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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period From to
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Commission File Number: 0-19986
CELL GENESYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 94-3061375
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
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342 Lakeside Drive, Foster City, California 94404
(Address of principal executive offices and zip code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common
Stock $.001 Par Value
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 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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of April 22, 1997, the approximate market value of voting stock held by
nonaffiliates of the Registrant was $48,076,866. 6,309,950 shares of Common
Stock held by each officer, director and holder of 5 percent or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of April 22, 1997, the number of outstanding shares of the Registrant's
Common Stock was 16,566,348.
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Documents incorporated by reference:
Incorporated by Reference Document
Document into Part of this Form 10-K
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(1) Portions of the Proxy Statement with respect
to the 1997 Annual Meeting of Stockholders
to be filed with the Securities and Ex-
change Commission not later than 120 days
after the close of the Registrant's year
end. III
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PART I
ITEM 1. BUSINESS
OVERVIEW
Statements made in this document other than statements of historical fact,
including statements about the company's and its subsidiary's clinical trials,
product pipelines, corporate partnerships, licenses and intellectual property,
are forward looking statements and are subject to a number of uncertainties
that could cause actual results to differ materially from the statements made,
including risks associated with the success of research and product
development programs, patents, proprietary technology and corporate
partnerships. Reference is made to discussions about risks associated with
product development programs, intellectual property and other risks which may
affect the company under "Risk Factors" below. The company does not undertake
any obligation to update forward-looking statements.
Since its inception in April 1988, Cell Genesys has focused its research and
product development efforts on human disease therapies which are based on
innovative gene modification technologies. Cell Genesys' strategic objective
is to develop and commercialize ex vivo and in vivo gene therapies to treat
major, life-threatening diseases and disorders. Cell Genesys' AIDS gene
therapy is in Phase II human clinical testing and is being developed through a
worldwide collaboration with Hoechst Marion Roussel ("HMR"). Cancer gene
therapy, for which Cell Genesys currently has worldwide rights, is in
preclinical testing for colon, ovarian and other specific types of cancer.
These and other gene therapy programs utilize proprietary, engineered genes
and gene delivery systems. During 1996, Cell Genesys established a subsidiary,
Abgenix, Inc. ("Abgenix") to focus on developing and commercializing antibody
therapies for inflammation, autoimmune disorders, cancer and other serious
diseases.
Cell Genesys believes that it is likely that gene therapies will be
developed on a continuum, progressing from ex vivo (modification of cells
outside the patient's body) to in vivo (modification of cells within the
patient's body). Both approaches require the use of genes, which may be
engineered with specific therapeutic qualities, along with transport vehicles
called "vectors."
Cell Genesys' clinical and preclinical programs currently use engineered
genes and vectors ex vivo to impart new capabilities to certain of the
patient's immune cells, such as T cells and stem cells. This treatment
involves extracting the immune cells from the patient's blood through standard
blood bank procedures, purifying and genetically modifying the cells to target
disease, and expanding their numbers. The genetically modified cells are then
reinfused into the patient as therapy to specifically target and destroy
diseased cells.
Cell Genesys believes that in vivo gene therapy, which also is in research
at Cell Genesys, will offer the opportunity to ultimately provide "gene in a
bottle" products that will be able to be used much like any biopharmaceutical.
This approach involves transporting genes into the patient's body to
selectively modify certain cells or activate specific genetic functions,
providing new disease-fighting capabilities. Unlike cells used in ex vivo gene
therapy, target cells for in vivo gene therapy typically cannot be easily
removed for external processing. Cell Genesys' goal is to stimulate cells
inside the patient to produce a protein needed to normalize key biological
processes, inhibit specific disease mechanisms, or generate an immune response
against disease.
Successful gene therapy, whether ex vivo or in vivo, depends to a great
extent on vectors, the vehicles used to transport genes into cells. Multiple
types of vectors are needed, and the appropriateness of a specific vector is
based on the disease indication, safety considerations, production
efficiencies, disease site and other factors. Certain viruses, because of
their natural ability to insert genes into cellular DNA, have proven to be
particularly efficient vectors. Cell Genesys has engineered proprietary
retroviral and adenoviral vectors that have been modified with the goal of
eliminating disease properties and providing safe, efficient, long-term gene
expression.
