UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________________to__________________________
Commission file number 0-14758
SOMATIX THERAPY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2762045
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
850 Marina Village Parkway, Alameda, California 94501
(Address of principal executive offices and zip code)
(510) 748-3000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of:
Class Outstanding at September 30, 1996
- -------------------------------- ---------------------------------
Common Stock, $0.01 Par Value 24,385,824
Preferred Stock, $0.01 Par Value 277,064
<PAGE>
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TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Consolidated Balance Sheets as of
September 30, 1996 and June 30, 1996...................... 1, 2
Consolidated Statements of Operations
for the Three Months Ended
September 30, 1996 and 1995............................... 3
Consolidated Statements of Cash Flows
for the Three Months Ended
September 30, 1996 and 1995............................... 4
Notes to Consolidated Financial Statements................ 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 6
Risk Factors.............................................. 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings......................................... 15
ITEM 2. Changes in Securities..................................... 15
ITEM 3. Defaults upon Senior Securities........................... 15
ITEM 4. Submission of Matters to a Vote of
Security Holders.......................................... 15
ITEM 5. Other Information......................................... 15
ITEM 6. Exhibits and Reports on Form 8-K.......................... 15
Exhibit Index............................................. 15
Signatures................................................ 16
2.
<PAGE>
PART I. FINANCIAL INFORMATION.
ITEM 1. Financial Statements
<TABLE>
SOMATIX THERAPY CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and June 30, 1996
ASSETS
<CAPTION>
September 30, June 30,
1996 1996
(unaudited)
---------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 8,403,000 $ 6,703,000
Marketable securities...................................... 5,445,000 7,738,000
Other current assets....................................... 978,000 889,000
---------------- ----------------
Total current assets.......................................... 14,826,000 15,330,000
Marketable Securities......................................... 494,000 595,000
Restricted cash............................................... 300,000 650,000
Equipment and improvements, at cost:
Laboratory and production equipment........................ 4,199,000 4,136,000
Equipment under capital leases............................. 3,635,000 3,435,000
Furniture and office equipment............................. 1,132,000 1,266,000
Leasehold improvements..................................... 4,438,000 4,286,000
---------------- ----------------
13,404,000 13,123,000
Less accumulated depreciation and amortization............. 10,983,000 10,459,000
---------------- ----------------
Net equipment and improvements............................. 2,421,000 2,664,000
---------------- ----------------
Other assets.................................................. 520,000 131,000
---------------- ----------------
$ 18,561,000 $ 19,370,000
================ ================
<FN>
See accompanying notes.
</FN>
</TABLE>
1.
<PAGE>
SOMATIX THERAPY CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 1996 and June 30, 1996
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, June 30,
1996 1996
(unaudited)
---------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities................... $ 2,293,000 $ 2,237,000
Accrued compensation and related expenses.................. 809,000 1,169,000
Capital lease obligations, current portion................. 932,000 861,000
Accrued restructuring costs, current portion............... 1,196,000 414,000
Other current liabilities.................................. 239,000 186,000
---------------- ----------------
Total current liabilities................................ 5,469,000 4,867,000
Capital lease obligations, net of current portion............. 1,192,000 1,217,000
Accrued restructuring costs,
net of current portion..................................... 727,000 834,000
Other liabilities............................................. 136,000 249,000
Stockholders' equity
Preferred stock, par value $0.01
per share, 1,000,000 shares authorized;
Series A, 243,731 shares, issued and
outstanding(239,811 at June 30, 1996);
Series B, 33,333 shares, issued and
outstanding(none at June 30, 1996)......................... 3,000 2,000
Common stock, par value $0.01 per share,
40,000,000 shares authorized,
24,385,824 issued and outstanding
(24,369,403 at June 30, 1996).............................. 244,000 244,000
Additional paid-in capital................................... 187,129,000 182,118,000
Accumulated deficit.......................................... (176,339,000) (170,161,000)
---------------- ----------------
Total stockholders' equity............................... 11,037,000 12,203,000
---------------- ----------------
$ 18,561,000 $ 19,370,000
================ ================
<FN>
See accompanying notes.
