<PAGE> 1
As filed with the Securities and Exchange Commission on June 19, 1995
Registration No. ____________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
SOMATIX THERAPY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 3827 94-2762045
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
--------------------
950 Marina Village Parkway
Alameda, CA 94501-1034
(510) 748-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
David W. Carter
Chairman of the Board, President and
Chief Executive Officer
SOMATIX THERAPY CORPORATION
950 Marina Village Parkway
Alameda, CA 94501-1034
(510) 748-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
Copies to:
J. STEPHAN DOLEZALEK, ESQ. BRIAN W. PUSCH, ESQ.
SONYA F. ERICKSON, ESQ. LAW OFFICES OF BRIAN W. PUSCH
BROBECK, PHLEGER & HARRISON PENTHOUSE SUITE
TWO EMBARCADERO PLACE 29 WEST 57TH STREET
2200 GENG ROAD NEW YORK, NY 10019
PALO ALTO, CA 94303 (212) 980-0408
(415) 424-0160
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price per aggregate offering Amount of
securities to be registered registered Security (1) price (1) registration fee
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 2,363,895 $4.25 $10,046,554 $3,464
per share
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The price of $4.25 per share, which was the average of the high and
low prices of the Common Stock as reported by the Nasdaq National
Market on June 16, 1995, is set forth solely for the purpose of
calculating the registration fee in accordance with Rule 457(c) of the
Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 3
SOMATIX THERAPY CORPORATION
Cross Reference Sheet showing the location in the Prospectus of the
Items on Form S-3
Location in
Form S-3 Item and Caption Prospectus
------------------------- -----------
1. Forepart of Registration Statement
and Outside Cover Page of Prospectus . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . . Inside Front and Outside
Back Cover Pages
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Charges . . . . Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . *
5. Determination of Offering Price . . . . . . . *
6. Dilution . . . . . . . . . . . . . . . . . . . *
7. Selling Security Holders . . . . . . . . . . . Selling Stockholders
8. Plan of Distribution . . . . . . . . . . . . . Outside Front Cover Page;
Plan of Distribution
9. Description of Securities to Be
Registered . . . . . . . . . . . . . . . . . . Description of the
Capital Stock
10. Interests of Named Experts and
Counsel . . . . . . . . . . . . . . . . . . . *
11. Material Changes . . . . . . . . . . . . . . . *
12. Incorporation of Certain Information
by Reference . . . . . . . . . . . . . . . . . Inside Front Cover
Page
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . *
- ---------------------
* Such item is inapplicable or the answer thereto is in the negative.
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
1.
<PAGE> 5
PROSPECTUS
2,363,895 SHARES
SOMATIX THERAPY CORPORATION
COMMON STOCK
($0.01 PAR VALUE PER SHARE)
_____________________________
This Prospectus relates to the public offering, which is not being
underwritten, of 2,363,895 shares (the "Shares") of Common Stock, par value
$0.01 per share (the "Common Stock") of Somatix Therapy Corporation (the
"Company"). All of the Shares may be offered by certain stockholders of the
Company or by pledgees, donees, transferees or other successors in interest that
receive such shares as a gift, partnership distribution or other non-sale
related transfer (the "Selling Stockholders"). The Shares may be offered by the
Selling Stockholders from time to time in transactions on the Nasdaq National
Market, in privately negotiated transactions, or by a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Shares were issued pursuant to an exemption
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), provided by Section 4(2) thereof in connection with the
Company's acquisition of Merlin Pharmaceutical Corporation (the "Acquisition").
The Shares are being registered by the Company pursuant to registration rights
granted to the Selling Stockholders in connection with the Acquisition. 106,511
of the Shares are issuable upon the exercise by certain Selling Stockholders of
outstanding warrants to purchase shares of Common Stock. The Selling
Stockholders may effect such transactions by selling the Shares to or through
broker- dealers and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders or the
purchasers of the Shares for whom such broker-dealers may act as agent or to
whom they sell as principal or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). See "Selling
Stockholders" and "Plan of Distribution."
None of the proceeds from the sale of the Shares by the Selling
Stockholders will be received by the Company. The Company has agreed to bear
certain expenses (other than fees and expenses, if any, of counsel or other
advisors to the Selling Stockholders) in connection with the registration and
sale of the Shares being offered by the Selling Stockholders. The Company has
agreed to indemnify the Selling Stockholders against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended.
The Common Stock of the Company is traded on the Nasdaq National
Market ("Nasdaq") under the symbol "SOMA." On June 16, 1995, the last sale
price for the Common Stock as reported by Nasdaq was $4.3125 per share.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
______________________________
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 5.
______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is June ___, 1995.
2.
<PAGE> 6
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection
with the offering made hereby, and if given or made, such information or
representations must not be relied upon as having been authorized by the
Company, any Selling Stockholder or by any other person. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that information herein is correct as of any time
subsequent to the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any security other than the
securities covered by this Prospectus, nor does it constitute an offer to or
solicitation of any person in any jurisdiction in which such offer or
solicitation may not lawfully be made.
AVAILABLE INFORMATION
Somatix Therapy Corporation ("Somatix" or the "Company"), is subject
to the information requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, is required to file
periodic reports, proxy materials and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at its regional offices located at Suite
1400, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661, and at Room 1400, 75 Park Place, New York, New York 10007, and copies of
such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Common Stock of the Company is quoted on the Nasdaq National
Market, and such material may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W. Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement
(which term shall include all amendments, exhibits and schedules thereto) on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Shares offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission, and to which reference is hereby made. Statements made in this
Prospectus as to the contents of any document referred to are not necessarily
complete. With respect to each such document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
3.
<PAGE> 7
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference in this Prospectus and made a part hereof:
(i) Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
(ii) Quarterly Report on Form 10-Q for the quarters ended
September 30, 1994, December 31, 1994 and March 31, 1995.
(iii) Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1995.
(iv) Definitive Proxy Statement dated October 21, 1994,
filed in connection with the Company's 1994 Annual
Meeting of Stockholders.
(v) Report on Form 8-K dated December 19, 1994, filed
December 20, 1994, as amended February 14, 1995 and
March 3, 1995.
(vi) The description of the Company's Common Stock
contained in its registration statement on Form 8-A,
File No. 0-14758.
All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering shall be incorporated by reference into this
Prospectus and shall be deemed to be a part of this Prospectus from the date of
filing of such documents. Any statement contained in a document incorporated
by reference shall be deemed to be modified or superseded for all purposes to
the extent that a statement contained in this Prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, in its unmodified form, to constitute a part of
this Prospectus.
The Company will provide, upon request, without charge to each person
to whom a copy of this Prospectus has been delivered, a copy of any or all of
the documents which have been or may be incorporated in this Prospectus by
reference, other than certain exhibits to such documents. Requests for such
copies should be directed to: Investor Relations, Somatix Therapy Corporation,
950 Marina Village Parkway, Alameda, California 94501-1034; (510) 748-3000.
4.
