company employed 107 individuals
full-time, of whom 19 hold Ph.D. degrees, and 8 hold M.D. degrees.
Of these employees, 23 were engaged in research, 71 in gene therapy
development, and 13 in finance and administration. None of the
Company's employees is represented by a labor union or is the
subject of a collective bargaining agreement. The Company has
never experienced a work stoppage and believes that it maintains
good relations with its employees.

ITEM 2. PROPERTIES

The Company operates a laboratory facility in Alameda,
California. This facility houses the research and development
staff and laboratories of the Company. The Company has occupied
this facility since March 1987 and believes that it is well
maintained and generally adequate for the Company's present needs
and intended uses. The facility is located in a building of
approximately 40,000 square feet at 850 Marina Village Parkway,
Alameda, California 94501. The facility is leased through February
1997, at an approximate annual rent of $560,000. In addition, on
July 1, 1994 the Company leased approximately 16,000 square feet of
office space for the corporate headquarters and administrative
staff at 950 Marina Village Parkway and on March 1, 1994 leased
26,000 square feet of shell space at 2060 Challenger Drive, Alameda
for a prospective manufacturing site which is idle and is being
marketed for sublease. The approximate annual rents are $213,000
and $380,000, respectively, through February 2004. The Company has
a one-time option to terminate these leases after 5 years. 13,000
square feet of office space at 1301 Marina Village Parkway, leased
at an approximate annual rent of $211,000 until September 1993 and
$279,000 per year thereafter through November 1997, is idle and is
being marketed for subleasing.

As a result of the Merlin acquisition, the Company assumed
Merlin's leased 2,500 square foot laboratory in Morrisville, North
Carolina. The lease is through December 1995 at a cost of
approximately $3,500 per month.

ITEM 3. LEGAL PROCEEDINGS

(a) No material legal proceedings to which Somatix was
a party or of which any of its property was the subject were pending
during fiscal 1995.

(b) No material legal proceedings were terminated in
the fourth quarter of fiscal 1995.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-
HOLDERS

No matters were submitted to a vote of the Company's
stockholders during the last quarter of the fiscal year ended
June 30, 1995.

19.

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Shares of the Company's common stock commenced trading in
the over-the-counter market on the NASDAQ National Market on June 5,
1986, under the symbol "HANA". On March 15, 1991, as a result of
the Merger of Hana and Somatix and the subsequent name change to
Somatix Therapy Corporation, the trading symbol was changed to
"SOMA". As of June 30, 1995, there were approximately 1016 holders
of record of the Company's common stock.

The Company has never paid cash dividends and does not
anticipate paying cash dividends in the foreseeable future.

The following table sets forth, for fiscal periods
indicated, the range of high and low closing sale prices available for
the fiscal years 1995 and 1994.

1995 HIGH LOW

Fourth Quarter $ 5 1/16 $ 3
Third Quarter 5 1/4 2 7/8
Second Quarter 5 1/2 2 7/8
First Quarter 6 5/8 4 1/8

1994 HIGH LOW

Fourth Quarter $ 7 3/8 $ 4 1/4
Third Quarter 9 5 3/8
Second Quarter 9 1/8 6
First Quarter 7 3/4 5 1/4

ITEM 6. SELECTED FINANCIAL DATA

Consolidated Statements of Operations Data:

<TABLE>
FISCAL YEAR ENDED JUNE 30,
______________________________________________________________________________________________
<CAPTION>
1995 1994 1993 1992 1991
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing agreement . . $ -- $ 2,000 $ -- $ -- $ --

20.

<PAGE>

Research agreements . . 250 900 -- -- --
Contract
manufacturing. . . . -- -- -- 69 2,564
________________ _______________ ________________ _________________ _________________
Total revenues . . . 250 2,900 -- 69 2,564

Costs and Expenses:
Cost of revenues. . . . -- -- -- 1,035 2,149

Research and
development. . . . . 18,395 13,186 12,732 7,444 5,759
General and
administrative . . . 4,699 3,895 3,903 2,568 2,070
Restructuring costs. . . . 2,752 -- -- -- --
In-process
technology . . . . . 13,679 -- -- 33,038 19,381
________________ _______________ ________________ _________________ _________________
Total costs and
expenses . . . . . 39,525 17,081 16,635 44,085 29,359

Operating loss . . . . . . (39,275) (14,181) (16,635) (44,016) (26,795)
Other income, net. . . . . 222 474 964 793 844
________________ _______________ ________________ _________________ _________________
Net loss . . . . . . . . . $ (39,053) $ (13,707) $ (15,671) $ (43,223) $ (25,951)
================ ================ ================ ================= =================

Net loss per share . . . . $ (2.34) $ (0.95) $ (1.19) $ (4.43) $ (7.92)
================ ================ ================ ================= =================

Shares used in calculation
of net loss per
share . . . . . . . . . 16,661 14,418 13,191 9,752 3,277

Consolidated Balance Sheet Data:

Total assets . . . . . . . $ 19,128 $ 25,747 $ 23,524 $ 38,755 $ 13,531
Capital lease obligations,
noncurrent portion. . . 1,692 1,627 176 330 384
Stockholders' equity . . . 10,489 21,846 21,552 36,510 11,179

</TABLE>

ITEM 7. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW In February 1995, the Company completed the
acquisition of Merlin Pharmaceutical Corporation ("Merlin") a
privately held gene therapy company, pursuant to a stock
transaction whereby a subsidiary of the Company was merged into
Merlin. As a result of the Merlin acquisition, the Company wrote-

21.

<PAGE>
off to operations an amount equal to $13.7 million in fiscal year
1995. With the exception of fiscal year 1990, when the Company
sold its cell biology and diagnostic product line, the Company has
been unprofitable since its inception and expects to continue to
incur operating losses in future periods due to continued
requirements for product development, clinical trials, regulatory
activities and other areas. As of June 30, 1995, the Company had
an accumulated deficit of $149.5 million.

RESULTS OF OPERATIONS Revenues for the fiscal year ending
June 30, 1995 were $250,000 compared to $2,900,000 in fiscal year
1994. There were no revenues in fiscal year 1993. Revenue in
fiscal year 1995 was derived from a research agreement with Baxter
Healthcare Corporation. In fiscal year 1994, revenues were derived
from research and licensing agreements with Baxter Healthcare
Corporation and a private group of investors.

On June 29, 1995, the Company completed a restructuring and
cost savings program separating its research and development
infrastructure into two groups. The development group will focus
on clinical trials and product development and the research group
will focus on gene transfer technologies for various medical
applications. As a result of the restructuring, the Company
recorded a restructuring charge of $2,752,000, consisting
principally of employee severance pay, the accrual of future rent
obligations including the write-off of leasehold improvements, and
the write-down of certain assets.

Research and development expenses increased by $5,209,000 in
fiscal year 1995 and increased by $454,000 in fiscal year 1994.
The increase in research and development expenses in fiscal year
1995 was primarily due to increased staffing, recruitment costs,
patent legal services, technology license fees, supplies, and
research contracts to meet the requirements of increased
preclinical and clinical activities in progress. The increase in
research and development expenses in fiscal year 1994 was due
primarily to pre-clinical and clinical activities. The Company
expects research and development expenses to increase in future
periods as the Company's preclinical and clinical activities
progress.

General and administrative expenditures increased $804,000
in fiscal year 1995 and decreased $8,000 in fiscal year 1994. The
increase in fiscal year 1995 was primarily due to the write-off of
$741,000 of future rent expenses and leasehold improvements
associated with the former corporate headquarters which the Company
is currently marketing for sublease. The Company expects general
and administrative expenses to increase in future periods in
support of expanded research efforts.

Other income consists principally of interest income earned
on the Company's cash balances. Changes in other income are due to
fluctuations in cash balances available for investment and returns
on cash invested in recent periods.

LIQUIDITY AND CAPITAL RESOURCES On June 30, 1995, the
Company had cash, cash equivalents, and marketable securities of
$14,576,000 compared with $20,222,000 on June 30, 1994. The
decrease in cash, cash equivalents and marketable securities is
directly attributable to operating expenses associated with pre-
clinical and clinical trial activities. Subsequent to June 30,
1995, the Company received $10 million from an equity investment in
the Company (see Note 10 to the Consolidated Financial Statements).
Operating expenses have exceeded revenues every fiscal year, except
1990, since the Company's inception. For the year ending June 30,
1995, capital expenditures were $1,496,000, including $479,000 for
research and development equipment, $213,000 for microcomputer
equipment, peripherals, and software, $380,000 for leasehold
improvements to corporate headquarters, and $291,000 for
preliminary engineering expense for a proposed manufacturing
facility. The Company expects its net losses to increase
significantly in future periods due to increased research and
development costs and other expenses.

The Company anticipates that its existing cash will be
sufficient to meet its cash requirements for at least the next
twelve months. The Company has financed its operations since
inception principally through the sale of equity securities,
contract research revenues, license fees and interest income. The
Company's future

22.

<PAGE>

capital requirements will depend on many factors, including the
progress of the Company's research and development, the scope and
results of preclinical studies and clinical trials, the cost of
obtaining regulatory approvals, the rate of technological advances,
determinations as to the commercial potential of the Company's
products under development, the status of competitive products and
the establishment of manufacturing capacity. The Company
anticipates that it will be required to raise substantial
additional funds, including funds raised through collaborative
relationships and public or private financings. Because of the
Company's significant long-term capital requirements, it may seek
to access the public equity markets whenever conditions are
favorable, even if it does not have an immediate need for
additional capital at that time. No assurance can be given that
additional financing will be available on acceptable terms, or at
all. If adequate funds are not available, the Company will be
required to curtail significantly its research and development
programs or may be required to discontinue its programs in their
entirety and liquidate its assets.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

Financial Statements: PAGE

Report of Independent Auditors . . . . . . . . . . . 24
Consolidated Balance Sheets at
June 30, 1995 and 1994 . . . . . . . . . . . . . . 25-26
Consolidated Statements of Operations for Years Ended
June 30, 1995, 1994, and 1993 . . . . . . . . . . 27
Consolidated Statements of Stockholders' Equity for
Years Ended June 30, 1995, 1994, and 1993. . . . . . 28-29
Consolidated Statements of Cash Flows for Years Ended
June 30, 1995, 1994, and 1993. . . . . . . . . . . 30-31
Notes to Consolidated Financial Statements . . . . . 32-40

All financial statement schedules of the registrant for the
years ended June 30, 1995, 1994, and 1993 have been omitted since
the information is not required or is not so material as to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes
thereto.

