<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1995
REGISTRATION NO. 33-60873
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOMATIX THERAPY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3827 94-2762045
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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850 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
850 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)
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COPIES TO:
<TABLE>
<S> <C>
J. STEPHAN DOLEZALEK, ESQ. PAUL CLEVELAND, ESQ.
SONYA F. ERICKSON, ESQ. COOLEY GODWARD CASTRO
BROBECK, PHLEGER & HARRISON HUDDLESON & TATUM
TWO EMBARCADERO PLACE FIVE PALO ALTO SQUARE
2200 GENG ROAD 3000 EL CAMINO REAL
PALO ALTO, CA 94303 PALO ALTO, CA 94306
(415) 424-0160 (415) 843-5000
</TABLE>
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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, check the following box. /
/
If 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 check the following box. /X/
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. / /
------------------------
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.
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<PAGE> 2
SOMATIX THERAPY CORPORATION
Cross Reference Sheet showing the location in the Prospectus of the Items
on Form S-3
<TABLE>
<CAPTION>
LOCATION IN
FORM S-3 ITEM AND CAPTION PROSPECTUS
- --------------------------------------------------------------- ----------------------------
<S> <C>
1. Forepart of the 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; The Company
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 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.............................. *
</TABLE>
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* Such item is inapplicable or the answer thereto is in the negative.
<PAGE> 3
PROSPECTUS
2,476,500 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 shares (the "Shares") of Common Stock, par value $0.01 per
share (the "Common Stock") of Somatix Therapy Corporation (the "Company"). The
Shares may be offered by certain stockholders of the Company or by pledges,
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") 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 are issuable upon conversion of
Series A Preferred Stock and exercise of Warrants received by the Selling
Stockholders in a private placement by the Company. See "Recent Developments."
The Series A Preferred Stock and Warrants, and the Shares issuable upon exercise
of the Warrants, 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. The Shares are being registered by the Company
pursuant to registration rights granted to the Selling Stockholders in
connection with the private placement. 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 30, 1995, the last sale price for
the Common Stock as reported by Nasdaq was $4.25 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 4.
------------------------
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 July , 1995.
<PAGE> 4
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.
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.
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(vi) The description of the Company's Common Stock contained in its
registration statement on Form 8-A, File No. 0-14758, including any
amendment or report filed for the purpose of updating such
description.
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.
3
<PAGE> 6
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 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
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<PAGE> 7
diseases in the patient. There can be no assurance that unacceptable side
effects will not be discovered during preclinical and clinical testing of the
Company's potential products or thereafter. There are many reasons that
potential products that appear promising at an early stage of research or
development do not result in commercialization. Although the Company is testing
one of its proposed products in Phase I clinical trials, there can be no
assurance that the Company will be permitted to undertake human clinical trials
for any of its other products or that the results of such testing will
demonstrate safety or efficacy. Even if clinical trials are successful, there is
no assurance that the Company will obtain regulatory approval for any
indication, or that an approved product can be produced in commercial quantities
at reasonable costs, or be successfully marketed. The Company has also recently
begun development of in vivo approaches to gene therapy that will target
specific cells. There can be no assurance that the desired specificity will be
attained or that such products will not have serious side effects.
OPERATING LOSS AND ACCUMULATED DEFICIT
The Company has incurred net losses since its inception. At 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 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
5
<PAGE> 8
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.
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
Merger, there can be no assurance that they will stay during the period or will
continue to be associated with the Company once the 18 month period has been
completed in August 1996.
The Company has clinical trial arrangements 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 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
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<PAGE> 9
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 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 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
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<PAGE> 10
could be adversely effected. Failure by the Company to obtain a license to any
technology that it may require to commercialize its technologies or potential
products may have a material adverse effect on the Company. In addition, the
Company could incur substantial costs in defending itself in 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.
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.
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<PAGE> 11
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
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
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organizations, self-insured employee plans and the Blue Cross/Blue Shield plans.