<PAGE> 8
RISK FACTORS
Prospective investors in the shares of the Company's Common Stock
offered hereby should carefully consider the following Risk Factors, in
addition to the other information appearing in or incorporated by reference
into this Prospectus.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The development of the Company's products will require the commitment
of substantial funds to conduct research and development of its products, to
establish commercial scale manufacturing capabilities, and to market its
products. 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 its existing cash and
interest income will be adequate to satisfy its capital requirements for
approximately the next nine months. 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 relinquish rights to certain of its technologies or discontinue its programs
in their entirety and liquidate its assets.
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
5.
<PAGE> 9
Company or others and general market conditions may have a significant effect
on the market price of the Common Stock.
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 and 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
6.
<PAGE> 10
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 March 31,
1995, the Company's accumulated deficit was approximately $140.2 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 $13.7 million in fiscal 1994 and expects to incur substantial and
increasing losses for at least the next several years due primarily to 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.
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
7.
<PAGE> 11
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.
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. There can be no
assurance, however, that new guidelines will not be instituted, or that Somatix
will be able to continue to comply with existing or future regulations.
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.
8.
<PAGE> 12
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. In May 1994, Richard C. Mulligan, Ph.D. joined the Company
as Executive Vice President of Research and Chief Scientific Officer. Dr.
Mulligan joined the Company with the understanding that he would return to an
academic research position for the 1996 academic year. Dr. Mulligan is
currently negotiating such a position.
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
Acquisition, 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 now in progress with The
Johns Hopkins University covering a Phase I clinical trial to treat kidney
cancer patients, 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
9.
<PAGE> 13
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 licensed to the Company will
result in patents being issued or that, if issued, the patents will afford
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 in such unpatented proprietary
technology or that others will not duplicate or independently develop
substantially equivalent technology.
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
10.
<PAGE> 14
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.
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, any rights
under such will be available to the Company on commercially reasonable terms,
if at all.
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 potential products, the Company
may be required to obtain licenses to patents or
11.
<PAGE> 15
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
affected. 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 suits brought against it on such
patents or in suits in which the Company's patents may be asserted by it
against another party.
A number of the DNA sequences that 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. 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, a hearing in an 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.
12.
<PAGE> 16
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.
13.
<PAGE> 17
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 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
14.
<PAGE> 18
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,
15.
<PAGE> 19
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.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by existing stockholders could adversely affect the
prevailing market price of the Company's Common Stock. On February 13, 1995,
the Company completed the acquisition of Merlin for an aggregate of 3,000,000
shares of the Company's Common Stock including the 2,363,895 shares of Common
Stock registered hereunder. All of the shares issued in the Merlin acquisition
will be released from escrow, depending upon certain events, in four equal
installments of 750,000 shares every six months, commencing with the first
installment in August 1995. Additionally, the Company is registering
concurrently herewith 2,769,892 shares of Common Stock and 1,551,139 shares of
Common Stock issuable upon exercise of warrants, and is further obligated to
register on or before August, 1995, 2,476,500 shares of Common Stock issuable
upon conversion of Preferred Stock and exercised warrants, all of such shares
having been sold by the Company in private placement transactions pursuant to
Common Stock Purchase Agreements and Preferred Stock Purchase Agreements,
respectively, dated June 17, 1995. With the exception of shares issued in the
Merlin Acquisition, the remaining outstanding shares of the Company's Common
Stock are all freely tradeable, subject to volume and other restrictions
imposed by Rule 144 under the Securities Act with respect to sales by
affiliates. Sales of substantial amounts of Common Stock may have an adverse
effect on the market price of the Common Stock.
16.
<PAGE> 20
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.
Somatix recently acquired Merlin Pharmaceutical 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.
The Company's operations have been unprofitable since its inception,
and will continue to be so, as its research and development programs expand
into preclinical studies and clinical trials.
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, the most
commonly used approaches fall into two categories: viral-based vectors and
non-viral or synthetic vectors. Each system has unique characteristics.
17.
<PAGE> 21
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.
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
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 cancer-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 cancer 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
18.
<PAGE> 22
including retroviral, adeno-associated virus, adenoviral and synthetic vector
systems.
Lead 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 Corporation 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 is preparing to evaluate the
use of gene therapy to treat this inherited disease. Dr. Mallech has received
approvals from the Institutional Review Board (IRB) of the NIH as well as from
the Recombinant DNA Advisory Committee (RAC) to NIH. If approved by the Food
and Drug Administration, this study will represent the Company's first clinical
trial involving the genetic modification of hematopoietic stem cells. Future
applications may include hemophilia, Gaucher's disease, multi-drug resistance
and AIDS.
The following table summarizes the current status of the Company's
product development programs:
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS TARGET DATES PARTNER
====================================================================================================
<S> <C> <C> <C> <C>
GVAX(TM) cancer vaccine renal cell carcinoma PI/II Complete --
2Q/95
melanoma PI/II dose escalation Complete --
3Q/95
melanoma PI/II dose scheduling Complete --
2H/95
prostate preclinical IND-2H/95 --
</TABLE>
19.
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C>
colorectal preclinical IND-2H/95 --
Autologous fibroblasts Parkinson's preclinical IND-1H/96 --
genetically altered to
produce TH
AAV/TH vectors for in Parkinson s preclinical IND-1H/96
vitro administration
Autologous stem cells chronic preclinical IND-2Q/95 Baxter
genetically altered to granulomatous
produce the p47 phox gene disease
Allogeneic cell line hemophilias A & B preclinical IND 1996 Baxter
modified to produce
factor VIII or IX,
implanted in membrane
device
===================================================================================================
</TABLE>
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 GVAX(TM)(1),_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
20.
<PAGE> 24
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
Dunning rat prostate model. The GM-CSF transduced tumor cell vaccine was more
potent than the nontransduced vaccine in every model tested.
With this preclinical data in hand and a 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 early this year. Both of these cancers have shown
responsiveness to immunotherapy approaches. Two other GVAX trials, one in
colorectal cancer and the other in prostate cancer, are expected to begin in
late 1995. The colorectal clinical trial is being funded by an outside party
through Phase I/II. The prostate clinical trial has been approved by the
Recombinant Advisory Committee (RAC) of the NIH in its first accelerated review
of a gene therapy trial and an amendment to the Company's IND is expected to be
submitted soon to the FDA.
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, the patients'
peripheral blood will be analyzed for the presence of tumor-specific cytotoxic
T-lymphocytes (CTLs), and the ability of these CTL's to kill the patient's
tumor cells in an in-vitro diagnostic assay. Preliminary data are encouraging,
but it is too early to draw any conclusions as to efficacy.
21.