To develop its technologies as broadly as possible, to fund product
development and to accelerate the commercialization of certain product
opportunities, Cell Genesys has and intends to continue to enter selectively
into strategic collaborative agreements with established pharmaceutical and
biotechnology companies. Such alliances are intended to provide financial
resources, research, development and manufacturing capabilities, and
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marketing infrastructure to aid in the commercialization of potential disease
therapies. Cell Genesys also evaluates on an ongoing basis in-licensing or
acquiring genes and technologies that complement Cell Genesys' portfolio.
There can be no assurance that Cell Genesys will be able to enter into
additional collaborative relationships or obtain new genes and technologies on
acceptable terms, if at all, or that, if such actions occur, they will be
successful. Failure to enter new corporate relationships or expand Cell
Genesys' product and technological base may limit Cell Genesys' success unless
alternative avenues are available.
During 1996, Cell Genesys made progress in its research and development of
gene therapy. In AIDS gene therapy, Cell Genesys demonstrated safety in Phase
I/II human clinical studies and initiated Phase II efficacy studies on a
patient-specific approach to treatment. In cancer gene therapy, Cell Genesys
initiated development of its lead therapeutic candidate, conducted pre-
investigational new drug application studies for the treatment of colon and
other cancers, and signed new agreements with the National Cancer Institute,
Dana-Farber Cancer Institute and Arizona Cancer Center at the University of
Arizona which provide certain genes that may be useful in creating other
specific cancer gene therapies.
Cell Genesys has maintained its financial strength through funding received
from its corporate partnerships, as well as through strategic management of
its resources. Cell Genesys reported a loss of $9.3 million for the fiscal
year ended December 31, 1996, and ended the year with $85.6 million in cash,
cash equivalents and short-term investments.
BACKGROUND
For many years the pharmaceutical industry has focused on developing
chemical compounds as pharmaceutical drugs and disease therapies. These
compounds are most often synthesized in the laboratory or derived from
substances found in nature. The therapeutic value of such compounds generally
depends on their ability to stimulate or inhibit physiological processes
related to disease, to interfere directly with infection or cancer, or to
correct various chemical imbalances. These traditional pharmaceutical products
include antibiotics, analgesics and compounds which treat inflammation,
cardiovascular diseases and cancer. However, traditional pharmaceutical
products are not always successful in treating many diseases for a variety of
reasons, including unwanted side effects and delivery of insufficient amounts
of the drug to the site of the disease. Equally important, traditional
pharmaceutical products may halt further damage from disease processes, but
generally cannot stimulate the regrowth of damaged cells or tissues.
Although the biotechnology industry has made significant advances over the
past 20 years, protein-based therapeutic products also may not adequately
treat diseases which involve the loss or dysfunction of particular cells in
the body. This may be true, for example, for diseases in which cell
populations are lost as a result of infection or malignancy. Examples include
AIDS, other viral infections and certain types of cancer. The use of chemical
compounds, therapeutic proteins or monoclonal antibodies to treat diseases of
this type has not been completely successful because such products cannot
replace the many complex biological functions of missing or damaged cells and
because it is often impossible to deliver such products in adequate
concentrations to the site of disease without unwanted side effects.
Therefore, an appropriate therapeutic strategy for diseases resulting from
cell loss or dysfunction may involve the transplantation of cells or cell
therapy. Cell Genesys believes that an important approach to cell therapy is
the genetic modification of cells, ex vivo or in vivo, to potentially provide
new or enhanced functions as a form of "gene therapy."
GENE THERAPY
At the core of gene therapy are genes, or pieces of DNA, which normally
exist in cells. These genes are engineered to make them suitable for medical
purposes and then inserted into the patient's cells to perform specific
therapeutic functions. Depending upon the choice of genetic material
delivered, gene therapy may be used to enhance normal cell activities or
enable cells to perform new roles. Certain forms of gene therapy involve "gene
correction," which introduces normal genes into patients with genetically
inherited diseases, or "vaccination," which uses genetic material or modified
cells to stimulate the patient's immune response. Cell Genesys' lead gene
therapy efforts are focused on expanding the capabilities of specific cells to
target and more effectively fight disease.
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Another key component of gene therapy is the methodology used to introduce
therapeutic genes into cells. Whether ex vivo or in vivo, the insertion of
genes into cells can be accomplished using reagents known as vectors. There
are both viral and non-viral vectors. The appropriate vector system or other
delivery vehicle may vary depending on the disease indication. Viral vectors
take advantage of the natural ability of many viruses to insert their own
genetic material into the chromosomes of the infected cells at high
efficiency. Viruses used as vectors are genetically modified with the
objective that, once inserted into cells, infectious viruses cannot form from
these vectors.