There is considerable pressure to reduce the cost of drug products. In
particular, reimbursement from government agencies and insurers and large health
organizations may become more restricted in the future. The Company's potential
products represent a new mode of therapy, and, while the cost-benefit ratio of
the products may be favorable, the Company expects that the costs associated
with its products will be substantial. There can be no assurance that the
Company's proposed products, if successfully developed, will be considered
cost-effective by third party payors, that insurance coverage will be available
or, if available, that such payors' reimbursement policies will not adversely
affect the Company's ability to sell its products on a profitable basis. In
addition, there can be no assurance that insurance coverage will be provided by
such payors at all or without substantial delay, or, if such coverage is
provided, that the approved reimbursement will provide sufficient funds to
enable the Company to become profitable.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of and availability of capital for
biotechnology companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
prospects.
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, of which 2,363,895 shares of Common Stock were
registered on June 27, 1995. 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 on June 27, 1995, the Company registered 4,321,031
shares of Common Stock, including 1,551,139 shares of Common Stock issuable upon
exercise of warrants, sold by the Company in private placement transactions
pursuant to Common Stock Purchase Agreements 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.
DILUTION
The price of the Securities issued in this offering is substantially higher
than the book value per share of Common Stock. Investors purchasing Securities
in this offering will therefore incur immediate, substantial dilution.
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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 Pharmaceuticals Corporation, a gene
therapy company developing adeno-associated viral vectors (AAV) and adenoviral
vectors (AV) for in vivo gene therapy. In addition to acquiring important
intellectual property in these vector systems, Somatix executed exclusive
consulting relationships with two leading researchers in the gene transfer
field: Richard Samulski, Ph.D. and Thomas Shenk, Ph.D. Combined with extensive
existing vector biology research ongoing at the Company under the direction of
Richard Mulligan, Ph.D., Chief Scientific Officer, this acquisition has
accelerated the Company's development of multiple vector systems for both in
vivo and ex vivo gene therapy.
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.
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 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.
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. 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.
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CORE SCIENCE AND CLINICAL DEVELOPMENT PROGRAMS
CORE SCIENCE
Somatix has built, through several carefully selected mergers and
acquisitions as well as substantial internal development activities, a
broad-based, multiple gene transfer technology platform. The Company has active
research and development efforts in several major gene transfer areas including
retroviral, adeno-associated virus, adenoviral and synthetic vector systems.
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>
GVAXTM cancer vaccine.......... renal cell carcinoma PI/II Complete 2Q/95 --
melanoma PI/II dose Complete 3Q/95 --
escalation
melanoma PI/II dose Complete 2H/95 --
scheduling
prostate preclinical IND-2H/95 --
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>
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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 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.
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
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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,
and it 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 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 requiring therapy.
While pre-clinical evidence suggests the
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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 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
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production and when it drops below a threshold level, these cells fire
uncontrollably creating the abnormal movements that are a hallmark of
Parkinson's. Blindness and paralysis are potential side-effects of the
treatment. It also appears that some patients experience long term relief of
their symptoms but many patients who experience immediate relief relapse quickly
back to their original state, or worse. Both fetal cell transplantation and
pallidotomy are considered to be the practice of medicine and therefore not
regulated by the FDA. Gene therapy, by contrast, will be regulated by the FDA
and ultimately stands to benefit by the requirement for well-controlled clinical
studies to prove its safety and efficacy.
ALZHEIMER'S DISEASE
Alzheimer's disease, a condition characterized by progressive dementia,
affects over 4 million Americans. The function of degenerating nerve cells which
cause this disease could be enhanced by administration of nerve growth factor
("NGF"). Since NGF does not cross the blood-brain barrier, and the current
method of using a catheter to deliver this chemical is impractical, Somatix is
studying the use of NGF-modified cells for its delivery. This method involves
genetically modifying a patient's own non-neural cells ex vivowith 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.
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.