<PAGE> 25
THE CENTRAL NERVOUS SYSTEM
The central nervous system ("CNS") is an important target for new drug
development. The brain controls many bodily functions but is one of the most
difficult to treat with drugs since it is a privileged sanctuary whose
blood-brain barrier prevents many drug molecules and most proteins from getting
through. 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 and the discovery of a number of growth factors in
the brain (neurotrophic factors) that could retard neurodegeneration and
perhaps revitalize neuronal cells, 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 which 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
movement symptoms of Parkinson's. Dopamine can be delivered to the brain
through administering L-dopa, a precursor which is converted in the brain to
dopamine, significantly alleviates the symptoms of Parkinson's. However,
L-dopa's efficacy is sharply attenuated after five years in a majority of
patients due to 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
22.
<PAGE> 26
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 excellent disease model exists for Parkinson's Disease. This
came about when in 1982 unfortunate drug addicts took heroin containing the
chemical MPTP that was found to cause symptoms and pathology in these people
indistinguishable from severe Parkinson's Disease. MPTP primate 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 reasonable facsimile. The final 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
23.
<PAGE> 27
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 main
advantage of an in vivo approach is that if frequent re-administration is
required it would likely be less invasive since much smaller amounts of
material would have to be injected into the brain, despite the fact that the
surgical technique for implanting cells, stereotaxic surgery, has been reduced
to routine practice. The potential safety risks of the in vivo approach are
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 will be more conclusive regarding immunogenicity and the
extent of vector diffusion and is developing cell specific gene expression and
targeting technology 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 a 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 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 3-4 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
24.
<PAGE> 28
different than Somatix's MPTP primate model. Several animals not severely MPTP
lesioned were tested for safety. Some received AAV/GDNF (glial derived
neurotrophic factor) and some received AAV/TH (the tyrosine hydroxylase gene
together with the gene for its conversion into L-dopa). Some animals were
sacrificed after ten days and some, including the AAV/GDNF monkeys, were
sacrificed after 4-1/2 months. Gene expression was confirmed in all monkeys
and no toxicity was observed. Other monkeys were severely lesioned to mimic
end stage, non-L-dopa responsive patients. Some of the monkeys received a
control gene and some received AAV/TH. For the 2-1/2 months prior to sacrifice
all the AAV/TH monkeys had partial behavioral recovery. The AAV/TH vector
appears to diffuse from the injection site in such a way that more uniform
coverage of the striatum with dopamine appears possible compared to the fixed
ex vivo implants. Somatix is now preparing to confirm these results in its own
primate models in an experiment that will run in parallel to the second
expanded ex vivo experiment mentioned above.
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 tested in a
well-controlled clinical trial. 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, a
$20,000-$40,000 procedure, 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
25.
<PAGE> 29
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.
The Somatix approach involves modifying a patient's own cells with the
gene for factor VIII, and re-implanting the modified cells at an appropriate
site in the patient's body. This ex vivo gene therapy could be prophylactic,
and more cost-effective than current factor VIII replacement. The Company has
obtained in vitro production of biologically active factor VIII at levels 100
times higher than those reported to date. The Company's next task will be to
identify the optimal cell type and engraftment method.
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.
26.
<PAGE> 30
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.
The Company has in place a strong scientific management team to guide
the Company's programs from the laboratory through commercialization. The
Company has accumulated right to patents and patent applications which it
believes will help it obtain freedom to commercialize its gene therapy
products. Finally, the Company has an approved GMP manufacturing facility and
trained manufacturing staff to conduct clinical programs.
The Company's principal office is located at 950 Marina Village
Parkway, Alameda, California, 94501, and its telephone and fax numbers are
(510) 748-3000 and (510) 814-8838, respectively.
27.
<PAGE> 31
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of each Selling Stockholder and as
adjusted to give effect to the sale of the Shares offered hereby. The Shares
are being registered to permit public secondary trading of the Shares, and the
Selling Stockholders may offer the Shares for resale from time to time. See
"Plan of Distribution".
The Shares being offered by the Selling Stockholders were acquired
from the Company in exchange for the outstanding shares of Common Stock of
Merlin Pharmaceutical Corporation ("Merlin") held by each of the Selling
Stockholders pursuant to the Agreement and Plan of Reorganization dated as of
December 19, 1994, as amended (the "Merger Agreement") at an exchange ratio of
approximately .8598 shares of Somatix Common Stock for each share of Merlin
Common Stock. Except as indicated, none of the Selling Stockholders has had a
material relationship with the Company within the past three years other than
as a result of the ownership of the Shares or other securities of the Company.
Each Selling Stockholder that received Common Stock pursuant to the
Merger Agreement represented to the Company that it was acquiring the Shares
for investment and with no present intention of distributing any of such
Shares. In lieu of granting the Selling Stockholders demand registration
rights, the Company has filed with the Commission, under the Act, a
Registration Statement on Form S-3, of which this Prospectus forms a part, with
respect to the resale of the Shares from time to time on the Nasdaq National
Market or in privately-negotiated transactions and has agreed to use its best
efforts to keep such Registration Statement effective until the earlier of (i)
such date as all of the Shares have been resold, or (ii) such time as all of
the Shares held by the Selling Stockholders can be sold within a given
three-month period without compliance with the registration requirement of the
Securities Act pursuant to Rule 144.
28.
<PAGE> 32
The Shares offered by this Prospectus may be offered from time to time
by the Selling Stockholders named below:
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Prior Beneficial Ownership
to Offering (1) After Offering (1)
Name of Number of
Selling Number of Shares Being Number of
Stockholders Shares Percent Offered Shares Percent
<S> <C> <C> <C> <C> <C>
Douglas Mark 21,493 * 21,493 0 *
Abrams I.R.A.
Rollover Bear
Stearns Securities
Corporation,
Custodian
ALSA Corp. 85,975 * 85,975 0 *
Berman Industries,
Inc. 30,951 * 30,951 0 *
Harold P. Bernstein 25,792 * 25,792 0 *
BNW Partners 51,482 * 51,482 0 *
Cranes Mayos
Associates 51,482 * 51,482 0 *
Direct Funding, Inc. 83,950 * 83,950 0 *
Mark Fawer (2) 54,721 * 54,721 0 *
Dr. Michael Feldman 1,074 * 1,074 0 *
Arie Genger 10,317 * 10,317 0 *
</TABLE>
29.
