<PAGE>
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 March 31, 1995
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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 0-15847
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LIPOSOME TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3031834
- ------------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
960 Hamilton Court, Menlo Park, CA 94025
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(Address of principle executive offices)
(415) 323-9011
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At April 17, 1995 the number of outstanding shares of the Company's common
stock, par value $.0001, was 19,146,132.
This conformed copy contains a total of 26 pages.
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LIPOSOME TECHNOLOGY, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
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ITEM 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheet
March 31, 1995 and December 31, 1994 . . . . . . . . . . . 3
Condensed Statement of Operations for the
Three Months Ended March 31, 1995 and 1994. . . . . . . . . 4
Condensed Statement of Cash Flows for the
Three Months Ended March 31, 1995 and 1994. . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 10
PART II. OTHER INFORMATION
ITEM 4. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 18
Signature . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 19
Page 2
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LIPOSOME TECHNOLOGY, INC.
CONDENSED BALANCE SHEET
(in thousands except par value)
(unaudited)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1995 1994
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,434 $ 5,448
Short-term marketable investments 1,575 6,309
Trade accounts and interest receivable 88 285
Inventory 648 558
Prepaid expenses 912 922
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Total Current Assets 17,657 13,522
Equipment and improvements, net 3,438 3,808
Long-term marketable investments - 500
Other assets 339 368
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Total Assets $ 21,434 $ 18,198
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,103 $ 1,586
Accrued clinical costs 3,535 3,954
Accrued compensation 3,071 797
Other accrued liabilities 1,677 923
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Total Current Liabilities 9,386 7,260
Commitments
Stockholders' Equity:
Preferred Stock, par value $.01 4 -
Common stock, par value $.0001 19 19
Additional paid-in capital 121,067 110,784
Accumulated deficit (109,042) (99,865)
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Total Stockholders' Equity 12,048 10,938
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Total Liabilities and Stockholders'
Equity $ 21,434 $ 18,198
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</TABLE>
See accompanying notes to condensed financial statements.
Page 3
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LIPOSOME TECHNOLOGY, INC.
CONDENSED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
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<S> <C> <C>
Revenues:
Net Sales $ 884 $ 233
Royalties and fees 8 23
Interest and other 94 387
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Total Revenues 986 643
Expenses:
Cost of goods sold 195 21
Research and development 5,482 6,120
Selling, general and administrative 4,441 2,160
Interest and other expense, net 33 2
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Total Expenses 10,151 8,303
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Net Loss $ (9,165) $ (7,660)
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Net loss per common share $ (0.48) $ (0.40)
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Common and common equivalent
shares used in calculation of loss
per share 19,123 18,916
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</TABLE>
See accompanying notes to condensed financial statements.
Page 4
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LIPOSOME TECHNOLOGY, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,165) $ (7,660)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 486 435
Decrease (increase) in assets:
Trade accounts and interest receivable 197 292
Inventories (90) (110)
Prepaid expenses 10 216
Other assets (3) -
Increase (decrease) in liabilities:
Accounts payable (483) (70)
Accrued clinical costs (419) 647
Accrued compensation 2,274 (302)
Other accrued liabilities 754 (153)
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Net cash used by operating activities (6,439) (6,705)
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Cash flows from investing activities:
Available for sale securities:
Purchases (313) (4,193)
Sales - 10,695
Maturities 5,534 2,000
Capital expenditures (83) (622)
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Net cash provided by investing activities 5,138 7,880
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Cash flows from financing activities:
Sale of common stock 254 257
Sale of preferred stock 10,033 -
Principal payments under capital lease
obligations - (18)
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Net cash provided by financing activities 10,278 239
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Net increase in cash and cash equivalents $ 8,986 $ 1,414
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(carried forward)
</TABLE>
See accompanying notes to condensed financial statements
Page 5
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(Continued)
LIPOSOME TECHNOLOGY, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
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<S> <C> <C>
Net increase in cash and cash equivalents
(brought forward) $ 8,986 $ 1,414
Cash and cash equivalents at beginning
of the period 5,448 3,073
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Cash and cash equivalents at end
of the period $ 14,434 $ 4,487
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</TABLE>
See accompanying notes to condensed financial statements
Page 6
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LIPOSOME TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1995
(unaudited)
(1) BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
financial statements of Liposome Technology, Inc. (LTI or the Company)
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position as of March 31, 1995 and
the results of operations for the three month periods ended March 31, 1995,
and 1994 and the changes in cash flows for the three month periods ended
March 31, 1995, and 1994.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31,
1994, which were filed with the Securities and Exchange Commission on Form
10-K and 10-K/A-1.
Although the nature of the business is not seasonal, the results of
operations for the interim periods presented are not necessarily indicative
of the results to be expected for the full year.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company invests its excess cash principally in high-grade investment
paper. Cash and cash equivalents consist of high-quality money market
instruments with original maturity of 90 days or less. Short-term
investments consist of high-quality money market instruments with original
maturity between 91 days and 12 months. Long-term investments consist of
high-quality financial instruments with original maturity in excess of 12
months.
The Company maintains its cash, cash equivalents and investments in several
different instruments with various banks and brokerage houses. This
diversification of risk is consistent with Company policy to maintain
liquidity and ensure the safety of principal.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. At March 31, 1995, all debt securities are designated as
available-for-sale. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported in stockholders'
equity. The amortized cost of debt securities in this category is adjusted
for amortization of premiums and discounts to maturity. Such amortization
is included in interest income along with interest earned. Realized gains
and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income.