RECENT DEVELOPMENTS
On June 28, 1995, the Company completed a $16.5 million private placement,
before offering costs, of 2,769,892 shares of Common Stock (the "Common
Shares"), 254,000 shares of Series A Preferred Stock (the "Preferred Stock") and
Warrants to purchase 2,440,139 shares of Common Stock. The Common Shares and
Warrants to purchase 1,551,139 shares of Common Stock (the "Common Warrants")
16
<PAGE> 19
certain investors (the "Common Investors") pursuant to an exemption from the
registration requirements of the Securities Act provided by Section 4(2)
thereof. Pursuant to registration rights granted to the Common Investors, the
resale of the Common Shares and Common Warrants was previously registered on a
Registration Statement on Form S-3 pursuant to which all of the Common Shares
and shares issuable upon exercise of the Common Warrants may be offered from
time to time by the Common Investors. The Preferred Stock and Warrants to
purchase 889,000 shares of Common Stock (the "Preferred Warrants") 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
Preferred Stock is initially convertible, at any time, into an aggregate of
1,587,500 shares of Common Stock. The Company granted S-3 registration rights to
the Selling Stockholders covering the resale of the shares of Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Preferred
Warrants (collectively, the "Shares"). The Shares are being registered by the
Company on a registration Statement on Form S-3, of which this Prospectus forms
a part, pursuant to which all of the Shares may be offered from time to time by
the Selling Stockholders. In addition, the Preferred Stock contains rights,
preferences and privileges, including a provision that resets the conversion
price of the Preferred Stock to the lesser of the initial conversion price of
$4.00 or the twenty (20) trading day consecutive average closing market price of
the Common Stock for the twenty (20) trading days prior to the thirteenth month
following the date of issuance; provided that the conversion price will not be
less than $2.00 per share of Common Stock. See "Description of Capital Stock." A
copy of the Preferred Stock Purchase Agreement between the Company and the
Selling Stockholders (the "Purchase Agreement"), and a copy of the form of
Warrant and the Company's Certificate of Designation of Preferences of Preferred
Shares designating the rights, preferences and privileges of the Preferred
Stock, are filed as Exhibits hereto.
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 (i) following conversion of Series A Preferred Stock acquired from the
Company in private placement transactions pursuant to the Purchase Agreement at
a per common share purchase price of $4.00 or (ii) upon exercise of Warrants
acquired in the same transactions. The placement agent in connection with the
sale of Preferred Stock pursuant to the Purchase Agreement (the "Placement
Agent") was paid a fee of $444,500. In addition, the Company reimbursed the
Placement Agent for its travel and out-of-pocket expenses incurred in connection
with the sale of Preferred Stock pursuant to the Purchase Agreement.
Each Selling Stockholder that purchased Preferred Stock pursuant to a
Purchase Agreement represented to the Company that it would acquire the Shares
for investment and with no present intention of distributing any of such Shares
except pursuant to this Prospectus. 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) the third anniversary of the closing under the Purchase Agreement (or
ninety (90) days following the final issuance of Additional Registrable
Securities (as defined in the Purchase Agreement), if late), (ii) such date as
all of the Shares have been resold, or (iii) such time as all of the Shares held
by the Selling Stockholders can be sold within a given three-month
17
<PAGE> 20
period without compliance with the registration requirement of the Securities
Act pursuant to Rule 144.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
PRIOR BENEFICIAL OWNERSHIP
TO OFFERING (1) AFTER OFFERING (1)
--------------------- NUMBER OF ---------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF SELLING STOCKHOLDERS SHARES PERCENT OFFERED SHARES PERCENT
- -------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Robert S. Birch(2).................... 39,000 * 39,000 0 *
Aeneas Venture Corporation(3)......... 2,203,726 11.7% 585,000 1,618,726 8.6%
Phoenix Partners, L.P.(4)............. 198,900 1.1% 198,900 0 *
Betje Partners, L.P.(5)............... 62,400 * 62,400 0 *
Morgens, Waterfall, Vintiadis
Investments(6)...................... 168,700 * 128,700 40,000 *
Olin Nisbet(7)........................ 97,500 * 97,500 0 *
SBSF Biotechnology Fund, L.P.(8)...... 292,500 1.6% 292,500 0 *
Counselors Emerging Growth Fund(9).... 1,190,000 6.5% 585,000 605,000 3.3%
WHI Somatix Partners(10).............. 195,000 1.1% 195,000 0 *
WPG-Farber Partners Fund, L.P.(11).... 208,650 1.1% 208,650 0 *
WPG-Farber Overseas Partners,
Ltd.(12)............................ 83,850 * 83,850 0 *
--------- ------------ ---------
Total....................... 4,740,226 2,476,500 2,263,726
</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.