<PAGE> 33
<TABLE>
<S> <C> <C> <C> <C> <C>
Martin D. Goldman 56,630 * 56,630 0 *
David Kabiller 17,195 * 17,195 0 *
Martin J. Kaplitt 39,682 * 39,682 0 *
David Khaghan and 20,592 * 20,592 0 *
Charlene Khaghan
as JT Ten
William N. Levy 3,359 * 3,359 0 *
Traci McCarty 45,567 * 45,567 0 *
Melimar, Inc. 13,023 * 13,023 0 *
Merrill Lynch, 172,033 1% 172,033 0 *
Pierce, Fenner
& Smith Incorporated (3)
Robert B. Oehler and 2,574 * 2,574 0 *
Judith B. Oehler,
JT TEN
Ted Owen 12,870 * 12,870 0 *
Robert W. Pittman 85,975 * 85,975 0 *
Jarrett Posner 10,317 * 10,317 0 *
Profile Sales Corp. 25,741 * 25,741 0 *
Brian W. Pusch (4) 18,739 * 1,544 17,195 *
Andrea Rabney 4,298 * 4,298 0 *
The Research Foundation
of the State 5,158 * 5,158 0 *
University of
New York
Steven Rosenfeld (5) 148,001 * 148,001 0 *
Richard Jude Samulski 429,878 2% 429,878 0 *
Dennis Shapiro 4,298 * 4,298 0 *
</TABLE>
30.
<PAGE> 34
<TABLE>
<S> <C> <C> <C> <C> <C>
Christopher T. Shenk 21,493 * 21,493 0 *
Gregory T. Shenk 21,493 * 21,493 0 *
Dr. Thomas Shenk (6) 430,716 2% 362,728 67,988 *
Martha Stewart 51,482 * 51,482 0 *
Sudbury Partners I 429,878 2% 429,878 0 *
Dr. Samuel D. 540,873 3% 515,873 25,000 *
Waksal (7)
Barry Martin 66,926 * 66,926 0 *
Weintraub (8)
First Trust
Corporation 5533
FBO 15,444 * 15,444 0 *
Barry Weintraub
IRA
</TABLE>
____________________
* Less than 1%
(1) Based upon 18,112,056 shares of Common Stock outstanding on May 31,
1995. This Registration Statement shall also cover additional shares
of Common Stock which become issuable in connection with the shares
registered for sale hereby by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without
the receipt of consideration which results in an increase in the
number of the Registrant's outstanding shares of Common Stock.
Approximately half of the shares being registered hereby and sold by
the Selling Stockholders are subject to an escrow arrangement pursuant
to the Agreement and Plan of Reorganization dated December 19, 1994,
as amended, between the Company and Merlin Pharmaceutical Corporation.
(2) Includes 13,023 shares held by Melimar, Inc. Mr. Fawer is an officer
of Melimar, Inc. and disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interest therein. Includes
warrants to purchase 21,150 shares of Somatix Common Stock.
31.
<PAGE> 35
(3) Includes warrants to purchase 52,873 shares of Somatix Common Stock.
(4) Includes an option to purchase 17,195 shares of Somatix Common Stock.
(5) Includes 83,950 shares held by Direct Funding, Inc. Mr. Rosenfeld is
an officer of Direct Funding, Inc. and disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest
therein. Includes warrants to purchase 32,488 shares of Somatix
Common Stock.
(6) Dr. Shenk has served as a member of the Company's Board of Directors
since February 13, 1995. Includes 21,493 shares held by Christopher
T. Shenk and 21,493 shares held by Gregory T. Shenk, both sons of
Thomas Shenk, and warrants to purchase 42,988 shares held by Susan M.
Shenk, Dr. Shenk's wife. Mr. Shenk disclaims beneficial ownership of
the shares held by each of his sons and his wife.
(7) Dr. Waksal has served as a member of the Company's Board of Directors
since February 13, 1995. Includes 429,878 shares held by Sudbury
Partners I. Dr. Waksal is a general partner of Sudbury Partners I and
disclaims beneficial ownership of such shares, except to the extent of
his pecuniary interest therein beginning April 1, 1995. Also includes
an option to purchase 25,000 shares of Common Stock.
(8) Includes 15,444 shares held by First Trust Corporation 5533 FBO Barry
Weintraub IRA.
32.
<PAGE> 36
PLAN OF DISTRIBUTION
The Company will receive no proceeds from this offering. The Shares
offered hereby may be sold by the Selling Stockholders from time to time in
transactions in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices. The Selling Stockholders may effect
such transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions
or commissions from the Selling Stockholders and/or the purchasers of the
Shares for whom such broker-dealers may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions).
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of the Securities Act, and
any commissions received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market making activities with respect to the Common Stock of the Company for
a period of two business days prior to the commencement of such distribution.
In addition and without limiting the foregoing, each Selling Stockholder will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders.
The Shares were issued to the Selling Stockholders pursuant to an
exemption from the registration requirements of the Securities Act provided by
Section 4(2) thereof. The Company agreed to register the Shares under the
Securities Act and to indemnify and hold the Selling Stockholders harmless
against certain liabilities under the Securities Act that could arise in
33.
<PAGE> 37
connection with the sale by the Selling Stockholders of the Shares. The
Company has agreed to pay all reasonable fees and expenses incident to the
filing of this Registration Statement.
DESCRIPTION OF THE CAPITAL STOCK
The Company has 26,000,000 shares of authorized capital stock, of
which 25,000,000 shares have been designated Common Stock, $0.01 par value, and
1,000,000 shares have been designated Preferred Stock, $0.01 par value (the
"Preferred Stock"). The Company had 18,112,056 shares of Common Stock
outstanding on May 31, 1995.
The Company has authorized the designation of 254,000 shares of Series A
Preferred Stock to be sold in private placement transactions pursuant to
Preferred Stock Purchase Agreements dated June 17, 1995. The holders of
Preferred Stock are entitled to receive on a quarterly basis cumulative
paid-in-kind dividends at the rate of 7% per annum per share (exclusive of
Preferred Stock received as dividends) in preference to the holders of Common
Stock. In addition, in the event of a liquidation, winding up, or change in
control of the Company, the holders of Preferred Stock are entitled to receive
in preference to any distribution of funds to the holders of Common Stock, an
amount of $25.00 per share of Preferred Stock (as adjusted for stock dividends,
combinations or splits with respect to such shares), plus any accrued but unpaid
dividends. The Preferred Stock is redeemable by the Company at any time on or
after the thirty-month anniversary date of issuance of the Preferred Stock at
the then-conversion price of the Preferred Stock in the event that (i) the
Common Stock closing price for forty (40) of sixty (60) consecutive trading days
exceeds 100% of the then conversion price, and (ii) the Common Stock into which
the Preferred Stock is convertible may be resold by the holders pursuant to an
effective registration statement under the Securities Act of 1933 until June
1998 or Rule 144(k). In addition, the Preferred Stock is redeemable by the
Company at any time on or after three years from the date of issuance of the
Preferred Stock at the liquidation preference payable either in cash or Common
Stock; however, the liquidation preference must be paid in cash unless the
holders can resell the Common Stock pursuant to an effective registration
statement under the Securities Act of 1933 until June 1998 or Rule 144(k). The
Preferred Stock is convertible into Common Stock at any time after issuance at a
conversion price of $4.00 per share of Common Stock (the "Initial Conversion
Price") plus accrued and unpaid dividends. On the date thirteen months from the
date of issuance, the Initial Conversion Price of the Preferred Stock (excluding
shares of Preferred Stock that have been converted, redeemed or repurchased
prior to such date) will be automatically reset to the lesser of (i) the Initial
Conversion Price, and (ii) the 30 trading day consecutive average closing market
price of the Common Stock for the period beginning on the 30th day prior to the
date thirteen months from the date of issuance, but in no event will the Initial
Conversion Price be reset to an amount
34.