Page 7
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LIPOSOME TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1995
(unaudited)
(2) INVESTMENTS
The following is a summary of available-for-sale securities as of March 31,
1995
<TABLE>
<CAPTION>
Available-for-Sale Securities
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ --------------- -------------
<S> <C> <C> <C> <C>
U.S. corporate securities $ 1,500 $ 3 $ (3) $ 1,500
Foreign corporate debt securities 75 - - 75
------------ ------------ --------------- -------------
$ 1,575 $ 3 $ (3) $ 1,575
------------ ------------ --------------- -------------
------------ ------------ --------------- -------------
Amounts included in short-term
marketable investments $ 1,575 $ 3 $ (3) $ 1,575
------------ ------------ --------------- -------------
$ 1,575 $ 3 $ (3) $ 1,575
------------ ------------ --------------- -------------
------------ ------------ --------------- -------------
</TABLE>
During the three months ended March 31, 1995, gross realized gains and
losses on sales of securities available-for-sale were immaterial. As of
March 31, 1995 the average portfolio duration was approximately 40 days and
contractual maturity of the investments did not exceed 11 months.
Page 8
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LIPOSOME TECHNOLOGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1995
(unaudited)
(3) PROPERTY AND EQUIPMENT
Details of the Company's property and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, Dec. 31
1995 1994
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<S> <C> <C>
Office and laboratory equipment $ 6,011 $ 5,952
Leasehold improvements 3,977 3,953
Equipment under capital lease 356 356
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10,344 10,261
Less accumulated depreciation
and amortization (6,906) (6,453)
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$ 3,438 $ 3,808
--------- ---------
--------- ---------
</TABLE>
(4) INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-
out) or market. The principal components of inventory are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, Dec. 31,
1995 1994
--------- ---------
<S> <C> <C>
Raw Materials $ 220 $ 268
Work-in-Progress 311 201
Finished Goods 117 89
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$ 648 $ 558
--------- ---------
--------- ---------
</TABLE>
(5) CONVERTIBLE RESET PREFERRED STOCK AND WARRANTS
On March 31, 1995, the Company raised $10.9 million (net proceeds $10.0
million) of new equity capital with the completion of a private placement
of 436,000 shares of a new issue of Series A Convertible Reset Preferred
Stock together with 734,000 warrants to purchase shares of Common Stock.
On April 13, 1995, the Company raised an additional $1.1 million (net
proceeds $1.0 million) with the sale of an additional 44,000 shares of
Series A Convertible Reset Preferred Stock together with 74,000 warrants to
purchase shares of Common Stock.
ITEM 2.
Page 9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
BACKGROUND
Until 1989, the Company funded a majority of its product development through
research agreements with pharmaceutical industry partners. In these
relationships, the Company usually performed the basic research, formulation and
preliminary testing required to assess the viability of a product concept, while
decisions regarding clinical development and product commercialization generally
rested with the industry partner.
This approach to product development provided research revenues which partially
offset product development expenses and provided valuable technical and business
insight into the commercial potential of different prospective drug products.
In 1988, LTI elected to consolidate its research and development programs in
order to focus its resources on the clinical development and commercialization
of the product groups it believed to have the most significant commercial
potential. LTI also decided to seek to retain marketing rights to these
products in the U.S. and to pursue strategic alliances for the distribution of
these products elsewhere in the world. Thus, LTI shifted its strategic emphasis
from obtaining near-term revenues provided by contract research and licensing to
building a proprietary pharmaceutical product business. This change in
strategy required substantial additional capital, and in 1991 the Company raised
approximately $35.4 million in two equity offerings. In the first quarter of
1992 the Company raised a further $34.2 million.
In August 1993, the Company signed a distribution agreement with Zeneca Limited
("Zeneca"), a major NYSE-listed (NYSE:ZEN) pharmaceutical and agricultural
bioscience company, under which Zeneca will market and sell LTI's proprietary
AMPHOCIL-TM- (1) product in most European countries. Under the terms of the
agreement, the Company received and recognized in the third quarter of 1993 a
signing fee and a milestone payment in the amount of $5.25 million which was
earned by the Company's receipt of a product license authorizing the sale of
AMPHOCIL in the United Kingdom. The Company manufactures and sells AMPHOCIL to
Zeneca at a price which, subject to a minimum, reflects the price(s) achieved by
Zeneca in the market. The Company will also receive additional milestone
payments upon receipt of product licenses in certain other European countries
and upon the achievement of certain cumulative sales totals.
In March 1994, LTI and Zeneca announced the expansion of their August 1993
agreement to cover all countries not previously covered with the exception of
the United States, Canada, Japan and selected small markets. Subsequently, LTI
announced Zeneca's commercial launch of AMPHOCIL in the U.K. in May 1994. For
the quarter ended March 31, 1995, 89% of the Company's product sales represent
sales of AMPHOCIL to Zeneca as compared to no sales of AMPHOCIL to Zeneca in the
first quarter of the prior year. A portion of these sales reflect pipeline-
filling orders, and future sales levels will depend on the rate at which the
product penetrates existing approved markets in the U.K. and Ireland, as well as
the timing of additional product approvals in other European countries for which
applications have been filed.