</FN>
</TABLE>
2.
<PAGE>
SOMATIX THERAPY CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
---------------------------------------
September 30, September 30,
1996 1995
<S> <C> <C>
Revenues:
Research agreement......................................... $ -- $ --
Costs and expenses:
Research and development................................... 4,057,000 3,634,000
General and administrative................................. 1,366,000 1,160,000
Restructuring costs........................................ 1,060,000 --
---------------- ----------------
Total costs and expenses................................. 6,483,000 4,794,000
---------------- ----------------
Operating loss................................................ (6,483,000) (4,794,000)
Other income, net............................................. 305,000 218,000
---------------- ----------------
Net loss................................................... $ (6,178,000) $ (4,576,000)
================ ================
Net loss per share............................................ $ (0.25) $ (0.21)
================ ================
Shares used in calculation of
net loss per share......................................... 24,376,503 21,815,617
<FN>
See accompanying notes.
</FN>
</TABLE>
3.
<PAGE>
SOMATIX THERAPY CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended September 30,
--------------------------------------
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (6,178,000) $ (4,576,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............................ 524,000 464,000
Increase in other current assets......................... (89,000) (33,000)
Increase in other assets................................. (389,000) (27,000)
Increase (decrease) in accounts payable and
accrued liabilities..................................... 56,000 (836,000)
Increase (decrease) in accrued compensation
and related expenses.................................... (360,000) 118,000
Decrease (increase) in accrued restructuring costs....... 675,000 (290,000)
Decrease in other liabilities............................ (60,000) (64,000)
---------------- ---------------
Net cash used in operating activities.................... (5,821,000) (5,244,000)
Cash flows from investing activities:
Maturities of marketable securities........................ 2,440,000 --
Purchase of marketable securities.......................... (46,000) (6,671,000)
Decrease in restricted cash................................ 350,000 --
Purchase of equipment and improvements..................... (281,000) (73,000)
---------------- ---------------
Net cash provided by (used in)
investing activities................................... 2,463,000 (6,744,000)
Cash flows from financing activities:
Borrowings under sale/leaseback agreement.................. 347,000 154,000
Principal payments under capital
lease obligations........................................ (301,000) (173,000)
Net proceeds from issuance of common stock................. 5,012,000 11,507,000
---------------- ---------------
Net cash provided by financing activities................ 5,058,000 11,488,000
Net increase (decrease) in cash............................... 1,700,000 (500,000)
Cash and cash equivalents, beginning of period................ 6,703,000 14,326,000
---------------- ----------------
Cash and cash equivalents, end of period...................... $ 8,403,000 $ 13,826,000
================ ================
Cash paid for interest........................................ $ 74,000 $ 82,000
<FN>
See accompanying notes.
</FN>
</TABLE>
4.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. Basis of Presentation
The information at September 30, 1996 and 1995, and for the periods
then ended, is unaudited, but includes all adjustments (consisting only
of normal recurring entries) which the Company's management believes to
be necessary for the fair presentation of the financial position,
results of operations and changes in cash flows for the periods
presented. Interim results are not necessarily indicative of results
for a full year. The accompanying consolidated financial statements
should be read in conjunction with the Company's audited financial
statements for the fiscal year ended June 30, 1996.
2. Reclassifications
Certain prior period balances have been reclassified to conform to
current year presentation.
3. Per Share Information
Per share information is based on the weighted average number of shares
of common stock outstanding during each period. Series A Preferred
shares convertible into 6.25 shares of common stock for each share of
Series A Preferred, Series B Preferred shares convertible into common
stock on basis of weighted average price of common stock at time of
conversion (see Note 4 below) and shares issuable upon the exercise of
outstanding options and warrants to purchase shares of the Company's
common stock (common stock equivalents) are not included in the
calculation of the net loss per share for the three month periods ended
September 30, 1996 and 1995, since their inclusion would be
anti-dilutive.