<PAGE> 38
less than $2.00 per share of Common Stock. In addition, the conversion price
will be further reset lower by 10% upon the first occurrence after the
conversion price reset set forth in the preceding sentence of (i) a failure to
make material filings under the 1934 Act on a timely basis, or (ii) the receipt
of a qualified audit opinion. The holders of Preferred Stock are entitled to
elect a majority of the Board of Directors in the event that the Company's
available cash falls below $5 million. In addition, consent of the holders of
a majority of the outstanding Preferred Stock is required for (i) the sale,
license or disposal of all or a substantial portion of the Company's assets,
(ii) any indebtedness for borrowed money (other than indebtedness with recourse
limited to tangible real and personal property of the Company), (iii) the
merger, consolidation, or recapitalization of the Company; or (iv) the
amendment or repeal of the Company's charter or bylaws in a manner that
adversely affects the holders of the Preferred Stock.
Holders of shares of Common Stock (and Common Stock issuable upon
conversion of Preferred Stock) are entitled to one vote per share on all
matters to be voted on by stockholders. Subject to the preferences applicable
to the outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors in
its discretion from funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably with the holders of Preferred Stock (on an
as-converted basis) in all assets remaining after payment of liability and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive rights and have no rights to convert their Common
Stock into any other securities. The outstanding shares of Common Stock and
Preferred Stock are, and the Common Stock to be outstanding upon completion of
this offering, will be, fully paid and nonassessable.
The Company has outstanding warrants to purchase an aggregate of
3,098,006 shares of the Company's Common Stock. Of the outstanding warrants,
warrants to purchase 106,511 shares of Common Stock are being registered in
this offering (the "Warrants"). The Warrants are exercisable at any time
until February 28, 1999. Warrants to purchase 83,131 shares of Common Stock
are exercisable at a price of $1.164 per share of Common Stock and Warrants to
purchase 23,380 shares of Common Stock are exercisable at a price of $1.943 per
share of Common Stock. The exercise price of the warrants is subject to
proportional adjustment in the event that the Company undertakes a stock split,
stock dividend, or recapitalization.
35.
<PAGE> 39
SOMATIX THERAPY CORPORATION
FINANCIAL STATEMENTS
Contents
Page
Report of Ernst & Young LLP, Independent Auditors.................. F-1
Financial Statements............................................... F-2
Consolidated Balance Sheets........................................ F-2
Consolidated Statements of Operations.............................. F-3
Consolidated Statements of Stockholders' Equity.................... F-4
Consolidated Statements of Cash Flows.............................. F-5
Notes to Consolidated Financial Statements......................... F-6
<PAGE> 40
LEGAL MATTERS
The legality of the securities being offered hereby will be passed
upon for the Company by Brobeck, Phleger & Harrison, Palo Alto, California.
EXPERTS
The consolidated financial statements of Somatix Therapy Corporation
at June 30, 1994 and 1993, and for each of the three years in the period ended
June 30, 1994, appearing in this Registration Statement and Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
36.
<PAGE> 41
SOMATIX THERAPY CORPORATION
FINANCIAL STATEMENTS
Contents
Page
Report of Ernst & Young LLP, Independent Auditors.................. F-1
Financial Statements............................................... F-2
Consolidated Balance Sheets........................................ F-2
Consolidated Statements of Operations.............................. F-3
Consolidated Statements of Stockholders' Equity.................... F-4
Consolidated Statements of Cash Flows.............................. F-5
Notes to Consolidated Financial Statements......................... F-6
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SOMATIX THERAPY CORPORATION
We have audited the accompanying consolidated balance sheets of Somatix Therapy
Corporation as of June 30, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1994. 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. These 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated July 29, 1994, the
Company, as discussed in Note 8, has experienced substantial losses that
adversely affect the Company's liquidity. Note 8 describes the Company's action
with respect to this issue.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Somatix Therapy Corporation at June 30, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Francisco, California
July 29, 1994
except for Note 8, as to which the date is
June 16, 1995
<PAGE> 43
SOMATIX THERAPY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30
---------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 777,000 $ 5,214,000
Marketable securities 19,196,000 6,482,000
Other current assets 901,000 761,000
----------- -----------
Total current assets 20,874,000 12,457,000
Marketable securities 249,000 6,365,000
Restricted cash 250,000 275,000
Equipment and improvements, at cost:
Laboratory and production equipment 4,040,000 4,585,000
Equipment under capital leases 2,107,000 927,000
Furniture and office equipment 1,204,000 1,741,000
Leasehold improvements 3,555,000 3,159,000
----------- -----------
Total equipment and improvements 10,906,000 10,412,000
Less accumulated depreciation and amortization 6,720,000 6,119,000
----------- -----------
Net equipment and improvements 4,186,000 4,293,000
Other assets 188,000 134,000
----------- -----------
Total assets $25,747,000 $23,524,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,418,000 $ 1,174,000
Accrued compensation and related expenses 311,000 356,000
Capital lease obligations, current portion 517,000 173,000
Other current liabilities 15,000 32,000
------------- ------------
Total current liabilities 2,261,000 1,735,000
Capital lease obligations 1,627,000 176,000
Deferred rent, net of current portion 13,000 61,000
Stockholders' Equity:
Series A Preferred stock, $.01 par value,
1,000,000 shares authorized; none outstanding
Common stock, $.01 par value, 25,000,000
shares authorized; 15,748,937 shares issued and
outstanding (1993--13,266,606 shares issued
and outstanding) 157,000 133,000
Capital in excess of par value 132,109,000 118,132,000
Accumulated deficit (110,420,000) (96,713,000)
------------- ------------
Total stockholders' equity 21,846,000 21,552,000
------------- ------------
Total liabilities and stockholders' equity $ 25,747,000 $ 23,524,000
============= ============
</TABLE>
See accompanying notes.