In February 1995, the FDA's Oncologic Drug Advisory Committee (ODAC) recommended
that the FDA not approve DOXIL-Registered Trademark- under its regular approval
procedures but did recommend that the FDA approve DOXIL under Subpart H of 21
CFR Ch 1 Section 314.500 et seq. Accelerated Approval of New Drugs for
- ----------------------------
(1) Also called Amphotec-TM- and ABCD
(2) Also called DOX-SL-TM- and S-Dox
Page 10
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Serious or Life-Threatening Illnesses (FDA "Accelerated Approval Procedures").
Under the FDA Accelerated Approval Procedures, ("AAP") such approval, if
granted by the FDA, will be subject to the additional requirement that following
product launch, the Company continue to study the drug to verify and describe
its clinical benefit. Approval by the FDA of the DOXIL NDA is dependent upon
numerous factors, including approval of prescribing information, the FDA's
inspection and approval of the Company's facilities, processes and procedures
related to the development and manufacture of the drug and similar inspection
and approval of the Company's suppliers, subcontractors and contract
manufacturer. Some of these activities have been completed. Prior to product
launch, which LTI is in the process of planning, the Company and the FDA must
also reach agreement on the Company's promotional materials. There can be no
assurance that the DOXIL NDA will be approved on a timely basis, if at all, and
under FDA Accelerated Approval Procedures, FDA may withdraw approval on an
expedited basis following product launch if the Company fails to show due
diligence in conducting post-marketing studies or if these studies fail to
demonstrate clinical benefit to the FDA's satisfaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and short-term and long-term investments
at March 31, 1995 were approximately $16.0 million, an increase of $3.7 million
from $12.3 million at December 31, 1994. This increase represents principally
cash provided by financing activities, receivables collections, interest and
other income offset by operating and capital expenditures.
The Company's strategy is to fund from its own cash resources the preclinical
and clinical development of two of its proprietary products, AMPHOCIL and DOXIL,
and to continue research and development of additional STEALTH-Registered
Trademark- liposome products in the anticancer, antibiotic, anti-inflammatory
and other areas. In addition to increased levels of operating activities, this
strategy will require significant capital expenditures including a pilot
production facility which is currently in the planning phase.
On March 31, 1995 and April 13, 1995, the Company raised an aggregate of $12
million (net proceeds of $10.0 million and $1.0 million respectively) from a
private placement of 480,000 shares of a new issue of Series A Convertible Reset
Preferred Stock and warrants to purchase common stock.
The Company believes that at current spending rates its existing cash balances
and interest income earned thereon together with revenues from sales will be
adequate to fund its planned activities through the fourth quarter of 1995 and
intends to seek additional financing if market conditions are favorable. The
Company will need additional financing to support the full commercialization of
its products, but no assurance can be given that adequate financing will be
available on satisfactory terms, if at all. In this connection the Company
filed a shelf registration statement on April 7, 1995 for possible future
financings, whether in the context of strategic alliances or otherwise.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 VS. THREE MONTHS ENDED MARCH 31, 1994
During the three months ended March 31, 1995, net sales were $884,000 compared
to the $233,000 recorded in the first quarter of the prior year. The increase
in revenue is attributable principally to the Company's shipments of AMPHOCIL to
Zeneca. A portion of these sales represent pipeline-filling orders. Interest and
other income was $94,000 as compared to $387,000 in the first quarter of 1994.
The decrease in interest income is the result of the decrease in the Company's
cash available for investment purposes offset in part by higher interest rates.
Page 11
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Generally, most of the Company's operating expenses are incurred for research
and development (R&D), including preclinical and clinical development required
for new pharmaceutical products. After personnel costs, the principal items of
R&D expense are costs of clinical trials, clinical production and supplies. In
the first quarter of 1995, R&D expenses declined by $638,000 compared to the
same period in 1994 when clinical activities related to regulatory filings for
LTI's DOXIL product were relatively intense. The Company anticipates increased
expenditures for clinical activities for the foreseeable future.
Selling, general and administrative expenses (SG&A) increased by $2.3 million
from the first quarter of the prior year, principally reflecting accrued
expenses in connection with termination of the employment of certain officers.
The Company expects its marketing expenses to rise significantly as it proceeds
with the commercialization of DOXIL in the United States.
The Company's net loss for the quarter ended March 31, 1995 increased to $9.2
million from $7.7 million in the first quarter of 1994. The loss per shares was
$0.48 compared to $0.40 in the same period of the prior year.
RISK FACTORS
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company to date has generated limited revenues. There can be no assurance
that LTI's revenues from product sales will be significant or sufficient to fund
operations. The Company has incurred losses in each year since its inception
and has accumulated approximately $109 million in net losses through March 31,
1995. Owing to expenditures associated with self-funded research, preclinical
and clinical programs, marketing expenses and other activities related to
obtaining approval and achieving commercialization of its products, the
Company expects operating losses to continue for a number of years. Additional
financing will be required to continue the clinical testing, manufacturing and
marketing on a commercial basis of the Company's products currently under
development. There can be no assurance that such financing will be available on
acceptable terms, if at all. The unavailability of such financing could delay
or prevent the development and marketing of some or all of the Company's
products.