23.

<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of
Somatix Therapy Corporation

We have audited the accompanying consolidated balance sheets
of Somatix Therapy Corporation as of June 30, 1995 and 1994, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period
ended June 30, 1995. 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 consolidated
financial position of Somatix Therapy Corporation at June 30, 1995
and 1994, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30,
1995, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

July 28, 1995, except Note 10 as to which the date is
August 14, 1995
San Francisco, California

24.

<PAGE>
<TABLE>
SOMATIX THERAPY CORPORATION
CONSOLIDATED BALANCE SHEETS

ASSETS

<CAPTION>
JUNE 30
________________________________

1995 1994
__________ __________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,326,000 $ 777,000
Marketable securities 250,000 19,196,000
Other current assets 726,000 901,000
________________________________ ____________________________
Total current assets 15,302,000 20,874,000
Marketable securities - 249,000
Restricted cash 300,000 250,000
Equipment and improvements, at cost:
Laboratory and production
equipment 3,942,000 4,040,000
Equipment under capital leases 3,078,000 2,107,000
Furniture and office equipment 1,115,000 1,204,000
Leasehold improvements 3,781,000 3,555,000
________________________________ ____________________________
Total equipment and
improvements 11,916,000 10,906,000
Less accumulated depreciation
and amortization 8,523,000 6,720,000
Net equipment and
improvements 3,393,000 4,186,000
Other assets 133,000 188,000
_________________________________ ____________________________
Total assets $ 19,128,000 $ 25,747,000
================================= ============================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued
liabilities $ 2,642,000 $ 1,418,000
Accrued compensation and
related expenses 992,000 311,000
Capital lease obligations,
current portion 718,000 517,000

25.

<PAGE>

Accrued restructuring costs,
current portion 859,000 -
Other current liabilities 186,000 15,000
_________________________________ ____________________________
Total current liabilities 5,397,000 2,261,000

Capital lease obligations, net of
current portion 1,692,000 1,627,000
Accrued restructuring costs, net
of current portion 1,288,000 -
Other liabilities 262,000 13,000

Commitments

Stockholders' equity:
Series A preferred stock, par value $0.01 per
share; liquidation preference of $6,350,000;
authorized 1,000,000 shares, issued
and outstanding 254,000 shares in 1995 and
none in 1994. 3,000 -
Common stock, par value $0.01 per share;
40,000,000 shares, issued and outstanding
20,991,996 shares in 1995 and 15,748,937
shares in 1994. 210,000 157,000
Additional paid-in capital 159,749,000 132,109,000
Accumulated deficit (149,473,000) (110,420,000)
_________________________________ ____________________________
Total stockholders' equity 10,489,000 21,846,000
_________________________________ ____________________________

Total liabilities and
stockholders' equity $ 19,128,000 $ 25,747,000
================================ ========================

See accompanying notes.

</TABLE>

26.

<PAGE>
<TABLE>
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED JUNE 30

________________________________________________

1995 1994 1993
__________ __________ ----------
<S> <C> <C> <C>

Revenues:
Licensing agreement $ - $ 2,000,000 $ -
Research agreements 250,000 900,000 -
_________________________ __________________________ _________________________
Total revenues 250,000 2,900,000 -
_________________________ __________________________ _________________________

Costs and Expenses:

Research and
development 18,395,000 13,186,000 12,732,000
General and
administrative 4,699,000 3,895,000 3,903,000
In-process technology 13,679,000 - -
Restructuring costs 2,752,000 - -
_________________________ __________________________ _________________________

Total costs
and expenses 39,525,000 17,081,000 16,635,000
_________________________ __________________________ _________________________
Operating loss (39,275,000) (14,181,000) (16,635,000)
Other income, net 222,000 474,000 964,000
_________________________ __________________________ _________________________
Net loss $ (39,053,000) $ (13,707,000) $ (15,671,000)
========================= ========================= =========================

Net loss per share $ (2.34) $ (0.95) $ (1.19)
========================= ========================= ========================= Shares
used in calculation of net
loss per share 16,660,528 14,417,679 13,191,035
========================= ========================= =========================
See accompanying notes.

</TABLE>
27.

<PAGE>
<TABLE>
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<CAPTION>
ADDITIONAL TOTAL

PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
____________________ ____________________
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
_____ ______ ______ ______ _______ ___________ ____________
<S> <C> <C> <C> <C> <C> <C> <C>

Years ended June 30, 1995, 1994
and 1993

Balances, June 30, 1992. . -- -- 13,137,317 $ 131,000 $117,421,000 $ (81,042,000) $ 36,510,000
____________ ____________ ____________ _____________ ____________
Issuance of shares of common stock
under stock option and purchase
plans. . . . . . . . . . -- -- 137,736 2,000 711,000 -- 713,000
Purchase and retirement of
common stock . . . . . . -- -- (8,447) -- -- -- --
Net loss . . . . . . . . . -- -- -- -- -- (15,671,000) (15,671,000)
____________ ____________ ____________ _____________ ____________
Balances, June 30, 1993. . -- -- 13,266,606 $ 133,000 $118,132,000 $ (96,713,000) $ 21,552,000

Issuance of shares of
common stock under
stock option and
purchase plans . . . . . -- -- 13,521 -- 69,000 -- 69,000
Private investment in public
equity financing at $5.85
per share, net of issuance
costs. . . . . . . . . . -- -- 2,005,483 20,000 10,842,000 -- 10,862,000
Issuance of common stock to
investors at $6.88 per share,
net of issuance costs. . -- -- 232,558 2,000 1,582,000 -- 1,584,000
Issuance of common stock to
investors at $6.50 per share,
net of issuance costs. . -- -- 230,769 2,000 1,484,000 -- 1,486,000
Net loss . . . . . . . . . -- -- -- -- -- (13,707,000) (13,707,000)
____________ ____________ ____________ _____________ ____________
Balances, June 30, 1994. . -- -- 15,748,937 $ 157,000 $132,109,000 $(110,420,000) $ 21,846,000

28.

<PAGE>

Issuance of shares of common stock
under stock option and purchase
plans. . . . . . . . . . -- -- 215,782 2,000 30,000 -- 32,000
Issuance of common stock to and
assumptions of options and
warrants upon the acquisition
of Merlin Pharmaceutical
Corporation. . . . . . . -- -- 2,257,385 23,000 12,574,000 -- 12,597,000
Private placement of common stock
at $3.68 per share,
net of issuance costs. . -- -- 2,769,892 28,000 8,689,000 -- 8,717,000
Private placement of preferred
stock at $25.00 per
share. . . . . . . . . . 254,000 $ 3,000 -- -- 6,347,000 -- 6,350,000

Net loss . . . . . . . . . -- -- -- -- -- (39,053,000) (39,053,000)
____________ ____________ ____________ ____________ ____________ _____________ ____________
Balances, June 30, 1995. . 254,000 $ 3,000 20,991,996 $ 210,000 $159,749,000 $(149,473,000) $10,489,000
============ ============ ============ ============ ============ ============= ============
See accompanying notes.
</TABLE>

29.

<PAGE>
<TABLE>
SOMATIX THERAPY CORPORATION

__________

CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
YEARS ENDED JUNE 30,
________________________________________

1995 1994 1993
__________ __________ __________
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . $ (39,053,000) $ (13,707,000) $ (15,671,000)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization . . . 1,965,000 1,466,000 1,232,000
Write-off of acquired
in-process technology. . . . . . 13,679,000 - -
Write-off of leasehold
improvements . . . . . . . . . . 324,000 - -
Decrease (increase)
in other current assets. . . . . 198,000 (140,000) (320,000)
Decrease (increase) in
other assets . . . . . . . . . . 55,000 (54,000) (134,000)
Increase (decrease) in accounts
payable and accrued
liabilities. . . . . . . . . . . 119,000 244,000 (72,000)
Increase (decrease) in accrued
compensation and related
expenses . . . . . . . . . . . . 681,000 (45,000) 94,000
Increase (decrease) in other
current liabilities. . . . . . . 171,000 (17,000) (75,000)

Increase in accrued restructuring
costs. . . . . . . . . . . . . . 2,147,000 - -
Increase (decrease) in other
liabilities. . . . . . . . . . . 249,000 (48,000) 76,000
_________________ ________________ ________________
Net cash used in operating
activities . . . . . . . . . . . (19,465,000) (12,301,000) (14,870,000)

Cash flows from investing activities:
Sales of marketable securities and changes
in restricted cash. . . . . . . . 25,975,000 9,625,000 6,533,000
Purchase of marketable
securities. . . . . . . . . . . . (6,830,000) (16,198,000) (3,453,000)
Purchase of equipment and
improvements. . . . . . . . . . . (1,496,000) (1,359,000) (2,480,000)
_________________ ________________ ________________
Net cash provided by (used in)
investing activities. . . . . . . 17,649,000 (7,932,000) 600,000

Cash flows from financing activities:
Borrowings under sale/leaseback
agreements. . . . . . . . . . . . 971,000 2,000,000 -
Principal payments under capital

30.