<PAGE> 44
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30
--------------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Licensing agreement $ 2,000,000 $ -- $ --
Research agreements 900,000 -- --
Contract manufacturing -- -- 69,000
------------ ------------ ------------
Total revenues 2,900,000 -- 69,000
------------ ------------ ------------
Costs and Expenses:
Cost of revenues -- -- 1,035,000
Research and development 13,186,000 12,732,000 7,444,000
General and administrative 3,895,000 3,903,000 2,568,000
In-process technology -- -- 33,038,000
------------ ------------ ------------
Total costs and expenses 17,081,000 16,635,000 44,085,000
------------ ------------ ------------
Operating loss (14,181,000) (16,635,000) (44,016,000)
Other income, net 474,000 964,000 793,000
------------ ------------ ------------
Net loss $(13,707,000) $(15,671,000) $(43,223,000)
============ ============ ============
Net loss per share $(0.95) $(1.19) $(4.43)
====== ====== ======
Shares used in calculation of net
loss per share 14,417,679 13,191,035 9,751,973
========== =========== =========
</TABLE>
See accompanying notes.
<PAGE> 45
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital
Common Stock in Excess Total
---------------------- of Par Deferred Accumulated Stockholders'
Shares Amount Value Compensation Deficit Equity
----------- ------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Years ended June 30, 1994, 1993
and 1992
Balances, June 30, 1991 $ 7,584,544 $ 76,000 $ 48,964,000 $(42,000) $ (37,819,000) $ 11,179,000
----------- -------- ------------ -------- ------------- ------------
Issuance of shares of common stock
under stock option and purchase
plans 127,951 1,000 291,000 -- -- 292,000
Issuance of common stock to and
assumptions of options and
warrants upon the acquisition
of GeneSys 1,967,214 20,000 32,203,000 -- -- 32,223,000
Public offering of common stock at
$11.50 per share, net of issuance
costs 3,450,000 34,000 36,029,000 -- -- 36,063,000
Issuance of common stock to officer
as compensation 12,500 -- -- -- -- --
Amortization of deferred
compensation -- -- -- 42,000 -- 42,000
Purchase and retirement of common
stock (4,892) -- (66,000) -- -- (66,000)
Net loss -- -- -- -- (43,223,000) (43,223,000)
----------- -------- ------------ -------- ------------- ------------
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
investor at $6.88 per share,
net of issuance costs 232,558 2,000 1,582,000 -- -- 1,584,000
Issuance of common stock to
investor 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
=========== ======== ============ ======== ============= ============
</TABLE>
See accompanying notes.
<PAGE> 46
SOMATIX THERAPY CORPORATION
________________
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(13,707,000) $(15,671,000) $(43,223,000)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization . . . . . . . . . . . . . . . 1,466,000 1,232,000 909,000
Write-off of acquired in-process technology . . . . . . . . -- -- 33,038,000
Decrease in contract revenue receivable . . . . . . . . . . -- -- 76,000
Increase in other current assets . . . . . . . . . . . . . (140,000) (320,000) (558,000)
Increase in other assets . . . . . . . . . . . . . . . . . (54,000) (134,000) (56,000)
Increase (decrease) in accounts payable and . . . . . . . .
accrued liabilities . . . . . . . . . . . . . . . . . . . 244,000 (72,000) (482,000)
Increase (decrease) in accrued compensation and
related expenses . . . . . . . . . . . . . . . . . . . . . (45,000) 94,000 142,000
Decrease in accrued acquisition costs . . . . . . . . . . . (17,000) (75,000) (1,354,000)
Increase (decrease) in deferred rent . . . . . . . . . . . (48,000) 76,000 --
------------ ------------ ------------
Net cash used for operating activities . . . . . . . . . (12,301,000) (14,870,000) (11,508,000)
Cash flows from investing activities:
Net proceeds from GeneSys acquisition . . . . . . . . . . . -- -- 2,171,000
Sales of marketable securities and changes
in restricted cash . . . . . . . . . . . . . . . . . . . . 9,625,000 6,533,000 3,910,000
Purchase of marketable securities . . . . . . . . . . . . . (16,198,000) (3,453,000) (11,907,000)
Purchase of equipment and improvements . . . . . . . . . . . (1,359,000) (2,480,000) (960,000)
------------ ------------ ------------
Net cash used in investing activities . . . . . . . . . . (7,932,000) 600,000 (6,786,000)
Cash flows from financing activities:
Borrowings under sale/leaseback agreements . . . . . . . . . 2,000,000 -- --
Principal payments under capital
lease obligations . . . . . . . . . . . . . . . . . . . . . (205,000) (296,000) (942,000)
Net proceeds from issuance of common stock . . . . . . . . . 14,001,000 713,000 37,276,000
------------ ------------ ------------
Net cash provided by financing activities . . . . . . . . 15,796,000 417,000 36,334,000
Net increase (decrease) in cash . . . . . . . . . . . . . . . (4,437,000) (13,853,000) 18,040,000
Cash and cash equivalents, beginning of period . . . . . . . 5,214,000 19,067,000 1,027,000
------------ ------------ ------------
Cash and cash equivalents, end of period . . . . . . . . . . $ 777,000 $ 5,214,000 $ 19,067,000
============ ============ ============
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 132,000 $ 121,000 $ 100,000
Capital lease obligations incurred . . . . . . . . . . . . . $ -- $ -- $ 658,000
</TABLE>
See accompanying notes.
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
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 two 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 (See Note 7). 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 market 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. Non-current marketable securities consist of
government securities, bank repurchase agreements and medium-term corporate
debt securities having maturities greater than one year. Marketable securities
are stated at cost which approximates market value.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company is required to
adopt the statement in its financial year ending June 30, 1995. This statement
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. The Company believes its short-term investments will be classified
as held-to-maturity and recorded at amortized cost with realized gains and
losses included in the statement of operations. In addition, the Company
believes that if it had adopted this statement in 1994, the effect on its
consolidated financial position at June 30, 1994, and results of 1994
operations would not have been significant.
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
straight-line method over their useful lives from three to five years.
Leasehold improvements are being amortized over the remaining lives of the
applicable leases.
<PAGE> 48
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, 1994
and 1993 amounted to $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. STOCKHOLDERS' EQUITY
ACQUISITION OF GENESYS THERAPEUTICS CORPORATION
Pursuant to the acquisition of GeneSys in 1992 (see Note 7), 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.
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 their own research expenditures. In 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 point 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.
<PAGE> 49
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 Company is to receive
$2,500,000 from the Investors 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 totaling $1,750,000, therefore recovering research funding under the
agreement.