DEVELOPING TECHNOLOGY; NO PROOF OF MARKET ACCEPTANCE
Although liposome and lipid-based products have been approved for sale in
certain European countries, no therapeutic product based on liposome or lipid-
based technology is presently commercially available in the U.S. Each of LTI's
products must be clinically tested, approved for use by appropriate government
agencies and manufactured in commercial quantities before marketing can be
undertaken. Unanticipated side effects or unfavorable publicity concerning any
product incorporating liposome or lipid-based technologies could have an adverse
effect on the Company's ability to obtain physician, patient or third-party
payer acceptance and to sell products using the same or similar technology.
There can be no assurance as to the Company's ability, or the length of time
required, to achieve commercialization of the Company's products or that
physicians, patients or third-party payers will accept liposome products as
readily as traditional forms of medication or at all.
NO ASSURANCE OF REGULATORY APPROVALS
The Company's products are subject to rigorous preclinical and clinical testing
and approval by the U.S. Food and Drug Administration (FDA) and by comparable
agencies in other countries and, to a lesser extent, by state regulatory
authorities prior to marketing. The process of conducting clinical trials and
obtaining regulatory approval for a product typically takes a number of years
and involves significant expenditures. Following the grant of any regulatory
approval for a product, the Company remains subject to continuing review from
the applicable regulatory body. Later discovery of previously unknown problems
may result in restrictions on a product's future use or withdrawal of the
product from the market.
Page 12
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DOXIL REGULATORY STATUS
In September 1994, LTI filed an NDA with the FDA seeking approval to market
DOXIL for treating AIDS-KS patients who have failed or are intolerant to
conventional combination chemotherapy. In February 1994, the FDA's Oncologic
Drugs Advisory Committee (ODAC) recommended that the FDA not approve DOXIL under
its regular approval procedures but did recommend that the FDA approve DOXIL
under Subpart H of 21 CRF Ch 1 Section 314.5000 et seq. Accelerated Approval of
New Drugs for Serious or Life-Threatening Illnesses (FDA Accelerated Approval
Procedures). Under the FDA Accelerated Approval Procedures, such approval, if
granted by the FDA, will be subject to the additional requirement that following
product launch, the Company continue to study the drug to verify and describe
its clinical benefit. Approval by the FDA of the DOXIL NDA is dependent upon
numerous factors, including approval of prescribing information, the FDA's
inspection and approval of the Company's facilities, processes and procedures
related to the development and manufacture of the drug and similar inspection
and approval of the Company's suppliers, subcontractors and contract
manufacturer. Some of these activities have been completed. Prior to product
launch, which LTI is in the process of planning, the Company and the FDA must
also reach agreement on the Company's promotional materials. There can be no
assurance that the DOXIL NDA will be approved on a timely basis, if at all, and
under FDA Accelerated Approval Procedures, FDA may withdraw approval on an
expedited basis following product launch if the Company fails to show due
diligence in conducting post-marketing studies or if these studies fail to
demonstrate clinical benefit to the FDA's satisfaction.
In December 1994, the Company submitted Marketing Authorization Applications
(MAAs) for DOXIL in the European Union (EU) countries seeking approval to use
DOXIL in the first-line treatment of AIDS-KS. The MAA submissions were made in
accordance with the Committee on Proprietary and Medicinal Products (CPMP) "High
Technology List B Concertation Procedures" procedures. Under the List B
procedures, a company is allowed to file for marketing approval simultaneously
in all EU countries and one EU country acts as so-called rapporteur to
coordinate the review process. The U.K. Medicines Control Agency (MCA) will act
as rapporteur for DOXIL. There can be no assurance that the CPMP, which is
composed of representatives from the respective regulatory bodies in the EU
countries, will determine that the Company's clinical data have provided
evidence of safety and efficacy in humans adequate to support approval or that
any of the MAAs will be approved on a timely basis, if at all.
AMPHOCIL REGULATORY STATUS
In June 1994, LTI submitted MAAs for AMPHOCIL in Finland, Sweden and the 10 EU
countries where MAAs had not previously been filed. The submissions were made
in accordance with CPMP "Multistate" procedures. In October 1994, the Company
received a list of questions raised by the member states. The Company is
developing additional data to respond to these questions, and it plans to file
the additional data with the CPMP as soon as practicable. There can be no
assurance that the Company's responses will be filed in a timely manner or that,
if filed, the responses will adequately address the issues raised by the member
states, that the CPMP will recommend approval based on the responses, or that
any member state will approve AMPHOCIL.
As soon as practicable, the Company intends to file an NDA for AMPHOCIL based
upon certain data from open label clinical trials. There can be no assurance
that the Company's NDA for AMPHOCIL will be accepted for filing by the FDA, that
the FDA will determine that the Company's NDA provides sufficient evidence of
safety and efficacy in humans adequate to support FDA approval or that the NDA
will be approved on a timely basis, if at all.
Page 13
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OTHER
Similarly, there can be no assurance that if the Company files for regulatory
approvals of other products in the U.S. or abroad, the relevant regulatory body
will accept the Company's application, approve the product for commercial sale
in the subject jurisdiction or that, if approved, it will be economically
feasibly for the Company to commercialize any such product.
LIMITED FACILITIES, MANUFACTURING AND MARKETING EXPERIENCE
The Company's current facilities and staff are inadequate for the large-scale
production and marketing of its products under development. The Company also
has limited experience in clinical development of therapeutic products,
currently lacks the financial resources to commercialize and sell products and
has no experience in marketing products. There can be no assurance that the
Company will be successful in conducting additional clinical development, or in
manufacturing and marketing its products.