4. Equity Investment
On September 25, 1996 the Company sold 33,333 shares of convertible
Series B-1 preferred stock ("Series B Preferred Stock") in a private
placement pursuant to Regulation S under the Securities Act of 1933, as
amended, for an aggregate consideration of $5,000,000 in cash. In
addition, the Company has the right to sell up to $10,000,000 in
additional shares of Series B Preferred Stock during the three (3) year
period ending September 25, 1999. No more than $5,000,000 may be sold
during any given six month period. The Series B Preferred Stock is not
entitled to dividends and is convertible into common stock at a premium
over an average of the market price of the Company's Common Stock on
the earlier of (i) the investor's option, (ii) immediately following
any sixty (60) day trading period after March 1997 in which the
Company's common stock has traded above 130% of the closing price of
the common stock on September 24, 1996, or (iii) September 25, 1999.
The Company also issued to the investor a warrant to purchase 650,000
shares of the Company's common stock at a price equal to 130% of the
closing price of the Company's common stock on September 24, 1996. Such
warrant is exercisable between March 1998 and September 2002.
5. Restructuring Costs
On September 24, 1996, the Company implemented a cost reduction
program, delaying a Phase III clinical trial for its Autologus GVAX(TM)
Cancer Vaccine and significantly reduced the clinical development
staff. Accordingly, the Company recorded restructuring costs of
$1,060,000 in the first quarter of fiscal 1997, which included employee
severance costs for 25 employees totaling $853,000. Severance costs
totaling $292,000 were paid prior to September 30, 1996.
5.
<PAGE>
ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Results Of Operations
Somatix Therapy Corporation ("Somatix" or the "Company") is a research and
development company in the field of gene therapy. Absent significant funding
from research collaborations, the Company expects costs and expenses to exceed
revenues in future periods, resulting in increasing losses for the next several
years.
There were no revenues for the three months ended September 30, 1996 or in
the same period in the prior fiscal year.
On September 24, 1996, the Company implemented a cost reduction program,
delaying a Phase III clinical trial of its Autologus GVAX(TM) cancer vaccine and
significantly reduced the clinical development staff involved in this program.
As a result of the restructuring, the Company recorded a first quarter
restructuring charge of $1,060,000 consisting principally of employee severance
pay. Costs and expenses for the three month period ended September 30, 1996 were
$6,483,000 compared to $4,794,000 for the same period in the previous fiscal
year.
Research and development expenses for the three-month period ended
September 30, 1996 increased by $423,000 from the same period in the prior
fiscal year. The increase is due to increased staffing and variable cost expense
to support the Company's on-going clinical trials and to prepare for the Phase
III clinical trials.
General and administrative expenses for the three-month period ending
September 30, 1996 increased by $206,000 from the same period in the prior
fiscal year. The increase is due to increased staffing to support ongoing
clinical trials and to prepare for Phase III clinical trials.
Other income consists principally of interest income earned on the
Company's cash reserves. The increase, to $305,000 in the first three months of
fiscal year 1997, from $218,000 for the same period in fiscal year 1996, was
primarily due to sublease rental income received.
Liquidity And Capital Resources
On September 30, 1996, the Company had cash, cash equivalents and
marketable securities of $14,342,000 compared with $15,036,000 on June 30, 1996.
Operating expenses have exceeded revenues for a number of years. For the
three-month period ended September 30, 1996, capital expenditures amounted to
$281,000. The Company expects its cash requirements and net losses to increase
significantly in future periods due to higher research and development costs,
cost of clinical and pre-clinical trials, and other expenses. The Company has no
material capital commitments.
Given its current operating plans, the Company anticipates that its
existing cash will be sufficient to meet its cash requirements for the next
twelve months. The Company's future cash requirements will depend upon many
factors, including the progress of the Company's research and development, the
scope and results of pre-clinical studies and clinical trials, the expense in
conjunction with obtaining regulatory approvals, the rate of technological
advances, the determination of the commercial potential of the Company's
products under development, the status of competitive products, and the
establishment of production capacity for clinical trials. The Company
anticipates that it will be required to raise substantial additional funds
through collaborative research, development and commercialization relationships
and public or private financings. Consummation of any such transaction would be
subject to numerous conditions and contingencies, and there can be no assurance
that any such transaction will occur in the near term, if at all. The Company
may also seek to access the public equity markets if and when conditions are
favorable, even if it does not have an immediate need for additional cash at
that time. If financing opportunities are not available to the Company, it will
adjust its operating plans accordingly.