<PAGE>

lease obligations . . . . . . . . (705,000) (205,000) (296,000)
Net proceeds from issuance of
capital stock . . . . . . . . . . 15,099,000 14,001,000 713,000
_________________ ________________ ________________
Net cash provided by financing
activities. . . . . . . . . . . . 15,365,000 15,796,000 417,000

Net increase (decrease) in cash. . . 13,549,000 (4,437,000) (13,853,000)
Cash and cash equivalents, beginning
of period. . . . . . . . . . . . . . 777,000 5,214,000 19,067,000
_________________ ________________ ________________
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . . $ 14,326,000 $ 777,000 $ 5,214,000
================== ================= =================

Cash paid for interest . . . . . . . . $ 300,000 $ 132,000 $ 121,000

See accompanying notes.

</TABLE>
31.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 1995

NOTE 1. The Company and its Significant Accounting Policies

Company and Basis of Presentation. Somatix Therapy
Corporation ("Somatix" or the "Company") is a leader in the
emerging field of gene therapy. Somatix is applying its gene
therapy expertise to research and develop therapies to treat a
variety of diseases. The Company is the result of three
transactions. The first transaction, which was consummated in March
1991, combined Somatix Corporation and Hana Biologics, Inc. The
second transaction occurred in January 1992, when the Company
acquired GeneSys Therapeutics Corporation (see Note 4). The third
transaction occurred in February 1995, when the Company acquired
Merlin Pharmaceutical Corporation (see Note 2). The consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.

Cash and Cash Equivalents. Cash equivalents consist of
government securities, short-term corporate debt securities and
demand deposits with maturities at the date of acquisition of three
months or less. Cash equivalents are stated at cost which
approximates fair value.

Revenue Recognition. License revenue is recorded as revenue
when all contractual obligations have been met. Research revenue
is recorded when earned as defined under the term of the respective
agreements. Payments received which are related to future
performance are deferred and recognized as income when earned.

Marketable Securities. Current marketable securities
consist primarily of government securities and corporate debt securities
having maturities between three months and one year. At June 30,
1994, non-current marketable securities consisted of medium-term
corporate debt securities having maturities greater than one year.
Marketable securities are stated at cost which approximates fair
value.

In May 1993, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The Company adopted the provisions of the new
standard for investments held as of or acquired after July 1, 1994.
In accordance with SFAS 115, prior period financial statements have
not been restated to reflect the change in accounting principle.
The Company has classified its entire investment portfolio as held-
to-maturity. There is no impact of adopting SFAS 115 on results of
operations or financial position because the difference between
cost and fair value was not significant.

In accordance with SFAS 115, debt securities are classified
as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Interest on
securities classified as held-to-maturity is included in investment
income.

It is the Company's policy to invest funds not required for
current operations in financial instruments with strong credit
ratings. The Company has not experienced significant losses to
date on these investments.

Equipment and Improvements. Depreciation of equipment and
furniture is provided over estimated useful lives of three to ten
years using the straight-line method. Assets under capital leases
are amortized by the

32.

<PAGE>

straight-line method over their useful lives of three to five
years. Leasehold improvements are amortized over the remaining
lives of the applicable leases.

Retirement Plan. On January 1, 1993, the Company
established a defined contribution plan which covers all employees
21 years and older. The Company's contributions to the plan are at
the discretion of the Company's Board of Directors. Amounts
contributed to the plan for the years ended June 30, 1995, 1994,
and 1993 were $61,000, $46,000, and $26,000, respectively.

Income Taxes. In February 1992, the FASB issued SFAS No.
109, "Accounting for Income Taxes". The Company adopted the provisions
of the Statement effective July 1, 1993. Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected
to reverse. There was no cumulative effect of adopting SFAS No.
109.

Per Share Information. Per share information is based on
the weighted average number of common shares outstanding during each
period. Shares issuable upon the exercise of stock options and
warrants are not included since their inclusion would be anti-
dilutive.

NOTE 2. Acquisition of Merlin Pharmaceutical Corporation

On February 13, 1995, the Company completed its acquisition
(the "Acquisition") of Merlin Pharmaceutical Corporation
("Merlin"), a privately-held gene therapy company. The Company
issued 2,257,385 shares of common stock in exchange for all of the
outstanding capital stock of Merlin and assumed options and
warrants to purchase an aggregate of 743,371 shares of the
Company's common stock at exercise prices between $0.01 and $1.94
per share.

The transaction was accounted for as a purchase and the
consideration issued by the Company was allocated to the tangible
assets and intangible in-process technology acquired based on their
estimated fair values on the Acquisition date. The aggregate
purchase price of $13,702,000 consisted of (in thousands):

Fair value of common stock issued $ 9,144
Fair value of warrants and options assumed 3,110
Acquisition costs 900
Liabilities assumed 548
_______
Total purchase price $13,702
=======
The aggregate purchase price exceeded the fair value of
Merlin's tangible assets by $13,679,000. This amount was allocated
to acquired in-process technology and charged to operations in
fiscal year 1995. The allocation of the aggregate purchase price
was as follows (in thousands):

Current assets $ 23
In-process technology 13,679
_______
$13,702
=======

33.

<PAGE>

NOTE 3. Marketable Securities

The following is a summary of marketable securities at June
30, 1995:

<TABLE>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
U.S. government and
related agency
securities $13,096,000 $4,000 $ - $13,100,000
Corporate notes 250,000 - (2,000) 248,000
___________ ______ _______ ___________
$13,346,000 $4,000 $(2,000) $13,348,000
=========== ====== ======= ===========
</TABLE>
The amortized cost and estimated fair value of marketable
securities at June 30, 1995, by contractual maturity, are as
follows:

<TABLE>
ESTIMATED
COST FAIR VALUE
<S> <C> <C>
Due in one year or less $13,346,000 $13,348,000

Included in cash and cash equivalents $13,096,000 $13,100,000
Included in marketable securities 250,000 248,000
___________ ___________
$13,346,000 $13,348,000
=========== ===========

</TABLE>

NOTE 4. Stockholders' Equity

Acquisition of GeneSys Therapeutics Corporation

Pursuant to the acquisition of GeneSys in 1992, the Company
assumed a warrant to purchase 993,740 shares of Series B Preferred
Stock from a shareholder at an exercise price of $2.0162 per share.
By its terms, this warrant can be exercised for GeneSys Series B
Preferred Stock from November 9, 1992 to November 9, 1994.
Concurrently with the acquisition, the Company entered into an
agreement with the warrant holder whereby the shares of GeneSys
stock issuable upon exercise of the warrant may be exchanged for
348,753 shares of the Company's common stock. The Company
subsequently entered into an agreement to extend the term of
exercise of the warrants until November 9, 1995.

T-body Technology Research and Development Agreement

On April 29, 1994, the Company signed collaborative research
and equity purchase agreements with Baxter Healthcare Corporation
("Baxter") to jointly research, develop and commercialize T-body
technology for the treatment of cancer. Under the terms of the
agreements, the Company and Baxter will be responsible for

34.

<PAGE>

their own research expenditures. In fiscal year 1994, the Company
received a non-refundable technology license fee of $400,000, as
well as $1,600,000 for the sale of 232,558 shares of common stock
to Baxter at $6.88/share. Baxter agreed to purchase $1,000,000 in
common stock at the then-market price along with making a milestone
payment of $1,000,000 after the first patient has been treated in a
phase I clinical trial. Before initiating phase III clinical
trials, the companies will have the opportunity to form a joint
venture to complete clinical development and commercialization of
this technology. The funding supported by each party at that time
will determine the ownership of the joint venture; provided,
however, that each party can supplement its funding contributions
so that the total amount funded by each party equals at least 30
percent and up to 50 percent of the total expenditures under the
program.

Colorectal Cancer Treatment Research and Development
Agreement

On May 12, 1994, the Company signed an agreement with a
private group of investors (the "Investors") to develop the
Company's GVAXTM vaccine technology for the treatment of colorectal
cancer. Under the terms of the agreement, the Company received
$500,000 to fund preclinical research and $1,500,000 for the sale
of 230,769 shares of common stock to the Investors, at $6.50 per
share. These initial research funds have been used to finance
staffing, overhead, and supply costs associated with the Company's
preclinical development of the GVAX vaccine for colorectal cancer.
Upon filing an IND, the Investors have agreed to provide an
additional $2,500,000 consisting of research funding of $1,250,000
and $1,250,000 from the sale of additional shares of common stock
at the then-current market price. In exchange for funding the
program, the Investors will receive royalty payments of 2% of net
sales of the colorectal product, although such payments are to be
terminated when the Investors have received aggregate payments of
$1,750,000, therefore recovering research funding under the
agreement.

Other Benefit or Bonus Plans

1992 Stock Option Plan. Under the 1992 Stock Option Plan,
3,200,000 shares have been authorized for the grant to employees of
either non-qualified or incentive stock options and the grant to
consultants of non-qualified options. Incentive stock options are
to be granted with exercise prices not less than the fair market
value of common stock at the date of grant and non-qualified
options at not less than 85% of fair market value. Options are
exercisable as determined by the Board of Directors, and the
Company may be granted the right to repurchase shares acquired in
diminishing amounts over varying periods of time (none through June
30, 1995). The following table summarizes the activity under the
Plan for the years ended June 30, 1995, 1994, and 1993:

<TABLE>
<CAPTION> OPTIONS EXERCISE
FOR THE YEARS ENDED JUNE 30, OUTSTANDING PRICE
___________ ________
<S> <C> <C>
1992
____
Balance 1,148,973 $2.44-$25.00

1993
____
Options granted 787,538 $ 5.75-$ 9.25
Options canceled (399,730) $ 3.75-$ 8.50
Options exercised (137,736) $ 2.50-$ 8.52
_________ _____________
Balance 1,399,045 $ 2.50-$ 9.25

1994
____
Options granted 483,538 $ 5.63-$ 6.88

35.