OTHER BENEFIT OR BONUS PLANS
1992 STOCK OPTION PLAN. The 1992 Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors on September 15, 1992, as the
successor of the 1983 Stock Option Plan (the "1983 Plan"). All outstanding
options under the 1983 Plan were incorporated into the Option Plan, and no
further option grants are to be made under the 1983 Plan. However, each
outstanding option incorporated into the Option Plan will continue to be
governed by the terms and conditions of the instrument evidencing such grant,
and nothing in the Option Plan will affect the rights and obligations of the
holders of such options with respect to their acquisition of shares of the
Company's common stock thereunder or their exercise of any outstanding stock
appreciation rights pertaining to those options. Under the 1992 Stock Option
Plan, 2,200,000 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 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, 1994). The following table
summarizes the activity under the Plan for the years ended June 30, 1994, 1993,
and 1992:
<TABLE>
<CAPTION>
Options Exercise
For the years ended June 30, Outstanding Price
---------------------------- ----------- -------------
<S> <C> <C>
1991
----
Balance 642,261 $ 2.50-$25.00
1992
----
Options granted 661,327 $ 2.44-$ 8.50
Options canceled (119,696) $ 2.88-$ 8.52
Options exercised (34,919) $ 2.88-$ 8.52
--------- -------------
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
Options canceled (56,737) $ 3.75-$25.00
Options exercised (13,521) $ 2.88-$ 7.00
--------- -------------
Balance 1,812,325 $ 2.88-$25.00
========= =============
</TABLE>
<PAGE> 50
Of the options outstanding at June 30, 1994, 870,157 shares were
exercisable, 428,352 would be subject to repurchase rights if exercised, and
942,169 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, 1994, 15,541 options are
outstanding under the plan, with an exercise price of $0.14 per share.
NOTE 3. JOINT RESEARCH AND DEVELOPMENT AGREEMENT
On November 2, 1993 Baxter Healthcare Corporation 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 hemophilia A and
B.
NOTE 4. INCOME TAXES
Significant components of the Company's non-current deferred tax
assets are as follows at June 30, 1994:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
NONCURRENT DEFERRED TAX ASSETS
Net operating loss carryforward $ 21,000,000 $2,400,000 $ 23,400,000
Capitalization research and development costs 500,000 -- 500,000
Research and development credit carryforward 3,000,000 800,000 3,800,000
------------ ---------- ------------
Gross non-current deferred tax assets 24,500,000 3,200,000 27,700,000
Valuation allowance (24,500,000) (3,200,000) (27,700,000)
------------ ---------- ------------
Net non-current deferred tax asset $ -- $ -- $ --
------------ ---------- ------------
</TABLE>
The valuation allowance increased $6,600,000 in fiscal year 1994.
At June 30, 1994 the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $62,000,000 and
$26,000,000, respectively, which expire in the years 1995 through 2009. The
Company also has federal and state research and development credit
carryforwards of approximately $3,000,000 and $800,000, respectively, which
expire in the years 1996 through 2009.
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.
<PAGE> 51
NOTE 5. COMMITMENTS
The Company leases certain laboratory and production 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, 1994 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
1995 $ 796,000 $1,143,000
1996 718,000 1,494,000
1997 670,000 1,330,000
1998 606,000 783,000
1999 -- 627,000
Thereafter -- --
---------- ----------
Total minimum lease payments $2,790,000 $5,377,000
---------- ==========
Less amount representing interest 646,000
----------
Present value of minimum lease payments 2,144,000
Less current portion 517,000
----------
Long-term portion $1,627,000
==========
</TABLE>
At June 30, 1994, the Company has certificates of deposit totaling
$250,000 which secure certain operating and capital leases.
Rent expense was approximately $1,051,000, $784,000 and $488,000 for
fiscal years 1994, 1993, and 1992, respectively. At June 30, 1994, the net
book value of equipment under capital leases is $2,071,000 ($371,000 in 1993).
Certain other facilities are sub-leased under a non-cancelable lease for terms
substantially identical to the original lease.
On May 24, 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.
NOTE 6. OTHER INCOME
Other income is comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30
--------------------------------------------------
1994 1993 1992
--------- ---------- ---------
<S> <C> <C> <C>
Interest income $ 731,000 $1,067,000 $ 758,000
Interest expense (132,000) (124,000) (100,000)
Other income (expense), net (125,000) 21,000 135,000
--------- ---------- ---------
$ 474,000 $ 964,000 $ 793,000
========= ========== =========
</TABLE>
<PAGE> 52
NOTE 7. ACQUISITION OF GENESYS THERAPEUTICS CORPORATION
On January 17, 1992, the Company completed its acquisition (the
"Acquisition") of GeneSys, a privately held gene therapy company, pursuant to a
transaction in which a wholly owned subsidiary of the Company was merged into
GeneSys. The Company acquired all capital stock of GeneSys by issuing 1,967,214
shares of common stock in exchange for all of the outstanding capital stock of
GeneSys and assumed options and warrants to purchase an aggregate of 549,453
shares of the Company's common stock at exercise prices between $0.28 and $5.73
per share.
The transaction was accounted for as a purchase and the consideration
issued by the Company was allocated to the tangible and intangible assets
acquired based upon their estimated fair values on the Acquisition date. The
aggregate purchase price of $35.7 million consisted of (in thousands):
<TABLE>
<S> <C>
Market value of common stock . . . . . . . . . . . . . . . . . . . . . . . . . $26,727
Fair value, net of accrued proceeds from exercise
of warrants and options assumed . . . . . . . . . . . . . . . . . . . . . . . 5,429
Acquisition costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,114
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
-------
Total purchase price . . . . . . . . . . . . . . . . . . . $35,695
=======
</TABLE>
The aggregate purchase price exceeded the fair value of GeneSys
tangible assets by $33 million. This amount was allocated to acquired
in-process technology and written off to operations in fiscal 1992. The
allocation of the aggregate purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,388
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 269
In-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,038
-------
$35,695
=======
</TABLE>
The operating results of GeneSys have been included in the Company's
statement of operations commencing January 17, 1992. Had the Acquisition
occurred on July 1, 1990, Somatix Therapy Corporation's unaudited pro forma
operating results would have been as follows (in thousands) for the year ended
June 30, 1992:
<TABLE>
<S> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,383)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,590)
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.98)
</TABLE>
The summarized pro forma results above consolidate GeneSys' operating
results with those of Somatix. The pro forma results are for comparative
purposes only and do not purport to present what would have occurred had the
Acquisition been made at the beginning of fiscal 1991 or of the results which
may occur in the future.
<PAGE> 53
NOTE 8 SUBSEQUENT EVENT
The Company continued to incur losses for the period from July 1, 1994
to June 16, 1995. Such losses have resulted primarily from expenses incurred
in the Company's reseach and development programs, the acquisition of new
technology and to a lesser extent from general and administrative expenses.
These losses have had a material adverse effect on the Company's liquidity and
at June 16, 1995, the Company has a working capital deficit. The Company has
received subscription agreements covering approximately $16.5 million in units
consisting of common stock and warrants or preferred stock and warrants the
closing of which is expected to occur on or about June 30, 1995.
<PAGE> 54
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or other individual has been authorized
to give any information or make any representations in connection with
this offering other than those contained in this Prospectus and, if 2,363,895 Shares
given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy any of
the securities in any jurisdiction where, or to any person to whom, it
is unlawful to make such offer or solicitation. The delivery of this SOMATIX
Prospectus at any time does not imply that information herein is THERAPY CORPORATION
correct as of any time subsequent to its date.