6.
<PAGE>
This Form 10-Q contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward- looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this Form 10-Q.
7.
<PAGE>
RISK FACTORS
Future Capital Needs; Uncertainty of Additional Financing
The Company anticipates that its existing cash and interest income will be
adequate to satisfy its capital requirements for at least the next 12 months.
The Company's future capital requirements will depend on many factors, including
the progress of the Company's research and development, the scope and results of
preclinical studies and clinical trials, the cost of obtaining regulatory
approvals, the rate of technological advances, determinations as to the
commercial potential of the Company's products under development, the status of
competitive products and the establishment of manufacturing capacity. The
Company anticipates that it will be required to raise substantial additional
funds, including funds raised through collaborative relationships and public or
private financings. Because of the Company's significant long-term capital
requirements, it may seek to access the public equity markets whenever
conditions are favorable, even if it does not have an immediate need for
additional capital at that time. No assurance can be given that additional
financing will be available on acceptable terms, or at all. If adequate funds
are not available, the Company will be required to curtail significantly its
research and development programs or may be required to discontinue its programs
in their entirety and liquidate its assets.
Early Stage of Development; No Developed or Approved Products
Somatix' 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(TM) cancer vaccine product is being tested in Phase I human
clinical trials primarily to determine its safety; the results of preclinical
studies do not predict safety or efficacy in humans. Possible serious side
effects of gene therapy include viral infections, the initiation of cancers and
possible autoimmune diseases in the patient. There can be no assurance that
unacceptable side effects will not be discovered during preclinical and clinical
testing of the Company's potential products or thereafter. There are many
reasons that potential products that appear promising at an early stage of
research or development do not result in commercialization. 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, some of which 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.
8.
<PAGE>
Operating Loss and Accumulated Deficit
The Company has incurred net losses since its inception. At June 30, 1996,
the Company's accumulated deficit was approximately $170.2 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 $20.7
million in fiscal 1996 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.
Volatility of Stock Price
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products by the
Company or its competitors, governmental regulation, developments in patent or
other proprietary rights, public concern as to the safety of products developed
by the Company or others and general market conditions may have a significant
effect on the market price of the Common Stock.
Uncertainty of Government Regulatory Requirements; Lengthy Approval Process
Because gene therapy is a relatively new technology and has not been
extensively tested in humans, the regulatory requirements governing gene therapy
products are uncertain and may be subject to substantial further review by
various regulatory authorities in the United States and abroad. These uncertain
requirements may result in extensive delays in initiating clinical trials and in
the regulatory approval process. Regulatory requirements ultimately imposed
could adversely affect the Company's ability to clinically test, manufacture or
market products.
The Company believes that its potential products will be regulated by the
FDA as biologics. Each potential product for a specific disease application may
be subject to regulation as a separate biologic, depending on its intended use
and FDA policy. The regulatory process for new therapeutic products, including
the required preclinical and clinical testing, is lengthy and expensive, and
there can be no assurance that FDA approvals will be obtained in a timely
manner, if at all. Future United States or foreign legislative or administrative
actions could also prevent or delay regulatory approval of the Company's
products. There can be no assurance that the Company will be able to obtain the
necessary authorizations to initiate clinical trials or approvals to market any
of its potential products. Even if FDA regulatory approvals are obtained, a
marketed product is subject to continual review. Later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in product marketing restrictions or withdrawal of the
product from the market, as well as possible civil or criminal sanctions. In
addition, many academic institutions and companies doing research in the gene
therapy field are using a variety of approaches and technologies. Any adverse
results obtained by such researchers in preclinical or clinical studies could
adversely affect the regulatory environment for gene therapy products generally,
possibly leading to delays in the approval process for the Company's potential
products.