<PAGE>

Options canceled (56,737) $ 3.75-$25.00
Options exercised (13,521) $ 2.88-$ 7.00
_________ _____________
Balance 1,812,325 $ 2.88-$25.00

1995
____
Options granted 763,500 $ 3.00-$ 5.63
Options canceled (189,820) $ 2.88-$25.00
Options exercised (3,200) $ 2.88-$ 3.00
________ _____________
Balance 2,382,805 $ 2.88-$25.00
========= =============
</TABLE>

Of the options outstanding at June 30, 1995, options to
purchase 813,235 shares were exercisable, 6,086 would be subject to
repurchase rights if exercised, and 1,569,570 were unvested and
unexercisable.

1988 Somatix Corporation Stock Option Plan. As a result of
the merger in March 1991 with Somatix Corporation, the Company
adopted Somatix Corporation's 1988 Stock Option Plan. At June 30,
1995, options to purchase 7,618 shares are outstanding under the
plan, with an exercise price of $0.14 per share.

Stock Option Cancellation/Regrant

On December 14, 1994, the Compensation Committee of the
Board of Directors approved a stock option cancellation/regrant program
for employees with stock option exercise prices in excess of the
then current fair value of the Company's common stock, or $3.00 per
share. The holders of such options were offered new options with
an exercise price of $3.00 per share in exchange for the
cancellation of partially or fully vested old options. The new
options were unvested and are subject to Modified Vesting Schedules.

Private Placement of Common and Preferred Stock

On June 29, 1995 the Company closed a private placement of
units of common and preferred stock in the aggregate amount of
$16,543,000, before issuance costs of $1,476,000. The financing
consisted of $10,100,000 in common stock units of the Company
("Common Stock Units"; 2,769,892 shares) and $6,400,000 in
preferred stock units of the Company ("Preferred Stock Units;
254,000 shares).

The Common Stock Units were priced at $3.68, and consisted
of one share of the Company's common stock ("Common Stock") and a
warrant to purchase 0.56 of a share of Common Stock. The Preferred
Stock Units were priced at $25.00, and consisted of one share of
the Company's convertible preferred stock (the "Preferred Stock"),
convertible to 6.25 shares of Common Stock at $4.00 per share, and
warrants for 3.5 shares of Common Stock. In both cases the
warrants have exercise prices of $4.00 per share and have three
year terms.

The Preferred Stock terms include a paid-in-kind dividend
paid quarterly until converted to common stock at the rate of 7% per
year, a liquidation preference of $25.00 per share, extraordinary
voting rights in the event the Company's net cash position, as
defined, falls below $5,000,000, and a conversion price reset
provision. Under the reset provision, thirteen months after
closing, the conversion price may be reset to the lower of the
current conversion price or the twenty day average closing price of
the Common Stock in the thirteenth month. The conversion price
after reset may not be less than $2.00 per share. Purchasers of
the Preferred Stock Units have agreed to certain trading
restrictions during this measurement period. The Preferred Stock
will automatically convert to Common Stock at any time after two
and one-half years after closing if the Common Stock trades at a
100% premium to the then-applicable conversion price.

36.

<PAGE>

Outstanding Warrants

As of June 30, 1995 and 1994, the Company had outstanding
warrants to purchase 3,099,168 and 393,063 shares of common stock,
respectively, at prices ranging from $0.01 to $7.25 per share. The
outstanding warrants resulted from the private placement of common
stock during fiscal year 1995 and the sale/leaseback agreements
entered into during fiscal year 1994 (see Note 7). The warrants
became exercisable in 1995 and expire at various dates through
1999. At June 30, 1995 and 1994, 3,099,168 and 393,063 shares of
common stock respectively, were reserved for that purpose.

Shares Reserved

At June 30, 1995 and 1994, common stock was reserved for the
following reasons:

1995 1994
_________ _______
Exercise of stock warrants 3,099,168 393,063
Conversion of preferred stock 1,587,500 --
_________ _______
4,686,668 393,063
========= =======

NOTE 5. Joint Research and Development Agreement

On November 2, 1993, Baxter and the Company signed an
agreement to jointly research and develop a gene therapy approach
for the treatment of hemophilia. Under the terms of the agreement,
the Company received a non-refundable technology license fee of
$2,000,000. The agreement grants Baxter worldwide marketing rights
to products developed.

As a part of this relationship, Baxter and the Company will
collaborate in areas of research and manufacturing and Baxter will
make certain milestone payments to the Company. Baxter will
conduct clinical trials and market the product worldwide. The
Company will receive royalties on product sales. The Company has
also agreed to provide Baxter with a right of first negotiations
for certain other approaches for the treatment of hemophilias A
and B.

NOTE 6. Income Taxes

Significant components of the Company's non-current deferred
tax assets are as follows at June 30, 1995:

<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
___________ ___________ ____________
<S> <C> <C> <C>
Noncurrent deferred
tax assets
Net operating loss
carryforward $27,900,000 $1,500,000 $29,400,000
Capitalization research and
development costs 500,000 1,600,000 2,100,000
Research and
development credit
carryforward 3,600,000 1,000,000 4,600,000
Restructuring costs 700,000 100,000 800,000
___________ __________ ___________

37.

<PAGE>

Gross non-current deferred
tax assets 32,700,000 4,200,000 36,900,000

Valuation allowance (32,700,000) (4,200,000) (36,900,000)
___________ ___________ ___________
Net non-current deferred
tax asset $ - $ - $ -
___________ ___________ ___________

</TABLE>

The valuation allowance increased $9,200,000 in fiscal year
1995.

At June 30, 1995 the Company has net operating loss
carryforwards for federal and state income tax purposes of
approximately $82,000,000 and $24,200,000, respectively, which
expire in the years 1996 through 2010. The Company also has
federal and state research and development credit carryforwards of
approximately $3,600,000 and $1,000,000, respectively, which expire
in the years 1996 through 2010.

Because of "change in ownership" provisions of the Tax
Reform Act of 1986, a portion of the Company's net operating loss and
research and development credit carryforwards will be subject to an
annual limitation regarding their utilization against taxable
income in future periods.

NOTE 7. Commitments

The Company leases certain laboratory, production, and
office equipment under capital leases, and all office and laboratory space
under operating leases. The operating lease agreements generally
require the Company to pay operating costs including property
taxes, insurance and maintenance.

Future minimum lease payments under capital and operating
leases at June 30, 1995 are as follows:

<TABLE>
<CAPTION> CAPITAL OPERATING
LEASES LEASES
__________ __________
<S> <C> <C>
1996 $1,004,000 $1,493,000
1997 956,000 1,330,000
1998 892,000 783,000
1999 126,000 456,000
__________ _________
Total minimum lease payments $2,978,000 $4,062,000
==========
Less amount representing interest 568,000
__________
Present value of minimum lease payments 2,410,000
Less current portion 718,000
__________
Long-term portion $1,692,000
==========
</TABLE>
At June 30, 1995, the Company has certificates of deposit
totaling $300,000 which secure obligations under certain operating
leases.

Rent expense was $1,438,000, $1,051,000, and $784,000 for
fiscal years 1995, 1994, and 1993, respectively. At June 30, 1995,
the net book value of equipment under capital leases is $1,683,000
($2,071,000

38.

<PAGE>

in 1994). Certain other facilities are sub-leased under a non-
cancelable lease for terms substantially identical to the original
lease.

In May 1994, the Company entered into a $2,000,000
sale/leaseback transaction for equipment used in the Company's
operations. The Company's resulting gain of $358,000 has been
recorded on the accompanying balance sheets as an offset to
equipment under capital leases and is being amortized over the
lease term. The lessor also received warrants, exercisable until
May 24, 1999, to purchase 25,000 shares of the Company's common
stock at an exercise price of $7.00 per share.

In June 1994, the Company entered into a $2,000,000 lease
line for equipment used in the Company's operations and such line
expires June 30, 1996. As of June 30, 1995, the Company had
borrowed a total of $971,000 under this line in the form of
sale/leaseback transactions. The lessor also received warrants
that became exercisable in fiscal year 1995. Such warrants expire
on December 31, 1999, and grant the lessor the right to purchase
19,310 shares of the Company's common stock at an exercise price
equal to the lesser of $7.25 per share or the closing sales price
per share of the Company's common stock as listed on the NASDAQ
National Market on the date the warrants become exercisable, but in
no event less than $6.00 per share.

NOTE 8. Other Income

Other income is comprised of the following:

YEAR ENDED JUNE 30
_______________________________________________
1995 1994 1993
________ ________ _________
Interest income $525,000 $731,000 $1,067,000
Interest expense (300,000) (132,000) (124,000)
Other income
(expense), net (3,000) (125,000) 21,000
________ ________ __________
$222,000 $474,000 $ 964,000
======== ======== ==========

NOTE 9. Restructuring Costs

In June 1995, the Company initiated certain changes in the
structure of its research and development efforts. These changes
included a selective reduction in the Company's overall research,
clinical and administrative work force. Accordingly, the Company
recorded restructuring costs of $2,752,000 in the fourth quarter of
fiscal year 1995, which included employee severance costs for 20
employees, totaling $314,000, of which $176,000 was paid during the
fiscal year. Restructuring costs also included the write-down of
certain assets to net realizable value and the accrual of future
rent obligations on vacated buildings and other such future costs
related to the restructuring. As of June 30, 1995, the remaining
accrual amounted to $2,147,000, of which the long term portion of
$1,288,000 relates primarily to future rent obligations.
Management believes that the accrual balance at June 30, 1995 is
adequate to cover all remaining costs related to the restructuring.

NOTE 10. Subsequent Event

On August 14, 1995, the Company entered into an agreement
with Bristol-Myers Squibb to evaluate possible areas for collaboration
in gene therapy. The Company received an initial equity investment
of $10 million and subject to obtaining release from regulatory
agencies to start a Phase II clinical trial for its GVAX(TM)

39.