DEPENDENCE ON THIRD-PARTY DISTRIBUTOR AND AGENTS
To date, all of the Company's product revenues have come from sales either to a
third-party distributor (Zeneca) or through third-party agents. In 1994,
ninety-one percent (91%) of the Company's product revenues came from sales of
AMPHOCIL to Zeneca, and a portion of those sales represented pipeline-filling
orders. As a consequence of this current dependence on a single customer, and
unless and until the Company receives any approvals for and begins to sell
DOXIL, the Company's future product revenues are largely dependent on Zeneca's
success in selling AMPHOCIL, Zeneca's assessment of the timing and likelihood of
additional approvals for AMPHOCIL and of Zeneca's assessment of its inventory
requirements. There can be no assurance that these or other factors could not
lead to substantial fluctuations in the Company's product revenues from period
to period.
DEPENDENCE ON THIRD-PARTY MANUFACTURER; MANUFACTURING RISKS
The Company's present manufacturing capabilities are limited. The Company is
dependent on a U.S. based contract manufacturer to manufacture commercial-scale
quantities of AMPHOCIL and DOXIL pursuant to supply agreements. There can be no
assurance, however, that the contract manufacturer will continue to meet FDA
standards for the manufacture of these products. There are only a limited
number of other manufacturers with the capability of manufacturing AMPHOCIL and
DOXIL, and any alternative manufacturer would require regulatory qualification
to manufacture the product. In the event of any interruption of supply from the
contract manufacturer due to regulatory or other causes, there can be no
assurance that the Company could make alternative manufacturing arrangements.
To date, the Company and the contract manufacturer have manufactured twelve
(12) commercial-scale batches of DOXIL, including the three (3) registration
batches which are required as part of the FDA's approval process, but there can
be no assurance that DOXIL can consistently be produced in accordance with
specifications. Similarly, there can be no assurance that the Company will be
able to meet routinely its manufacturing goals in a timely manner or to the
continuing satisfaction of regulatory agencies.
RAW MATERIALS
Although the Company has supply agreements in place with the suppliers of its
key raw materials, the number of alternative qualified suppliers of key raw
materials required for the manufacture of AMPHOCIL and DOXIL is limited. There
can be no assurance that the Company could make alternative supply arrangements
in the event of a supply interruption on commercially reasonable terms, if at
all.
Page 14
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COMPETITION AND TECHNOLOGICAL CHANGE
The drugs being developed by the Company compete with existing and new drugs.
Many companies, including established pharmaceutical and chemical companies, and
university-related entities both in the U.S. and abroad are developing products
based on improved drug delivery technologies. Some of these companies are
active in liposome and lipid-based research and product development and many
have financial and technical resources and production and marketing capabilities
substantially greater than those of the Company. In addition, most such
companies have had significantly greater experience than the Company in
preclinical and clinical development activities and in obtaining regulatory
approval to manufacture and market pharmaceutical products. The Liposome
Company (TLC) is dedicated primarily to liposomal drug delivery, and NeXstar
Pharmaceuticals, Inc., which incorporates a predecessor company, Vestar, Inc.
(Vestar), devotes a significant portion of its resources to liposomal drug
delivery. In certain European countries, NeXstar currently sells a liposomal
amphotericin B product with which LTI expects AMPHOCIL to compete, and TLC has
submitted MAAs for a liposomal amphotericin B product in certain of these
countries and has received approval for its product in the UK. LTI believes
that competition in all pharmaceutical products and in all forms of drug
delivery will continue to be intense. There can be no assurance that other
pharmaceutical companies will not develop more effective drug delivery
technologies than, or will not produce products superior to, those of the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends largely upon its ability to attract and retain
qualified scientific, engineering, manufacturing, sales and marketing and
management personnel. The Company faces competition for such personnel from
other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
hiring or retaining such personnel.
PATENTS AND TRADE SECRETS
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. There
can be no assurance that any patents owned or controlled by the Company will
protect LTI against further infringement litigation or afford commercially
significant protection of LTI's technology. The majority of the Company's
patents have not yet been tested in court to determine their validity and scope.
Moreover, the patent laws of foreign countries differ from those of the U.S. and
the degree of protection, if any, afforded by foreign patents may, therefore,
be different.
The Company has been required to defend itself in patent litigation in the past
and the uncertainties inherent in any other lawsuits that may be commenced in
the future with respect to any alleged patent infringement by the Company make
the outcome of any such litigation difficult to predict. There can be no
assurance that the Company will be successful in any such litigation, and a
judgment adverse to the Company in any such litigation could adversely affect
the Company. Moreover, the expense of such litigation could adversely affect
the Company, whether or not the Company is successful in such litigation.
In October 1991, the Company received a letter from TLC alleging that DOXIL
infringes two TLC patents (the TLC Patents) relating to lyophilization (freeze-
drying) of liposomes. The Company's current DOXIL formulation is not
lyophilized and therefore does not infringe the TLC Patents. In addition, the
Company had previously asked its patent counsel to review, among other things,
the TLC Patents. In September 1991, such counsel delivered an opinion to the
Company that, among other things, LTI's doxorubicin products do not infringe any
valid claim under either of the TLC Patents. However, no assurance can be given
that TLC will not make a claim against LTI with respect to the TLC Patents. In
December 1994 in a case involving TLC and Vestar the U.S. District Court in
Wilmington, Delaware, found one of the two TLC patents invalid and ordered it
revoked.