On October 25, 1993, the vaccines and related biological products advisory
committee to the Center for Biologics Evaluation and Research ("CBER") of the
FDA met to review issues related to gene therapy, including the use of
retroviruses and adenoviruses. The committee did not recommend limiting the use
of viral vectors in gene therapies and made certain recommendations that will be
incorporated into a revision of the FDA's 1991 "Points to Consider" document
related to gene therapies and somatic cell therapies. There can be no assurance,
9.
<PAGE>
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.
The Company has clinical trial arrangements with The Johns Hopkins
University covering a Phase I clinical trial to treat kidney cancer patients,
now in progress, and a Phase I/II clinical trial to treat prostate cancer
patients for which RAC approval has been obtained, but for which no patients
have yet been enrolled. The Company has additional arrangements with the
Netherlands Cancer Institute and the Dana Farber Cancer Center to treat melanoma
patients in two separate Phase I clinical trials. Both trials are currently in
progress. The Company is also testing a product for the treatment of chronic
granulomatous disease ("CGD") using hematopoietic stem cells in a clinical
trial, in conjunction with laboratories at the National Institutes of Health. 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 PD. If the
relationship were terminated, progress of preclinical testing might be adversely
affected.
The Company depends in part on the continued availability of outside
scientific collaborators performing research, which may be funded by the
Company, in certain areas relevant to the Company's research. These
relationships generally may be terminated at any time by the collaborator,
typically by giving 30 days' notice to the Company. The Company's scientific
collaborators are not employees of the Company. As a result, the Company has
limited control over their activities and can expect that only limited amounts
of their time will be dedicated to Company activities. The Company's agreements
with these collaborators as well as those with the Company's scientific
consultants provide that any rights the Company obtains as a result of the
research efforts of these individuals will be subject to the rights of the
research institutions in such work. In addition, some of these collaborators
have consulting or other advisory arrangements with other entities that may
conflict with their obligations to the Company. For these reasons, there can be
no assurance that inventions or processes discovered by the Company's scientific
collaborators or scientific consultants will become the property of the Company.
Patents, Proprietary Rights and Licenses
Patent positions in the field of biotechnology are generally highly
uncertain and involve complex legal and scientific questions. To date, there has
emerged no consistent policy regarding the breadth of claims allowed in
10.
<PAGE>
biotechnology patents, especially in the area of gene therapy. Accordingly,
there can be no assurance that patent applications and patents licensed to the
Company will result in patents being issued or that, if and when issued, the
patents will afford protection against competitors with similar technology. The
Company 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 purportedly holds an exclusive license to
a United States patent issued to the National Institutes of Health covering ex
vivo gene therapy (U.S. Patent No. 5,399,346 to Anderson, et al.). This patent
is exclusively licensed to Genetic Therapy Inc., which in 1995 was acquired by
Sandoz Pharmaceuticals. The United States Patent and Trademark Office ("PTO")
has declared an interference between a pending patent application exclusively
licensed to the Company, a patent application of another company, and the
Anderson et al. patent. The PTO is conducting an interference proceeding, which
is primarily intended to determine the priority of the invention rights among
the parties, and, in addition, will review the validity and patentability of the
parties' patent filings. Somatix' application has been accorded senior party
status based on its priority filing date of July 5, 1985. The outcome of these
proceedings is uncertain, and is expected to take at least a year. However,
there can be no assurance that a competitor's patent will not prevail, and that,
if it prevails, any rights under such patent will be available to the Company on
commercially reasonable terms.
In addition, the Company is aware of pending patent applications which have
been licensed to another competitor of the Company relating to certain types of
genetically modified cells. For example, the Company is aware of a pending
application covering genetically modified endothelial cells and their use in
gene therapy. The patent application is assigned to the United States
Government, and it is believed that the patent application is exclusively
licensed to a competitor. There is no assurance that a license to this or
related patent applications will be available to the Company. Furthermore, as
gene therapy becomes more established, others may enter the field who have
patent rights to genes and technology which may be used in gene therapy. If the
Company is unable to obtain licenses to such patents, its business may be
substantially and adversely affected. In addition, since patent applications in
the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, Somatix cannot be certain that its licensors were the
first creators of inventions covered by its pending patent applications or that
they were the first to file patent applications for such inventions.