<PAGE>

cancer vaccine, Bristol-Myers Squibb will make an additional $10
million equity investment in the Company's common stock.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

40.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 with respect to the
identification of Directors is hereby incorporated by reference
from the information under the caption "Proposal One - Election of
Directors" in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held on November 16, 1995 (the "Proxy
Statement").

The information required by this item with respect to the
identification of Executive Officers is contained in Item 1 of Part
I of this report under the caption "Executive Officers of the
Company" on pages 17 and 18.

The information required by Section 16(a) is hereby
incorporated by reference from the information under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated
by reference from the information under the captions "Proposal One
- - Election of Directors", "Summary of Cash and Certain Other
Compensation", "Stock Options" and "Option Holdings" in the Proxy
Statement.

ITEM 12. SECURITY OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by this item is hereby incorporated
by reference from the information under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by
reference from the information under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement.

41.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS

See Index to Financial Statements under Item 8.

2. FINANCIAL STATEMENT SCHEDULES

All financial statement schedules of the registrant for the
years ended June 30, 1995, 1994, and 1993 have been omitted since
the information is not required or is not so material as to require
submission of the schedule, or because the information requested is
included in the consolidated financial statements or the notes
thereto.

(b) Reports on Form 8-K

A Current Report on Form 8-K dated June 19, 1995 was filed
during the fourth quarter of fiscal 1995, with disclosure in Item 5
thereto.

The following documents are referenced or included in this
report.

EXHIBIT
NO.
_______
3.1 1 Amended and Restated Certificate of Incorporation
effective May 16, 1986. Reference Exhibit 3.1.
3.2 1 Certificates of Determination. Reference Exhibit 3.2.
3.3 2 Bylaws. Reference Exhibit 3.3.
3.4 8 Certificate of Amendment of Certificate of Incorporation
effective January 22, 1987. Reference Exhibit 3.2.
3.5 8 Certificate of Amendment of Restated Certificate of
Incorporation effective March 15, 1991. Reference
Exhibit 3.4.
3.6 8 Certificate of Amendment of Restated Certificate of
Incorporation effective January 17, 1992. Reference
Exhibit 3.5.
3.7 8 Certificate of Designation of Preferences of Preferred
Shares effective December 12, 1988. Reference Exhibit
3.3
3.8 15 Certificate of Amendment of Restated Certificate of
Incorporation effective December 16, 1993.
3.9 19 Amended and Restated Certificate of Incorporation
effective November 29, 1994. Reference Exhibit 3.1.
3.10 22 Certificate of Designation of Preferences of
Preferred Shares effective June 27, 1995. References
Exhibit 3.3.

42.

<PAGE>

3.10 19 Bylaws, as amended and restated September 29,
1994. Reference Exhibit 3.2.
10.1 2 Lease Agreement dated June 16, 1986, between Hana
Biologics, Inc. and Alameda Marina Village Associates.
Reference Exhibit 10.37.
10.2 3 1988 Directors Stock Option Plan. Reference Exhibit
10.67.
10.3 4 Trade Secrets Agreement dated September 13, 1989,
between Hana Biologics, Inc. and Irvine Scientific Sales
Company, Inc. Reference Exhibit 3.
10.4 4 License Agreement dated September 13, 1989, between Hana
Biologics, Inc. and Irvine Scientific Sales Company,
Inc. Reference Exhibit 4.
10.5 4 Manufacturing and Supply Agreement dated September 13,
1989, between Hana Biologics, Inc. and Irvine Scientific
Sales Company, Inc. Reference Exhibit 5.
10.6 5 Development Agreement dated May 1, 1990, between Hana
Biologics, Inc. and The Polymer Technology Group,
Incorporated. Reference Exhibit 10.68.
10.7 6 License Agreement dated February 1, 1988, between
Somatix Corporation and the Massachusetts Institute of
Technology. Reference Exhibit 10.1.
10.8 6 Somatix Corporation's 1988 Stock Option Plan, as
amended, and forms of agreement currently used
thereunder. Reference Exhibit 10.2.
10.9 7 Consulting Agreement dated March 14, 1991, between the
Company and Dr. Richard Mulligan. Reference Exhibit
10.29.
10.10 8 Lease Agreement dated September 7, 1990, between
GeneSys Therapeutics Corporation and Ventana Leasing,
Inc. Reference Exhibit 10.49.
10.11 8 License Agreement dated October 1, 1990, between
GeneSys Therapeutics Corporation and Washington
University. Reference Exhibit 10.34.
10.12 8 License Agreement dated April 4, 1991, between
GeneSys Therapeutics Corporation and the Regents of the
University of California. Reference Exhibit 10.37.
10.13 8 Warrant Agreement dated April 15, 1991, between
GeneSys Therapeutics Corporation and Ventana Leasing,
Inc. Reference Exhibit 10.50.
10.14 8 Letter Agreement dated April 17, 1991, between
GeneSys Therapeutics Corporation and the Regents of the
University of California, as amended by that Letter
Agreement dated May 10, 1991. Reference Exhibit 10.51.
10.15 8 License Agreement dated June 7, 1991, between
GeneSys Therapeutics Corporation and the Fred Hutchinson
Cancer Research Center. Reference Exhibit 10.38.
10.16 8 License Agreement No. 1 dated August 20, 1991,
between GeneSys Therapeutics Corporation and The Salk
Institute for Biological Studies. Reference Exhibit
10.39.
10.17 8 Scientific Consulting Agreement dated November 8,
1991, between Somatix and Dr. Theodore Friedmann.
Reference Exhibit 10.41.
10.18 8 Scientific Consulting Agreement dated November 8,
1991, between Somatix and Dr. Frederick Gage. Reference
Exhibit 10.42.
10.19 8 Scientific Consulting Agreement dated November 8,
1991, between Somatix and Dr. Inder Verma. Reference
Exhibit 10.43.
10.20 8 Consulting Agreement dated November 13, 1991,
between Somatix and Dr. Harry F. Hixson, Jr. Reference
Exhibit 10.44.
10.21 8 Warrant Agreement dated November 9, 1991, between
GeneSys Therapeutics Corporation and Kleiner Perkins
Caufield & Byers V. Reference Exhibit 10.45.
10.22 8 Agreement dated January 15, 1992, between Somatix
and The Board of Trustees of the Leland Stanford Junior
University. Reference Exhibit 10.46.
10.23 8 Registration Rights Agreement dated January 17,
1992, among Somatix and certain Investors as set forth
on Exhibit A thereto. Reference Exhibit 10.47.

43.

<PAGE>

10.24 8 Shareholder Agreement dated January 21, 1992,
among Somatix, GeneSys Therapeutics Corporation and
Kleiner Perkins Caufield & Byers V. Reference Exhibit
10.48
10.25 9 License Agreement dated March 4, 1992, by and
among Somatix, The Johns Hopkins University and The
University of Texas System. Reference Exhibit 10.56.
10.26 9 Lease Agreement dated July 15, 1992, between
Somatix and Alameda Real Estate Investments. Reference
Exhibit 10.58.
10.27 9 1992 Stock Option Plan, as amended and restated.
Reference Exhibit 10.63.
10.28 10 GeneSys Therapeutics Corporation 1991 Stock Option
Plan and forms of agreement currently used thereunder.
Reference Exhibit 28.5.
10.29 11 Sublease Agreement dated March 26, 1992, by and
among GeneSys Therapeutics Corporation, Del Mar Plaza,
Ltd. and Ligand Pharmaceuticals, Inc.; Consent to
Sublease Agreement dated April 10, 1992. Reference
Exhibit 10.57.
10.30 11 Employment Agreement dated July 10, 1992, between
Somatix and Dr. Krzysztof S. Bankiewicz. Reference
Exhibit 10.66.
10.31 12 Agreement dated January 15, 1993, by and between
Somatix and the Regents of the University of California
on behalf of its Davis Campus. Reference Exhibit 10.70.
10.32 12 Agreement dated February 10, 1993, by and between
Somatix and the California Parkinson's Foundation.
Reference Exhibit 10.71.
10.33* 12 Letter Agreement dated March 16, 1993, between
Somatix and Vector Securities International, Inc.
Reference Exhibit 10.72.
10.34 12 Employment Agreement dated July 1, 1993, between
Somatix and David Carter. Reference Exhibit 10.73.
10.35 12 Agreement dated August 30, 1993, by and between
Somatix and Ludwig Institute for Cancer Research.
Reference Exhibit 10.74.
10.36 13 Employment Agreement dated November 11, 1993,
between Somatix and Richard Mulligan. Reference Exhibit
10.76.
10.37 14 Property Lease Agreement dated February 8, 1994,
between Somatix and Alameda Real Estate Investments.
Reference Exhibit 10.77.
10.38 15 Property Lease Agreement dated May 5, 1994,
between Somatix and Alameda Real Estate Investments.
Reference Exhibit 10.55.
10.39* 15 Research Collaboration Agreement dated April 29,
1994, by and between Somatix and Baxter Healthcare
Corporation. Reference Exhibit 10.53.
10.40 15 Stock Purchase Agreement dated April 29, 1994, by
and between Somatix and Baxter Healthcare Corporation.
Reference Exhibit 10.54.
10.41 15 Stock Purchase Agreement dated May 12, 1994, by
and between Somatix and Health Care Partners, LLC.
Reference Exhibit 10.56.
10.42 15 Common Stock Purchase Agreement dated November 29,
1993, among Somatix and the Investors listed on the
Schedule of Investors attached thereto. Reference
Exhibit 10.52.
10.43 15 Amended and Restated Registration Rights Agreement
dated May 12, 1994, among Somatix and the parties listed
on Schedule A attached thereto. Reference Exhibit
10.57.
10.44 15 Master Equipment Lease Agreement dated May 24,
1994, between Somatix and Aberlyn Capital Management
Limited Partnership. Reference Exhibit 10.58.
10.45 15 Agreement to Issue Warrant dated May 24, 1994,
between Aberlyn Capital Management Limited Partnership
and Somatix. Reference Exhibit 10.59.
10.46 15 Agreement to Issue Warrant dated May 24, 1994,
between Aberlyn Capital Management Limited Partnership
and Somatix. Reference Exhibit 10.60.
10.47 15 Master Equipment Lease Agreement dated June 30,
1994, between Financing for Science International, Inc.
and Somatix. Reference Exhibit 10.61.