To date, Cell Genesys has focused on the development of proprietary viral
vectors such as retroviral and adenoviral vectors. Currently, retroviral
vectors are used in Cell Genesys' AIDS and cancer gene therapy. Cell Genesys
is using a retroviral vector system to insert genes ex vivo into a certain
type of immune white blood cells, known as killer T cells. The T cells are
genetically modified so that they can recognize and destroy HIV-infected
cells. Cell Genesys' Phase I/II human clinical trials to evaluate AIDS gene
therapy are currently under way. A similar approach is being used with Cell
Genesys' T cell gene therapy as potential treatment for specific cancers, such
as colon, breast and lung cancers and for which Cell Genesys expects to
initiate human clinical trials by mid-1997. Adenoviral vectors in research at
Cell Genesys easily infect certain cell types including lung cells, and do not
appear to permanently insert genetic material into the cell's genome. Cell
Genesys has engineered forms of the virus to deliver genes that it believes
are noninfectious. These novel adenoviral vectors appear to be capable of
long-term expression and can potentially avoid the toxicities seen with
earlier versions of the vectors.
Cell Genesys believes that gene therapy methodology will need to vary
depending upon the disease indication. The differences between ex vivo and in
vivo gene therapy and viral and non-viral vectors must be considered in the
context of the disease indication, safety factors, production efficiencies,
disease site and other factors.
PRODUCT DEVELOPMENT PROGRAMS
Cell Genesys' strategic objective is to develop and commercialize ex vivo
and in vivo gene therapies to treat major, life-threatening diseases and
disorders. Toward this end, Cell Genesys is focused on genetically modifying
selected cell types, using patient-specific or more broadly applicable
treatment approaches, to impart disease-fighting capabilities that are not
possible with conventional disease therapies.
Current development programs focus on the therapeutic use of white blood
cells, which are among the most powerful components of the human immune
system. White cells, such as T cells and stem cells, are naturally able to
seek out and destroy diseased cells and secrete an elaborate cascade of immune
hormones in response to disease-causing agents. Employing a unique gene
therapy strategy, Cell Genesys is genetically engineering T cells to target
and destroy virally-infected or cancer cells that otherwise overwhelm the
immune system or elude immune detection. Cell Genesys also is engineering bone
marrow stem cells, which give rise to all blood and immune cells and may thus
provide a self-renewing source of white blood cells.
T cells are a type of white blood cell found in the bloodstream and in other
tissues and are important components of the body's immune system. Killer T
cells directly attack infected or malignant cells through a precise and
controlled process that avoids damaging nearby healthy cells. More
specifically, killer T cells recognize disease cells by means of a complex
structure on the cell surface, referred to as a T cell receptor. Cell Genesys
is introducing into killer T cells novel disease-specific T cell receptors
that have the potential to recognize infected or malignant cells in multiple
patients with that particular disease.
Cancer Gene Therapies. To treat cancer, Cell Genesys scientists are
engineering T cells to recognize and bind to cells exhibiting a specific
cancer-related protein. Since the normal action of T cells is to destroy
anything that it binds to, the introduction of these engineered cells into the
patient's body is expected to kill specific cancer cells. This approach may
prove particularly useful in treating patients whose immune systems are
impaired, such as those who have undergone radiation or chemotherapy.
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Preclinical studies for Cell Genesys' lead cancer gene therapy are being
conducted in collaboration with the National Cancer Institute and target
multiple cancers, including colon, breast, lung, ovarian and prostate cancers.
These efforts utilize an antibody gene, CC49, to construct immune cells that
specifically bind TAG-72, a protein which is highly specific to and found on
the surface of various types of tumor cells. Preclinical laboratory studies
have demonstrated highly specific killing of colon tumor cells by these
engineered immune cells in vitro. Additional preclinical studies should
provide the basis for an investigational new drug application with the FDA and
human clinical studies which are currently planned for mid-1997.
Cell Genesys initiated a research collaboration in 1995 with the Ludwig
Institute for Cancer Research and the Sloan-Kettering Institute for Cancer
Research which has provided a portfolio of reagents for use in developing T
cell gene therapies for specific types of cancers, including breast, colon and
lung cancers. In 1996, through new agreements established with the National
Cancer Institute, Dana-Farber Cancer Institute and Arizona Cancer Center at
the University of Arizona, Cell Genesys expanded the portfolio of genes it has
the right to engineer and will generate preclinical data for multiple cancer
indications. Cell Genesys' objective is to develop cancer gene therapies that
represent highly targeted treatment approaches that can selectively destroy
tumor cells while leaving healthy cells unharmed.