In November 1991, the Company received a letter from TLC bringing to LTI's
attention TLC's U.S. Patent No. 5,059,591 (the '591 Patent) containing claims
directed to amphotericin B/sterol compositions and their method of use.
Subsequently, LTI's patent counsel delivered an opinion to the Company that,
among other things, AMPHOCIL does not infringe any claim of the '591 Patent.
However, no assurance can be given that TLC will not make a claim against LTI
with respect to the '591 Patent.
Page 15
<PAGE>
The Company has a practice of monitoring patents and other developments in the
liposome field. To the extent that the Company becomes aware of patents of
other parties which the Company's processes or products might infringe, it is
the Company's practice to seek review of such patents by the Company's patent
counsel. In accordance with this practice, the Company's patent counsel has
reviewed a patent issued to TLC in January 1992 (the Loading Patent) which
covers, among other things, a process related to the loading of therapeutic drug
into liposomes. The Company's patent counsel has rendered an opinion that, if
certain elements of the claims of the Loading Patent can be proved to exist in
certain of LTI's products, such products may be found to infringe the Loading
Patent. The Company's patent counsel has, however, rendered an opinion that
the Loading Patent should be held invalid and/or unenforceable on a variety of
grounds. The Company continues to proceed in product development in reliance on
this opinion. Such opinion does not, however, prevent TLC from commencing
litigation to enforce the Loading Patent, and no assurance as to the outcome of
such litigation can be given.
The Company's patent counsel has also rendered advice with respect to all other
patents which have been referred to such patent counsel that the Company's
products do not infringe any valid claim under such patents. Such advice does
not, however, prevent any third party from commencing litigation to enforce such
patents.
Other public and private concerns control patents covering technology
potentially useful or necessary to the Company. The scope and validity of such
patents, the extent to which the Company may wish or need to acquire licenses
under such patents, and the cost or availability of such licenses, are currently
unknown. The Company relies on unpatented knowledge, and others may be able to
obtain access to, or independently develop, such expertise.
PRODUCT LIABILITY
Testing, manufacturing and marketing of the Company's products will entail risk
of product liability. There can be no assurance that the amount of insurance
the Company has obtained against the risk of product liability will be adequate,
that the amount of such insurance can be renewed or that the amount and scope of
any coverage obtained will be adequate to protect the Company in the event of a
successful product liability claim. The Company's business could be adversely
affected by a successful product liability claim.
HEALTH CARE REFORM; UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT
The levels of revenues and profitability of biotechnology and pharmaceutical
companies may be affected by the continuing efforts of governmental and third-
party payers to contain or reduce the costs of health care through various
means. In the U.S. there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to control health care
costs. President Clinton and members of Congress introduced proposals to the
103rd Congress for the comprehensive reform of the nation's health care system.
Some of the proposed legislation contained measures intended to control public
and private spending on health care as well as to provide universal public
access to the health care system. In addition, some of the proposed
legislation included limitations on Medicare and Medicaid reimbursement for
drugs and called for the creation of a committee to monitor and evaluate the
pricing of new drugs. Although no legislation was ultimately passed by the
103rd Congress, federal, state and local officials and legislators (and certain
foreign government officials and legislators) have proposed or are reportedly
considering proposing a variety of reforms to the health care systems in their
respective jurisdictions, including reforms that may affect the pharmaceutical
industry. It is uncertain what new legislative proposals, if any, might be
adopted or what actions federal, state or third-party payers may take in
response to any health care reform proposals or legislation. The Company cannot
predict the effect health care reforms may have on its business or the business
of its collaborators.
In the U.S. and elsewhere, sales of therapeutic products are dependent in part
on the availability of reimbursement from third-party payers, such as government
and private insurance plans. These third-party payers are increasingly
challenging the prices charged for medical products and services. If the
Company succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a profitable basis.
Page 16
<PAGE>
VOLATILITY OF STOCK PRICE
The market price of the Common Stock, like the stock prices of many publicly
traded biotechnology companies, has been and may continue to be highly volatile.
A variety of events, both concerning and unrelated to the Company and the
biotechnology industry, may have a significant negative impact on the market
price of the Common Stock. Although the Common Stock trades on the Nasdaq
National Market, the trading volume has fluctuated and at times has been quite
low. Any large sale of shares of the Company could have a significant adverse
effect on the market price of the Common Stock.
Page 17
<PAGE>
PART II - OTHER INFORMATION
ITEM 4.
LEGAL PROCEEDINGS
From time to time, the Company is notified of potential claims or
litigation against it arising out of the ordinary course of business. As
of May 12, 1995 there are no material legal proceedings pending against the
Company.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 10.13 Letter Agreement between the Company and Peter V. Leigh
dated May 5, 1995 regarding Mr. Leigh's separation from the Company.
(b) Reports on Form 8-K. During the quarter ended March 31, 1995, no reports
on Form 8-K were filed.
Page 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIPOSOME TECHNOLOGY, INC.
(Registrant)
Date: May 12, 1995 By: /s/ Donald J. Stewart
------------------------------
Donald J. Steward
Vice President, Finance
(Principal Accounting Officer)
Page 19
<PAGE>
EXHIBIT 10.13
Liposome Technology, Inc.