44.

<PAGE>

10.48 15 Warrant dated July 30, 1994, issued by Somatix to
Financing for Science International, Inc. Reference
Exhibit 10.62.
10.49* 16 Agreement dated November 2, 1993, by and between
Somatix and Baxter Healthcare Corporation together with
Amendment No. 1 dated September 30, 1994. Reference
Exhibit 10.75.
10.50 17 Employment Agreement dated August 1, 1993, between
Somatix and Arlene Jordan-Levy.
10.51 17 Employment Agreement dated August 1, 1993, between
Somatix and Lawrence Cohen.
10.52 17 Employment Agreement dated November 1, 1993,
between Somatix and Edward Oliver Lanphier II.
10.53 17 Employment Agreement dated December 30, 1993,
between Somatix and Mark N.K. Bagnall.
10.54* 17 Non-Exclusive License Agreement dated April 20,
1994 by and between the Fred Hutchinson Cancer Research
Center and Somatix.
10.55 17 Research Agreement dated June 1, 1994 between
Baxter Healthcare Corporation and Somatix.
10.56* 17 Letter Agreement dated September 1, 1994 between
Baxter Healthcare Corporation and Somatix.
10.57 18 Amendment #1 to the Warrant Agreement and
Shareholder Agreement dated November 7, 1994 by and
among Somatix, GeneSys Therapeutics Corporation and
Kleiner Perkins Caufield & Byers V.
10.58* 19 Agreement and Plan of Reorganization dated
December 19, 1994 as amended on January 18, 1995 and
January 31, 1995 among Somatix, STC Acquisition Co. and
Merlin Pharmaceutical Corporation. Reference Exhibit 3.
10.59 19 Escrow Agreement, dated as of February 3, 1995, by
and between STC Acquisition Company, The First National
Bank of Boston and the stockholders of Merlin
Pharmaceutical Corporation. Reference Exhibit 4.
10.60* 19 Consulting and Repurchase Agreement, dated February 3,
1995, between Somatix and Samuel D. Waksal. Reference
Exhibit 5.
10.61* 19 Consulting and Repurchase Agreement, dated January
21, 1995, between Somatix and Thomas Shenk. Reference
Exhibit 6.
10.62* 19 Consulting and Repurchase Agreement, dated
February 3, 1995, between Somatix and R. Jude Samulski.
Reference Exhibit 7.
10.63* 19 Consulting and Repurchase Agreement, dated
February 3, 1995, between Somatix and Michael Kaplitt.
Reference Exhibit 8.
10.64* 19 Consulting and Repurchase Agreement, dated
February 3, 1995, between Somatix and Matthew During.
Reference Exhibit 9.
10.65 19 Indemnification Agreement, dated as of December
19, 1994, as amended by Amendment No. 1, dated as of
February 3, 1995, among Merlin Pharmaceutical
Corporation and Samuel D. Waksal. Reference
Exhibit 10.
10.66 19 Promissory Note, dated February 2, 1995, by and
between Samuel D. Waksal and Somatix. Reference Exhibit
11.
10.67 20 Merlin Pharmaceutical Corporation 1993 Stock
Option Plan. Reference Exhibit 99.1.
10.68 20 Non-Qualified Stock Option Agreement to be
generally used in connection with Merlin Pharmaceutical
Corporation 1993 Stock Option Plan. Reference Exhibit
99.2.
10.69 20 Stock Option Assumption Agreement - Installment
Option. Reference Exhibit 99.3.
10.70 20 Stock Option Assumption Agreement - Immediately
Exercisable Option. Reference Exhibit 99.4.
10.71* 21 License Agreement, dated January 10, 1994, between
Merlin Pharmaceutical Corporation and University of
Florida Research Foundation. Reference Exhibit 10.13.
10.72* 21 License Agreement, dated May 1, 1994, between
Merlin Pharmaceutical Corporation and University of
Pittsburgh - of the Commonwealth System of Higher
Education. Reference Exhibit 10.14.

45.

<PAGE>

10.73* 21 License Agreement, dated August 11, 1994, between
Merlin Pharmaceutical Corporation and The Research
Foundation of State University of New York. Reference
Exhibit 10.15.
10.74* 21 License Agreement, dated August 17, 1994, between
Merlin Pharmaceutical Corporation and University of
Pittsburgh - of the Commonwealth System of Higher
Education. Reference Exhibit 10.16.
10.75 21 Sublease Agreement, dated December 1, 1994,
between Merlin Pharmaceutical Corporation and ICAgen,
Inc. Reference Exhibit 10.17.
10.76* 21 Amendment dated February 15, 1995 to License
Agreement dated May 1, 1994, between Merlin
Pharmaceutical Corporation and University of Pittsburgh
- of the Commonwealth System of Higher Education.
Reference Exhibit 10.18.
10.77 21 Employment Agreement, dated April 7, 1995, between
Somatix and Jan Drayer, M.D. Reference Exhibit 10.19.
10.78 22 Common Stock Purchase Agreement, dated June 17,
1995. Reference Exhibit 10.20.
10.79 22 Preferred Stock Purchase Agreement, dated June 17,
1995. Reference Exhibit 10.21.
10.80 22 Form of Warrant to Purchase Shares of Common
Stock. Reference Exhibit 10.22.
10.81 Engagement letter, dated April 27, 1995, between Somatix
Therapy Corporation and Merrill Lynch & Co. of Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
22.1 3 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule

____________________

1 Incorporated by reference to exhibit of the registrant's
Registration Statement on Form S-1 (File No. 33-4795) as filed with
the SEC on April 14, 1986.
2 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for fiscal year ended June
30, 1986.
3 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989.
4 Incorporated by reference to exhibit filed with the
registrant's Form 8-K dated September 13, 1989.
5 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1990.
6 Incorporated by reference to exhibit of the registrant's
Registration Statement on Form S-4 (File No. 33-4795) as filed with
the SEC on January 14, 1991.
7 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1991.
8 Incorporated by reference to exhibit of the registrant's
Registration Statement on Form S-1 (File No. 33-4795) as filed with
the SEC on January 21, 1992.
9 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1992.
10 Incorporated by reference to exhibit of the registrant's
Registration Statement on Form S-8 as filed with the SEC on August
17, 1992.
11 Incorporated by reference to exhibit filed with the
registrant's Quarterly Report on Form 10-Q for quarter ended
September 30, 1992.
12 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993.

46.

<PAGE>

13 Incorporated by reference to exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993.
14 Incorporated by reference to exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994.
15 Incorporated by reference to exhibit filed with the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
16 This agreement was originally filed as Exhibit 10.75 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993, and refiled with Amendment No. 1 thereto with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
17 Incorporated by reference to exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
18 Incorporated by reference to exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994.
19 Incorporated by reference to exhibit filed with registrant's
Amendment No. 1 to Current Report on Form 8-K/A as filed with the
SEC on February 14, 1995.
20 Incorporated by reference to exhibit of the registrant's
Registration Statement on Form S-8 as filed with the SEC on
March 3, 1995.
21 Incorporated by reference to exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
22 Incorporated by reference to exhibit of the registrant's
Registration Statement on Form S-3 (File No. 33-60873) as filed
with the SEC on June 19, 1995.

* Confidential treatment has been granted as to certain portions
of this agreement.
** Confidential treatment has been requested for certain portions
of this agreement.

47.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of 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.

Dated: September 26, 1995

SOMATIX THERAPY CORPORATION

By: DAVID W. CARTER
David W. Carter
Chairman and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

SIGNATURE TITLE DATE
___________________ ____________________________ __________________

DAVID W. CARTER Chief Executive Officer September 26, 1995
(David W. Carter) (Principal Executive Officer)

MARK N.K. BAGNALL Vice President, Finance September 26, 1995
(Mark N.K. Bagnall) (Principal Financial and
Accounting Officer)

HARRY F. HIXSON JR., Director September 26, 1995
(Harry F. Hixson Jr.,
Ph.D.)

KAREN DAVIS Director September 26, 1995
(Karen Davis, Ph.D)

MICHAEL R. EISENSON Director September 26, 1995
(Michael R. Eisenson)

48.

<PAGE>

FRED H. GAGE Director September 26, 1995
(Fred H. Gage, Ph.D.)

Director September , 1995
(Richard C. Mulligan,
Ph.D.)

THOMAS SHENK Director September 26, 1995
(Thomas Shenk, Ph.D)

Director September , 1995
(Samuel D. Waksal, Ph.D.)

JOHN T. POTTS Director September 26, 1995
(John T. Potts,
Ph.D., M.D.)

49.

<PAGE>

EXHIBIT 10.81

April 27, 1995

Somatix Therapy Corporation
950 Marina Village Parkway
Alameda, California 94501

Gentlemen:

Merrill Lynch & Co. of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") is pleased to act as exclusive
financial advisor to Somatix Therapy Corporation (the "Company") from
the date of this letter agreement (the "Agreement") through the end
of the Engagement Period (as hereinafter defined). In such capacity,
Merrill Lynch shall act as an independent contractor, and any duties
of Merrill Lynch arising out of its engagement pursuant to this
Agreement shall be owed solely to the Company.