(2) Includes shares issuable upon exercise of warrants to purchase 14,000
shares of Somatix Common Stock.
(3) Includes 25,000 shares which are currently issuable upon the exercise of
outstanding options. Includes shares issuable upon exercise of warrants to
purchase 210,000 shares of Somatix Common Stock. Michael R. Eisenson, a
director of the Company, is a Vice President and member of the investment
committee of Aeneas Venture Corporation. He may be deemed the beneficial
owner of 2,203,726 shares of Common Stock held by Aeneas Venture
Corporation with shared voting and investment power with respect thereto.
Mr. Eisenson disclaims beneficial ownership of such shares.
(4) Includes shares issuable upon exercise of warrants to purchase 71,400
shares of Somatix Common Stock.
(5) Includes shares issuable upon exercise of warrants to purchase 22,400
shares of Somatix Common Stock.
(6) Includes shares issuable upon exercise of warrants to purchase 46,200
shares of Somatix Common Stock.
(7) Includes shares issuable upon exercise of warrants to purchase 35,000
shares of Somatix Common Stock.
(8) Includes shares issuable upon exercise of warrants to purchase 105,000
shares of Somatix Common Stock.
(9) Includes shares issuable upon exercise of warrants to purchase 210,000
shares of Somatix Common Stock.
(10) Includes shares issuable upon exercise of warrants to purchase 70,000
shares of Somatix Common Stock.
(11) Includes shares issuable upon exercise of warrants to purchase 74,900
shares of Somatix Common Stock.
(12) Includes shares issuable upon exercise of warrants to purchase 30,100
shares of Somatix Common Stock.
18
<PAGE> 21
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 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 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") of which 254,000 shares have been designated Series A-1
Preferred Stock and 100,000 shares have been designated Series A-2 Preferred
Stock. The Company had 18,112,056 shares of Common Stock outstanding on May 31,
1995 and 254,000 shares of Series A Preferred Stock outstanding on June 28,
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
19
<PAGE> 22
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 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, the Common
Stock issuable upon exercise of warrants to purchase 889,000 shares of Common
Stock are being registered in this offering (the "Warrants"). The Warrants are
exercisable at any time beginning 60 days from the date of issuance until the
third anniversary of the date of issuance. The Warrants are exercisable at a
price of $4.00 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.
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.
20
<PAGE> 23
SOMATIX THERAPY CORPORATION
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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 of Consolidated Financial Statements............................................ F-6
</TABLE>
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
SOMATIX THERAPY CORPORATION
We have audited the accompanying consolidated balance sheets of Somatix
Therapy Corporation and subsidiaries 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.
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 28, 1995
F-1
<PAGE> 25
SOMATIX THERAPY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
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.
F-2
<PAGE> 26
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.
F-3
<PAGE> 27
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.
F-4
<PAGE> 28
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.
F-5
<PAGE> 29
SOMATIX THERAPY CORPORATION
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.