Common Stock
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Available Information . . . . . . . . . . . . . . . . . 3
Incorporation of Certain Documents by Reference . . . . 3 ----------------------------------
The Company . . . . . . . . . . . . . . . . . . . . . . 5
Background of Gene Therapy . . . . . . . . . . . . . . 5
Core Science and Clinical Development Programs . . . . 6 June _____, 1995
Risk Factors . . . . . . . . . . . . . . . . . . . . . 10
Selling Stockholders . . . . . . . . . . . . . . . . . 16
Plan of Distribution . . . . . . . . . . . . . . . . . 20 ------------------------------- --
Description of Capital Stock . . . . . . . . . . . . . 20
Legal Matters . . . . . . . . . . . . . . . . . . . . . 20
Experts . . . . . . . . . . . . . . . . . . . . . . . . 20
Index to Consolidated Financial Statements . . . . . . F-1
Report of Independent Auditors . . . . . . . . . . . . F-1
Financial Statements . . . . . . . . . . . . . . . . . F-2
</TABLE>
37.
<PAGE> 55
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The fees and expenses incurred by the Company in connection with the
offering are payable by the Company and, other than filing fees, are estimated
as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . . . . . $ 3,464
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 20,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . 5,000
Transfer Agent Fees and Expenses . . . . . . . . . . . . . . . . . 5,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,464
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor, against
expenses actually and reasonably incurred in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other
II-1
<PAGE> 56
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in
its certificate of incorporation a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
(relating to unlawful payment of dividends and unlawful stock purchase and
redemption) or (iv) for any transaction from which the director derived an
improper personal benefit.
The Registrant's Restated Certificate of Incorporation provides
that the Registrant's directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liabilities is not permitted under
the DGCL as in effect at the time such liability is determined. The Registrant
has entered into indemnification agreements with all of its officers and
directors, as permitted by the DGCL.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits listed in the Exhibit Index as filed as part of this
Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
5.1 Opinion of Brobeck, Phleger & Harrison.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Brobeck, Phleger & Harrison (included in the opinion filed as Exhibit 5.1).
24.1 Power of Attorney (included in Part II of this Registration Statement under the caption
"Signatures").
- ----------------------
</TABLE>
II-2
<PAGE> 57
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section 230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; provided, however, that (i) and (ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by (i) and (ii) is
contained in periodic reports filed with or furnished to the Commission by
the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the
II-3
<PAGE> 58
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-4
<PAGE> 59
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF ALAMEDA, STATE OF CALIFORNIA ON THIS 19TH DAY OF
JUNE, 1995.
SOMATIX THERAPY CORPORATION
By /s/ David W. Carter
-------------------------------------
David W. Carter, Chairman of the
Board, President, Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Somatix Therapy
Corporation, a Delaware corporation, do hereby constitute and appoint jointly
and severally, David W. Carter and Mark N.K. Bagnall and each of them, the
lawful attorneys and agents, with power and authority to do any and all acts
and things and to execute any and all instruments which said attorneys and
agents determine may be necessary or advisable or required to enable said
corporation to comply with the Securities Act, and any rules or regulations or
requirements of the Securities and Exchange Commission in connection with this
Registration Statement. Without limiting the generality of the foregoing power
and authority, the powers granted include the power and authority to sign the
names of the undersigned officers and directors in the capacities indicated
below to this Registration Statement, to any and all amendments, both
pre-effective and post-effective, and supplements to this Registration
Statement, and to any and all instruments or documents filed as part of or in
conjunction with this Registration Statement or amendments or supplements
thereof, and each of the undersigned hereby ratifies and confirms all that said
attorneys and agents or any of them shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
</TABLE>
<PAGE> 60
<TABLE>
<S> <C> <C>
/s/ David W. Carter Chairman of the Board, June 19, 1995
-------------------------------------------------- President, Chief Executive
David W. Carter Officer and Director
(Principal Executive Officer)
/s/ Mark N. K. Bagnall Vice President, Finance, and June 19, 1995
--------------------------------------------------- Chief Financial Officer
Mark N. K. Bagnall (Principal Financial and
Accounting Officer)
/s/ Karen Davis, Ph.D. Director June 19, 1995
---------------------------------------------------
Karen Davis, Ph.D.
/s/ Michael R. Eisenson Director June 19, 1995
---------------------------------------------------
Michael R. Eisenson
/s/ Fred H. Gage, Ph.D. Director June 19, 1995
---------------------------------------------------
Fred H. Gage, Ph.D.
/s/ Harry F. Hixson, Jr. Ph.D. Director June 19, 1995
---------------------------------------------------
Harry F. Hixson, Jr., Ph.D.
/s/ Richard C. Mulligan, Ph.D. Director June 19, 1995
---------------------------------------------------
Richard C. Mulligan, Ph.D.
/s/ John T. Potts, Jr., M.D. Director June 19, 1995
---------------------------------------------------
John T. Potts, Jr., M.D.
/s/ Thomas E. Shenk, Ph.D. Director June 19, 1995
---------------------------------------------------
Thomas E. Shenk, Ph.D.
/s/ Samuel D. Waksal, Ph.D. Director June 19, 1995
---------------------------------------------------
Samuel D. Waksal, Ph.D.
</TABLE>
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. EXHIBIT Page No.
- ------- ------------
<S> <C> <C>
5.1 Opinion of Brobeck, Phleger & Harrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
23.1 Consent of Ernst & Young LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
23.2 Consent of Brobeck, Phleger & Harrison (See Exhibit 5.1) . . . . . . . . . . . . . . . . . . . . . . *
24.1 Power of Attorney (See page II-3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
</TABLE>
__________
<PAGE> 1
Exhibit 5.1
June 19, 1995
Somatix Therapy Corporation
950 Marina Village Parkway
Suite 100
Alameda, California 94501-1034
Ladies and Gentlemen:
We have acted as counsel to Somatix Therapy Corporation (the
"Company"), a Delaware corporation, in connection with its registration of
2,363,895 shares of Common Stock (the "Common Stock") as described in the
Company's Registration Statement on Form S-3, filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Registration Statement").
We are familiar with the corporate proceedings taken by the
Company in connection with the issuance and sale of the Common Stock, and
consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement. It is our opinion that the Common Stock has been duly authorized
and is validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is part of the Registration Statement.
Very truly yours,
BROBECK, PHLEGER & HARRISON
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 29, 1994, except Note 8 as to which the date is
June 16, 1995 in the Registration Statement (Form S-3) and related Prospectus
of Somatix Therapy Corporation for the registration of 2,363,895 shares of
its common stock.
San Francisco, California
June 16, 1995