In addition, during the Engagement Period, Merrill Lynch will
act as exclusive placement agent for the Company in a transaction
(the "Private Placement"). Pursuant to the Private Placement, it is
contemplated that the Company will issue securities (the
"Securities") with expected gross proceeds up to $15 million. The
Private Placement is intended to be exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), and
otherwise to comply with the applicable law and regulations of any
other jurisdictions in which the Securities are offered. In acting
as the exclusive placement agent for the Private Placement, Merrill
Lynch will seek to complete the financing on a best efforts basis,
acting as the Company's agent and not as a principal in the sale and
placement of the Securities. Merrill Lynch may separately engage, at
is own expense and with the prior written approval of the Company,
sub-agents as it may deem necessary or appropriate.

1. THE PRIVATE PLACEMENT

The "Engagement Period" shall mean that period commencing on the
date hereof and continuing through the date of the final closing of
the Private Placement, unless terminated at an earlier date pursuant
to Section 9 of this Agreement.

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 2

The Company and Merrill Lynch will each reasonably believe at
the time of any sale of the Securities as part of the Private
Placement that each purchaser of the Securities is an "accredited
investor" as that term is defined in Rule 501 of Regulation D
promulgated under the Securities Act (and will take all actions
necessary to establish such reasonable belief) or an otherwise
sophisticated investor satisfactory to the Company and Merrill Lynch.
Neither the Company or any person acting on its behalf nor Merrill
Lynch will offer or sell the Securities by any form of general
solicitation or general advertising, including the methods described
in Rule 502(c) of Regulation D. The Company will file in a timely
manner with the Securities and Exchange Commission (the "SEC") any
notices with respect to the Securities required by Rule 503
Regulation D and will furnish to Merrill Lynch promptly thereafter a
signed copy of each such notice. The Company and Merrill Lynch shall
have the right to reject any proposed purchaser of Securities.

2. INFORMATION TO BE SUPPLIED

The Company will furnish or cause to be furnished to Merrill
Lynch such information as Merrill Lynch reasonably believes
appropriate to its assignment or is necessary in connection with its
assistance in the preparation of, or for inclusion in, a confidential
Private Placement Memorandum (as supplemented and amended from time
to time being hereinafter referred to as the "Information"). It is
also understood that the Company may make available to offerees of
Securities additional material, data or other information (whether
oral or written) relating to the Company (the "Company Data"). The
Company recognizes and confirms that (a) in performing the services
contemplated by this Agreement, Merrill Lynch will use and rely
primarily on the information and on other information available from
generally recognized public sources without having independently
verified the same; (b) Merrill Lynch does not assume responsibility
for the accuracy or completeness of the Memorandum, the Information,
the Company Data, and such other information and will not undertake
to verify independently its accuracy or completeness; and (c) Merrill
Lynch will not make an appraisal of any of the assets owned or
managed by the Company.

3. COVENANTS, REPRESENTATIONS AND WARRANTIES

In connection with the Private Placement, the Company agrees as
follows:

(a) The Company will furnish Merrill Lynch, from time to time,
such number of copies of the Memorandum, any exhibits thereto

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 3

and agreements and documents referred to therein, as Merrill Lynch
may reasonably request.

(b) If any event shall occur or condition exist as a result of
which it is necessary or advisable, in the opinion of the Company or
Merrill Lynch, to amend or supplement the Memorandum in order that
the Memorandum will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading in light of the
circumstances existing at the time it is delivered to prospective
purchasers, the Company will forthwith prepare and furnish to Merrill
Lynch such number of copies as Merrill Lynch may reasonably request
of an amendment or supplement to the Memorandum (in form and
substance satisfactory to Merrill Lynch and its counsel) that will
ensure that the Memorandum does not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements contained therein not misleading in light of the
circumstances existing at the time it is delivered to prospective
purchasers.

(c) The Company will advise Merrill Lynch promptly of (i) the
occurrence of any event or the existence of any condition known to
the Company referred to in clause (b) of this paragraph, (ii) such
other information concerning the business and financial condition of
the Company as Merrill Lynch may from time to time reasonably
request, (iii) the receipt by the Company of any communication from
the SEC or any state securities commissioner or regulatory authority
in any other jurisdiction concerning the offering of the Securities,
and (iv) the commencement of any lawsuit or proceeding to which the
Company is a party relating to the offering of the Securities.

(d) The Company will (i) make available to each offeree of the
Securities such information (in addition to that contained in the
Memorandum) concerning the offering of the Securities, the Company
and any other relevant matters as the Company possesses or can
acquire without unreasonable effort or expense and (ii) provide each
offeree the opportunity to ask questions of, and receive answers
from, the officers and employees of the Company concerning the terms
and conditions of the offering and to obtain any other additional
information about the Company and the Securities, to the extent the
officers and employees of the Company possess the same or can acquire
it without unreasonable effort or expense.

(e) At any closing of Securities hereunder (each a "Closing"),
the Company will deliver, or cause to be delivered, to Merrill Lynch,
in each case in form and substance satisfactory to

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 4

Merrill Lynch and its counsel: (i) a letter representing and
warranting to Merrill Lynch that the representations and warranties
of the Company contained in each purchase, subscription or other
similar agreement entered into with a prospective purchaser of the
Securities are true and correct in all material respects as of the
date of such letter, except to the extent any such representation or
warranty was expressly made as of any other date, in which case such
representation and warranty was true and correct in all materials
respects as of such other date; and (ii) all certificates and other
documents (other than the Securities) delivered to each prospective
purchaser at such Closing. In addition, the Company will cause each
counsel who is furnishing an opinion to a prospective purchaser and
each independent public accountant who is furnishing an accountant's
letter to a prospective purchaser to address to Merrill Lynch any
such opinion or letter (or, alternatively, to furnish Merrill Lynch
with a letter stating that Merrill Lynch may rely on such opinion or
letter as though it were addressed to Merrill Lynch). Merrill Lynch
shall, in any event, be provided with one opinion of counsel
satisfactory to Merrill Lynch which shall state that nothing has come
to such counsel's attention that would lead it to believe that the
Memorandum contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading. In rendering its opinion, such
counsel may rely upon the representations and warranties of the
purchasers contained in the purchase agreements and upon certificates
from officers of the Company as to factual matters. The Company
further agrees that it will not consummate the sale of the Securities
unless it delivers or causes to be delivered the items described in
this paragraph to Merrill Lynch at each Closing.

(f) The Company will not, directly or indirectly (except
through Merrill Lynch), sell or offer, or attempt to offer to dispose
of, or solicit any offer to buy, or otherwise approach or negotiate
in respect of, any of the Securities, and the Company has not
heretofore done any of the foregoing.

(g) The Company represents that no offers or sales of
securities of the same or a similar class as the Securities have been
made by it or for it during the six-month period ended on the date of
this Agreement and none is currently being made or contemplated by
the Company or on its behalf. The Company agrees that no offers or
sales of any securities of the same or a similar class as the
Securities will be made by it or on its behalf during the six-month
period after the completion of the offering of the Securities without
the prior written consent of Merrill Lynch,

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 5

which consent will not be unreasonably withheld and may be withheld
only to avoid an integration of such offering with this Private
Placement.

(h) The Company will qualify the Securities for offering and
sale under the state securities or "blue sky" laws of such
jurisdictions in which any sales of the Securities may be transacted
and as may otherwise be requested by Merrill Lynch, provided that, in
connection therewith, the Company shall not be required to qualify as

a foreign corporation or to file a general consent to service of
process in any such jurisdiction.

(i) The Company represents and warrants that, at all times from
the respective dates that the Memorandum, the Company Data, and any
other documents, material, data or other information (whether oral or
written) are furnished or made available by the Company either
directly or through Merrill Lynch to offerees of the Securities or
any of their representatives, such Memorandum, Company Data, and
other information will not, taken separately or in any combination as
provided to any offeree or its representatives, contain any untrue
statement of a material fact or omit to state a material necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

4. FEES AND EXPENSES

The Company agrees to pay Merrill Lynch (i) a fee (the "Fee") of
7.0% of the aggregate gross proceeds of the Private Placement and
(ii) to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of its legal
counsel, regardless of whether or not the transactions contemplated
by this Agreement are consummated. Such expenses shall not exceed
$100,000 without the prior written approval of Somatix.

All payments shall be made in cash or by certified or official
bank check, or by wire transfer in immediately available funds.

If during the Engagement Period or within the 6 month period
thereafter, the Company or any of its affiliates sells the
Securities, or other securities representing an equity interest in
the Company, to any purchaser identified by Merrill Lynch (on Exhibit
A attached) or subsequently in writing to Somatix in connection with
this Private Placement and with which Merrill Lynch had discussions
regarding the purchase of Securities during the Engagement Period,
the Company will pay Merrill Lynch a Fee with

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 6

respect to all such sales of Securities calculated in accordance with
the preceding paragraph.

The Company or any purchaser of the Securities will bear all
legal, accounting, printing and other expenses in connection with the
offering and sale of the Securities. It also is understood that
Merrill Lynch will not be responsible for any fees or commissions
payable to financial or other advisors utilized or retained by the
Company or by any offeree of the Securities.