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
F-6
<PAGE> 30
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 thencurrent 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
F-7
<PAGE> 31
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-8
<PAGE> 32
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 33
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
--------- ----------
<S> <C> <C>
Interest income............................................. $ 731,000 $1,067,000
Interest expense............................................ (132,000) (124,000)
Other income (expense), net................................. (125,000) 21,000
--------- ----------
$ 474,000 $ 964,000
========= =========
</TABLE>
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.
F-10
<PAGE> 34
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 8. SUBSEQUENT EVENT
On June 28, 1995, the Company received approximately $16 million for units
consisting of common stock and warrants or preferred stock and warrants.
F-11
<PAGE> 35
- ------------------------------------------------------
- ------------------------------------------------------
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 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 PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Risk Factors.......................... 4
The Company........................... 11
Selling Stockholders.................. 17
Plan of Distribution.................. 18
Description of Capital Stock.......... 19
Legal Matters......................... 20
Experts............................... 20
Index to Consolidated Financial
Statements.......................... 21
Report of Independent Auditors........ F-1
Financial Statements.................. F-2
- --------------------------------------
- --------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
2,476,500 SHARES
SOMATIX
THERAPY
CORPORATION
COMMON STOCK
--------------
JULY , 1995
--------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 36
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 . . . . . . . . . . . . . . . . . . . . . . $ 3,469
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Transfer Agent Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,469
</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 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.
II-1
<PAGE> 37
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>
3.3* Certificate of Designation of Preferences of Preferred Shares.
5.1* Opinion of Brobeck, Phleger & Harrison.
10.20* Common Stock Purchase Agreement.
10.21* Preferred Stock Purchase Agreement.
10.22* Form of Warrant to Purchase Shares of Common Stock.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Brobeck, Phleger & Harrison.
25.1* Power of Attorney.
</TABLE>
- --------
* Previously filed.
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
II-2
<PAGE> 38
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
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
II-3
<PAGE> 39
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> 40
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
AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ALAMEDA, STATE OF
CALIFORNIA ON THIS 17TH DAY OF JULY, 1995.
SOMATIX THERAPY CORPORATION
By /s/ DAVID W. CARTER*
---------------------------------------
David W. Carter, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this
Amendment to Registration Statement has been signed below by the persons whose
II-5
<PAGE> 41
signatures appear below, which persons have signed such Registration
Statement in the capacities indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ DAVID W. CARTER* Chairman of the Board, July 17, 1995
--------------------------------------------------- President, Chief Executive
David W. Carter Officer and Director
(Principal Executive
Officer)
/s/ MARK N. K. BAGNALL Vice President, Finance, and July 17, 1995
--------------------------------------------------- Chief Financial Officer
Mark N. K. Bagnall (Principal Financial and
Accounting Officer)
/s/ KAREN DAVIS* Director July 17, 1995
---------------------------------------------------
Karen Davis, Ph.D.
Director July , 1995
---------------------------------------------------
Michael R. Eisenson
/s/ FRED H. GAGE* Director July 17, 1995
---------------------------------------------------
Fred H. Gage, Ph.D.
/s/ HARRY F. HIXSON, JR.* Director July 17, 1995
---------------------------------------------------
Harry F. Hixson, Jr., Ph.D.
Director July , 1995
---------------------------------------------------
Richard C. Mulligan, Ph.D.
Director July , 1995
---------------------------------------------------
John T. Potts, Jr.
Director July , 1995
---------------------------------------------------
Thomas E. Shenk
/s/ SAMUEL D. WAKSAL* Director July 17, 1995
---------------------------------------------------
Samuel D. Waksal, Ph.D.
*By /s/ MARK N.K. BAGNALL
----------------------------------------------
Mark N.K. Bagnall
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. EXHIBIT Page No.
- ------- --------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<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 28, 1995 in the Registration Statement (Amendment No. 1 to Form S-3
No. 33-60873) and related Prospectus of Somatix Therapy Corporation for the
registration of 2,476,500 shares of its common stock.
ERNST & YOUNG LLP
San Francisco, California
July 17, 1995