960 Hamilton Court
Menlo Park, CA 94025
Revised
May 5, 1995
Peter V. Leigh
428 Hillside Drive
Woodside, California 94062
Dear Peter:
This letter confirms that you and Liposome Technology, Inc. ("LTI") have
mutually agreed to end the employee/employer relationship effective April 30,
1995. This letter outlines the terms of the separation package offered to you
by LTI and your responsibilities to LTI pursuant to the Employment and Patent,
Copyright and Nondisclosure Agreement dated June 17, 1991 and signed by you upon
acceptance of LTI's employment, a copy of which is attached hereto. LTI
represents that you have been paid all salary, bonuses and other wages, unpaid
vacation and all other vested benefits due to you under the California Labor
Code as of the date of termination of your employment.
By your signature below you acknowledge that:
1. You have returned to LTI all physical property of LTI in your
possession, including, but not limited to, the property listed in Exhibit I.
2. You shall not disclose any confidential or proprietary information
that you acquired while an employee of LTI to any other person or use such
information in any manner that is detrimental to LTI's interest.
3.a Beginning ten (10) days after receipt of a signed copy of this offer,
you will receive six (6) calendar months of separation pay, paid to you as
salary continuation at the level of your base salary. Therefore, during the six
(6) months period (the "Salary Continuation Period") your salary will continue
such that you will be on a paid leave of absence. During this Salary
Continuation Period, you will be compensated at your base annualized salary rate
(less withholding for state and federal taxes and social security). You will
not be eligible for a bonus during the Salary Continuation Period.
Page 20
<PAGE>
Peter V. Leigh
Revised Confidential
5/13/95
2
3.b You will continue to "vest" in the Stock Option program according to
the vesting schedule until June 16, 1995. In addition, LTI's Board of Directors
has approved the time period for exercise of these options such that you will
have one (1) year from June 16, 1995 (i.e., until the close of business on June
16, 1996), in which to exercise any or all of your options to purchase LTI
common stock not subject to LTI's right of repurchase. LTI will not exercise
its right to repurchase as to (i) fourteen thousand (14,000) shares under the
Incentive Stock Option Agreement dated as of June 16, 1992; (ii) thirty-six
thousand (36,000) shares under the Non-Qualified Stock Option Agreement dated as
of June 16, 1992; (iii) three thousand twenty five (3,025) shares under the
Incentive Stock Option Agreement dated as of June 14, 1994; and (iv) nine
thousand four hundred seventy-five (9,475) shares under the Non-Qualified Stock
Option Agreement dated as of June 14, 1994, and all options covering such shares
shall be fully vested and exercisable by you during the period June 15, 1995
through June 16, 1996. LTI reserves its right to exercise its right to
repurchase all other shares subject to options under the foregoing stock option
agreements; provided, however, that the right to repurchase will expire as to
all shares covered by such options, and all such options will become fully
vested and exercisable, if there shall occur, prior to June 16, 1996, a sale of
LTI or substantially all of the assets or stock of LTI to another entity or
person, or a merger in which LTI is not the surviving entity, such expiration to
be effective at least fifteen (15) days prior to the effectiveness of such sale
or merger. Your stock option agreements are hereby amended to the extent
inconsistent with this paragraph. You should be aware that this extension of the
option exercise period beyond the ninety (90) day period provided for in LTI's
1987 Employee Stock Option Plan changes the terms of your original grant.
Specifically, if such grant was an "incentive stock option" within the meaning
of the Internal Revenue Code, the extension of the option exercise period
changes that option to a "nonqualified stock option". For further information
about incentive and nonqualifed stock options, please see your tax advisor.
3.c LTI agrees to keep your voicemail active for the next thirty (30)
days. Likewise, LTI will pay $12,000 to Transitions Management Group for twelve
(12) months of outplacement services.
3.d Your insurance benefits consisting of medical, dental, life,
accidental death and dismemberment, vision care, business travel accident, sick
leave, and
Page 21
<PAGE>
Peter V. Leigh
Revised Confidential
5/13/95
3
long term disability insurance as well as optional Stock Purchase Plan, 401(k)
and FlexElect programs will end on April 30, 1995.
3.e LTI agrees to allow you to continue to contribue to your 401(k)
accounts through payroll deductions during your Salary Continuation Period.
However, you will not be eligible for the company match at the end of 1995.
3.f You have the right to continue group health benefits under the
Consolidated Omnibus Budget Reconciliation Act ("COBRA"). If you elect to
continue benefits through COBRA provisions, you will be responsible for
compliance with all notification and payment schedules as required by law.
4. On behalf of yourself and your executors, administrators,
representatives, heirs and assigns, you hereby release LTI and its owners,
stockholders, affiliates, predecessors, directors, officers, employees,
insurers, representatives and agents (the "LTI Releasees") from any and all
manner of action or actions, cause or causes of action, in law or in equity,
suits, debts, liens, contracts, agreements, promises, liabilities, claims,
demands, damages, charges, losses, costs, or attorneys' fees or expenses of any
nature whatsoever, known or unknown, fixed or contingent, choate or inchoate,
which you now have against the LTI Releasees, or any of them by reason of any
matter, cause, act or thing whatsoever from the beginning of time. The claims
released hereby include any claims in any way arising out of based upon, or
relating to your hire, employment, remuneration or termination from LTI,
including any claims arising under Title VII of the Civil Rights Act of 1964, as
amended; the Equal Pay Act, as amended; the Age Discrimination in employment
Act, as amended; the Employee Retirement Income Security Act, as amended; the
Older Workers Benefit Protection Act of 1990; the California Fair Employment and
Housing Act, as amended; the California Labor Code; and/or any other local,
state, or federal law governing discrimination in employment and/or the payment
of wages and benefits.