5. INDEMNIFICATION, CONTRIBUTION AND LIMIT ON LIABILITY

The Company agrees that it will indemnify and hold harmless
Merrill Lynch and its affiliates, and its and their respective
directors, officers, employees, agents and controlling persons
(Merrill Lynch and each such person being an "Indemnified Party")
from and against any and all losses, claims, damages and liabilities,
joint or several, as incurred, to which such Indemnified Party may
become subject under any applicable United States federal or state
law, or otherwise, and related to or arising out of (i) any untrue
statement or alleged untrue statement of a material fact contained in
any information (whether oral or written) or documents, including
without limitation the Memorandum, Information, Company Data and
public information, furnished or made available by the Company,
directly, through Merrill Lynch or otherwise, to an offeree of the
Securities or any of their representatives or the omission or the
alleged omission to state therein a material fact necessary in order
to make the statements therein not misleading, in the light of the
circumstances under which they were made, or (ii) any transaction
contemplated by this Agreement or the engagement of Merrill Lynch
pursuant to, and the performance by Merrill Lunch of the services
contemplated by, this Agreement; provided, however, that the Company
will not be liable under clause (ii) hereof to the extent that any
loss, claim, damage or liability is found in a final judgment by a
court to have resulted from Merrill Lynch's bad faith, gross
negligence or willful misconduct in performing the services described
above. The Company also agrees to reimburse any Indemnified Party
for all expenses (including the reasonable counsel fees and expenses
of one counsel) as they are incurred in connection with the
investigation of, preparation for or defense of any pending or
threatened claim or any action or proceeding arising therefrom,
whether or not such Indemnified Party is a party and whether or not
such claim, action or proceeding is initiated or brought by or on
behalf of the Company. The Company also agrees that no Indemnified
Party shall have any liability (whether direct or indirect, in
contract or tort or otherwise) to the Company or its security holders
or creditors

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 7

related to or arising out of the engagement of Merrill Lynch pursuant
to, or the performance by Merrill Lynch of the services contemplated
by, this Agreement except to the extent that any loss, claim, damage
or liability is found in a final judgment by a court, or admitted in
a definitive settlement agreement to have resulted from Merrill
Lynch's bad faith or gross negligence.

If the indemnification provided for in this Agreement is for any
reason held unenforceable, the Company agrees to contribute to the
losses, claims, damages and liabilities, as incurred, for which such
indemnification is held unenforceable in such proportion as is
appropriate to reflect the relative benefits to the Company, on the
one hand, and Merrill Lynch, on the other hand, and also the relative
fault of the Company, on the one hand, and Merrill Lynch, on the
other hand, in connection with the statements, acts or missions
resulting in such losses, claims, damages or liabilities of the
placement of the Securities as contemplated (whether or not the
placement is consummated) provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Company
agrees that for the purposes of this paragraph the relative benefits
to the Company and Merrill Lynch of the placement of Securities as
contemplated shall be deemed to be in the same proportion that the
total value of Securities sold or contemplated to be sold by the
Company as a result of or in connection with the proposed Private
Placement bears to the Fee paid or to be paid to Merrill Lynch under
this Agreement; provided, however, that, to the extent permitted by
applicable law, in no event shall the Indemnified Parties be required
to contribute an aggregate amount in excess of the aggregate Fee
actually paid to Merrill Lynch under this Agreement.

6. NOTICE, DEFENSE AND SETTLEMENT OF CLAIM, ACTION OR PROCEEDINGS

Promptly after receipt by an Indemnified Party of notice of any
claim or the commencement of any action or proceeding with respect to
which an Indemnified Party may be entitled to indemnity hereunder,
the Indemnified Parties will notify the Company in writing of such
claim or of the commencement of such action or proceeding (provided
that any delay in so doing by an Indemnified Party shall not relieve
the Company from its obligations hereunder to that Indemnified Party
unless said delay has resulted in material prejudice to the Company),
and the Company will assume the defense of such action or proceeding
and will employ counsel satisfactory to the Indemnified Parties and
will pay the fees and expenses of such counsel, as incurred.
Notwithstanding the

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 8

preceding sentence, any Indemnified Party will be entitled to employ
counsel separate from counsel for the Company and from any other
party in such action if such Indemnified Party reasonably determines
that a conflict of interest exists which makes representation by
counsel chosen by the Company not advisable or if such Indemnified
Party reasonably determines that the Company's assumption of the
defense does not adequately represent its interest. In such event,
the fees and disbursement of such separate counsel will be paid by
the Company. It is understood that the Company shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in
such jurisdiction at any one time for Merrill Lynch together with any
other Indemnified Parties.

The Company agrees that, without Merrill Lynch's prior written
consent (which consent will not be unreasonably withheld) it will not
settle, compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding in respect of which
indemnification could be sought under the indemnification provision
of this Agreement (whether or not Merrill Lynch or any other
Indemnified Party is an actual or potential party to such claim,
action or proceeding), unless such settlement, compromise or consent
includes an unconditional release of each Indemnified Party from all
liability arising out of such claim, action or proceeding. In
addition, the Company will not be liable under this letter agreement
for any settlement of any claim against Merrill Lynch made without
the Company's written consent.

In the event Merrill Lynch or any Indemnified Party is requested
or required to appear as a witness in any action brought by or on
behalf of or against the Company or any affiliate or any participant
in a transaction covered hereby in which Merrill Lynch or such
Indemnified Party is not named as a defendant, the Company agrees to
reimburse Merrill Lynch for all expenses incurred by it in connection
with such Indemnified Party's appearing and preparing to appear as a
witness, including, without limitation the fees and disbursements of
its legal counsel, and to compensate Merrill Lynch in an amount to be
mutually agreed upon.

7. ANNOUNCEMENT OF TRANSACTION

When the Private Placement is completed, Merrill Lynch may, at
its option and expense, place an announcement in such newspapers and
periodicals as it may choose stating that Merrill Lynch has acted as
financial advisor to the Company and/or exclusive placement agent in
the Private Placement.

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 9

8. NOTICES

All communications hereunder shall be in writing and shall be
mailed or delivered (a) to the Company, at its offices at 950 Marina
Village Parkway, Alameda, California 94501, Attention: Mark N.K.
Bagnall and (b) to Merrill Lynch, at its offices at World Financial
Center, North Tower, New York, N.Y. 10281-0327, Attention: Matthew J.
Hogan.

9. TERMINATION OF THIS AGREEMENT

This Agreement and all of Merrill Lynch's obligations hereunder
may be terminated by Merrill Lynch for any reason upon giving ten
days prior notice thereof to the Company; provided, however, that in
the event the Company does not perform any obligation under this
Agreement or any representation and warranty hereunder is incomplete
or inaccurate in any respect, this Agreement and all of Merrill
Lynch's obligations hereunder may be immediately terminated by
Merrill Lynch by notice thereof to the Company. This Agreement and
all of the Company's obligations hereunder may be terminated by the
Company for any reason upon giving ten days prior notice thereof to
Merrill Lynch; provided, however, that in the event Merrill Lynch
does not perform any obligation under this Agreement or any
representation and warranty hereunder is incomplete or inaccurate in
any respect, this Agreement and all of the Company's obligations
hereunder may be immediately terminated by the Company by notice
thereof to Merrill Lynch. Notwithstanding any termination of or
under this Agreement as provided herein, there shall be no liability
of any part to any other party, except as otherwise provided in the
Section 4 relating to the payment of fees and expenses and it being
further understood that the Sections relating to indemnification,
limitations on the liability of Indemnified parties, contribution,
settlements, choice of law and waiver of the right to trial by jury
will survive any such termination.

10. SURVIVAL OF CERTAIN PROVISIONS

The representations, warranties, indemnities, and agreements of
the Company and its officers or representatives shall remain
operative and in full force and effect regardless of any
investigation made by or on behalf of the Company or Merrill Lynch or
any affiliates or controlling person, and shall survive the
consummation of the Private Placement.

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 10

11. WRITING REQUIRED TO WAIVE, AMEND OR MODIFY

No waiver, amendment or other modification of this Agreement
shall be effective unless in writing and signed by each party to be
bound thereby.

12. PARTIES

This Agreement incorporates the entire understanding of the
parties with respect to this engagement of Merrill Lynch by the
Company, and supersedes all previous agreements regarding such
engagement, should they exist.

13. GOVERNING LAW

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT
OF LAW PRINCIPLES THEREOF.

14. CONSENT TO JURISDICTION AND WAIVER OF TRIAL BY JURY

The Company hereby waives all right to trial by jury in any
action, proceeding or counterclaim (whether based upon contract, tort
or otherwise) related to or arising out of the engagement of Merrill
Lynch pursuant to, or the performance by Merrill Lynch of the
services contemplated by, this Agreement.

<PAGE>

Somatix Therapy Corporation April 27, 1995
Page 11

Please confirm that the foregoing terms correctly set forth our
agreement by signing and returning to Merrill Lynch the duplicate
copy of this Agreement enclosed herewith.

Very truly yours,

MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED

By:______________________________
Name:
Title:

Accepted as of the date
first written above

Somatix Therapy Corporation

By:_____________________________
Name:
Title:

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 33-84010), dated
September 14, 1994 pertaining to the 1992 Stock Option Plan of
Somatix Therapy Corporation, the Registration Statement on Form
S-8 (No. 33-87632), dated December 19, 1994 pertaining to the
1992 Stock Option Plan and a special grant award to Fred H.
Gage, the Registration Statement on Form S-8 (No. 33-89926),
dated March 3, 1995, pertaining to the Stock Option Plan of
Merlin Pharmaceutical Corporation, the Registration Statement
on Form S-3 (No. 33-60363), dated June 19, 1995 for the
registration of 2,363,895 shares of common stock in connection
with the acquisition of Merlin Pharmaceutical Corporation, the
Registration Statement on Form S-3 (No. 33-60365), dated
June 19, 1995 for the registration of 4,321,031 shares of
common stock and the Registration Statement on Form S-3
(No. 33-60873), dated July 6, 1995 for the registration of
2,476,500 shares of common stock upon conversion of Series A
Preferred Stock and the exercise of warrants to purchase common
stock of our report dated July 28, 1995, except Note 10 as to
which the date is August 14, 1995, with respect to the
consolidated financial statements of Somatix Therapy Corporation
included in this Annual Report on Form 10-K for the year ended
June 30, 1995.

ERNST & YOUNG LLP

Walnut Creek, California
September 25, 1995

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