In order to manufacture and market its products, the Company may be
required to obtain licenses to patents or other proprietary rights of third
parties. There can be no assurance that the Company will be able to obtain a
license to any third party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. If the Company does not obtain such licenses, it could encounter delays in
introducing any such potential products while it attempts to design around such
patents, or it could find
11.
<PAGE>
that the development, manufacture or sale of such potential products could be
adversely effected. Failure by the Company to obtain a license to any technology
that it may require to commercialize its technologies or potential products may
have a material adverse effect on the Company. In addition, the Company could
incur substantial costs in defending itself in lawsuits brought against it on
such patents or in lawsuits in which the Company's patents may be asserted by it
against another party.
A number of the DNA sequences which the Company expects to use in its gene
therapy products are or may become patented by third parties. As a result, the
Company may be required to obtain licenses under such patents in order to
conduct certain research, to manufacture or to market products that contain
proprietary genes. There can be no assurance that such licenses will be
available on commercially reasonable terms, if at all. Although the rights to
the DNA Sequence for the form of Factor VIII used by the Company have not yet
been determined, the Company is aware of United States patents for Factor VIII
DNA sequences that have been licensed to competitors for exclusive use in their
gene therapy programs. Unless the Company can similarly license such sequences
or other sequences, the Company may not be able to commercialize its hemophilia
program. The Company is aware of proceedings to determine rights to the human
GM-CSF cDNA sequence in the United States and Europe. In the United States, in
the most recent public disclosure of which the Company is aware, the Board of
Patent Appeals and Interferences granted a motion by a third party in an
interference proceeding stating that the human GM-CSF cDNA sequence is not
patentable over the prior art. In Europe, an 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
12.
<PAGE>
of products for regulatory approval and initiation of new development programs,
which would have a material adverse effect on the Company.
Competition
The gene therapy field is relatively 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.
13.
<PAGE>
Reimbursement
In both domestic and foreign markets, sales of the Company's potential
products will depend in part upon coverage and reimbursement from third-party
payors, including health care organizations, including government agencies,
private health care insurers and other health care payors such as health
maintenance organizations, self-insured employee plans and the Blue Cross/Blue
Shield plans. There is considerable pressure to reduce the cost of drug
products. In particular, reimbursement from government agencies and insurers and
large health organizations may become more restricted in the future. The
Company's potential products represent a new mode of therapy, and, while the
cost-benefit ratio of the products may be favorable, the Company expects that
the costs associated with its products will be substantial. There can be no
assurance that the Company's proposed products, if successfully developed, will
be considered cost-effective by third party payors, that insurance coverage will
be available or, if available, that such payors' reimbursement policies will not
adversely affect the Company's ability to sell its products on a profitable
basis. In addition, there can be no assurance that insurance coverage will be
provided by such payors at all or without substantial delay, or, if such
coverage is provided, that the approved reimbursement will provide sufficient
funds to enable the Company to become profitable.
Uncertainty of Pharmaceutical Pricing and Related Matters
The future revenues and profitability of and availability of capital for
biotechnology companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
prospects.
14.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings. None.
ITEM 2. Changes in Securities. None.
ITEM 3. Defaults Upon Senior Securities. None.
ITEM 4. Submission of Matters to a Vote of Security Holders. None
ITEM 5. Other Information. None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following documents are referenced or included in this
report:
Exhibit
No.
-------
27 Financial Data Schedule.
(b) Reports on Form 8-K. A Current Report on Form 8-K dated
September 24, 1996 was filed in the quarter ended September 30, 1996, with
disclosure in Items 5 and 7 thereto. No financial statements were filed in
conjunction therewith.
15.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed in its behalf
by the undersigned thereunto duly authorized.
SOMATIX THERAPY CORPORATION
DATED: November 13, 1996 By: /s/ David W. Carter
---------------------------------------
President, Chief Executive Officer and
Chairman of the Board
DATED: November 13, 1996 By: /s/ Edward O. Lanphier II
---------------------------------------
Executive Vice President, Commercial
Development and Chief Financial Officer
(Principal Financial and Accounting
Officer)
16.
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