4.b. "YOU ACKNOWLEDGE THAT YOU HAVE BEEN ADVISED BY YOUR LEGAL COUNSEL AND
ARE FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH
PROVIDES AS FOLLOWS:
Page 22
<PAGE>
Peter V. Leigh
Revised Confidential
5/13/95
4
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
BEING AWARE OF SAID CODE SECTION, YOU HEREBY EXPRESSLY WAIVE ANY RIGHTS THAT YOU
MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW
PRINCIPLES OF SIMILAR EFFECT."
5. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. YOU ACKNOWLEDGE THAT YOU
ARE WAIVING AND RELEASING ANY RIGHTS YOU MAY HAVE UNDER THE AGE DISCRIMINATION
IN EMPLOYMENT ACT OF 1967 ("ADEA") AND THAT THIS WAIVER AND RELEASE IS KNOWING
AND VOLUNTARY. YOU AND LTI AGREE THAT THIS WAIVER AND RELEASE DOES NOT APPLY TO
ANY RIGHTS OR CLAIMS THAT MAY ARISE UNDER ADEA AFTER THE EFFECTIVE DATE. YOU
ACKNOWLEDGE THAT THE CONSIDERATION GIVEN FOR THIS WAIVER AND RELEASE AGREEMENT
IS IN ADDITION TO ANYTHING OF VALUE TO WHICH YOU WERE ALREADY ENTITLED.
IN ACCORDANCE WITH THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990, YOU
ACKNOWLEDGE THAT YOU ARE AWARE OF THE FOLLOWING:
(i) YOU HAVE THE RIGHT TO CONSULT WITH AN ATTORNEY BEFORE ACCEPTING THIS
OFFER;
(ii) YOU HAVE 21 DAYS FROM THE DATE SET FORTH ABOVE TO CONSIDER THIS OFFER; AND
(iii) YOU HAVE SEVEN DAYS AFTER ACCEPTING THIS OFFER TO REVOKE YOUR ACCEPTANCE,
AND YOUR ACCEPTANCE WILL NOT BE EFFECTIVE UNTIL THAT REVOCATION PERIOD HAS
EXPIRED.
6. LTI releases you, your executors, administrators, representatives, heirs
and assigns from any and all manner of action or actions, cause or causes of
action, in law or in equity, suits, debts, liens, contracts, agreements,
promises, liabilities, claims, demands, damages, charges, losses, costs, or
attorneys' fees or expenses, of any nature whatsoever, that are known to the
Board of Directors of LTI as of the effective date of this Agreement. The
Claims released herein include, without limiting the generality of the
foregoing, any Claims based upon contract, tort or statute arising out of, based
upon, or relating to your hire, employment, remuneration or termination of your
employment with LTI.
7. The provisions of this agreement are severable. If any provision is held
to be invalid or unenforceable, it shall not affect the validity or the
enforceability of any other provisions.
Page 23
<PAGE>
Peter V. Leigh
Revised Confidential
5/13/95
5
8. You represent that you thoroughly read and considered all aspects of this
agreement, that you understand all of its provisions, and that you are
voluntarily entering into this agreement.
9. This agreement sets forth the entire agreement between you and LTI and
supersedes any and all prior oral or written agreements or understandings
between you and LTI concerning the termination of your employment.
10. This agreement may not be altered, amended, or modified except by a written
document signed by you and a representative of LTI.
11. LTI shall indemnify you and advance expenses as incurred by you in
defending any proceeding to the maximum extent permitted under LTI's Certificate
of Incorporation, By-laws, the Delaware General Corporation Law, any directors'
and officers' liability insurance or similar insurance policy maintained by LTI
and any indemnification agreement between LTI and you. the provisions of this
paragraph shall inure to the benefit of your estate, executor, administrator,
heirs, legatees or devisees.
12. Each party agrees to refrain from any disparagement, criticism, defamation,
slander of the other, or tortious interference with the contracts and
relationships of the other.
13. LTI represents and warrants that the undersigned has the authority to act
on behalf of LTI and to bind LTI and all who make claims through it to the terms
and conditions of this agreement. You represent and warrant that you have the
capacity to act on your behalf and on behalf of all who might claim through you
to bind them to the terms and conditions of this agreement.
14. This agreement shall be governed by and construed in accordance with the
laws of the State of California.
Page 24
<PAGE>
Peter V. Leigh
Revised Confidential
5/13/95
6
If the above terms are agreeable to you, please date and sign the original of
this letter in the places indicated below and return it to me by May 31, 1995.
I encourage you to carefully consider this offer and to consult with an attorney
prior to accepting it if you so desire.
Sincerely,
Liposome Technology, Inc.
Joseph M. Limber
Executive Vice President and
Acting Chief Operating Officer
Accepted and agreed to on this ______ day of __________________, 1995.
_______________________________________
Peter V. Leigh
Page 25
<PAGE>
Exhibit I
PHYSICAL PROPERTY IN PETER LEIGH'S POSSESSION
Key to LTI Premises
AT&T Calling Card
Pager
Page 26
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