AIDS Gene Therapy. HIV infection is the cause of AIDS. The Centers for
Disease Control estimates that over 600,000-900,000 Americans are infected
with HIV and that more than 450,000 persons in the United States have been
afflicted with AIDS. It is estimated that during the next 10 years there will
be approximately 50,000 new cases of AIDS each year. A number of antiviral
drugs for the treatment of HIV infection have been approved by the FDA. These
drugs, including the new protease inhibitors, inhibit virus replication in
individuals already infected with HIV. However, they do not kill HIV-infected
cells or eliminate persistent sites of infection. Virus replication is only
temporarily inhibited and, therefore, the virus quickly reappears when
medication is discontinued. Furthermore, patients on long-term drug therapy
may become resistant to treatment and must switch to other drugs, until all
options have been exhausted.
Cell Genesys' AIDS gene therapy, by targeting and destroying HIV-infected
cells that are the reservoir for the virus, offers a different but highly
compatible treatment strategy. Studies published in the scientific literature
suggest that T cells may play an important role in attacking HIV-infected
cells. Over time, however, it appears that the patient's T cells lose their
ability to fight HIV, and the virus infection increases, often with fatal
consequences. Cell Genesys has developed a method for arming T cells with the
ability to recognize and destroy HIV-infected cells. Specifically, a new
targeting mechanism is introduced into killer T cells--genetically engineered
receptors--that enable the T cell to recognize viral proteins (antigens) that
appear on the surface of an HIV-infected cell. The modified killer T cells can
then bind to the infected cell and destroy it. To increase the specificity of
anti-HIV T cells and to attempt to overcome the virus' tendency to become
resistant to antiviral drugs, Cell Genesys has constructed a genetically
engineered receptor that targets the part of the virus that is involved in
binding to healthy cells during infection. A proprietary gene for the new
receptor, which can potentially function in multiple patients with HIV
infection, is introduced into killer T cells using Cell Genesys' high
efficiency gene transfer technology. This proprietary methodology increases
the ability to generate larger numbers of modified T cells for patient
therapy.
Two Phase II human clinical studies are currently under way using Cell
Genesys' ex vivo gene therapy. The initial proof-of-principle study for AIDS
gene therapy is being conducted by Drs. Robert Walker and H. Clifford Lane,
two AIDS researchers at the National Institute of Allergy and Infectious
Diseases in Bethesda, Maryland. This trial is designed to determine the
efficacy of repeated doses of Cell Genesys' T cell gene therapy over an
extended period. Approximately 30 pairs of identical twins, one HIV-positive,
the other not, are participating in the Phase II portion of the study, in
which T cells are obtained from the healthy twin, modified by inserting the
CD4-zeta gene which should enable them to recognize and destroy HIV-infected
cells, expanded in number and then infused into the HIV-positive twin as
therapy. To date, Cell Genesys has evaluated over 100 treatment cycles of this
proof-of-principle AIDS gene therapy, and has observed no significant
treatment-related safety problems associated with this therapy. In addition,
six-month data have demonstrated that the genetically modified killer T cells
continue to persist in the patient's circulatory system.
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Cell Genesys' patient-specific treatment intended for commercialization is
currently being tested in a series of Phase II pilot studies designed to
evaluate various treatment protocols, including combination therapy with
antiviral drugs. Initiated in June 1996, this effort involves genetically
engineering the patient's own T cells to recognize and destroy HIV-infected
cells. Leading clinical investigators in the AIDS field--Drs. Steven Deeks and
Paul Volberding of the University of California, San Francisco and San
Francisco General Hospital, respectively, Drs. Elizabeth Connick and Robert
Schooley of the University of Colorado Health Sciences Center, Drs. Bruce
Walker and David Scudder of Massachusetts General Hospital, and Dr. Ronald
Mitsayasu of the University of California, Los Angeles--are conducting these
studies. Initial clinical findings confirm earlier safety results and cell
persistence data. Cell Genesys expects to complete these pilot studies during
1997 and, based on efficacy data, develop a plan to expand into Phase II/III
studies. Cell Genesys' T cell gene therapy is a novel therapy which must
undergo rigorous human testing regulated by the FDA. There is no assurance
that the therapy will be proven safe or efficacious or, if approved, that the
therapy can be successfully commercialized. Although preliminary results of
Cell Genesys' Phase I/II clinical testing in AIDS gene therapy reported to
date have shown no significant treatment-related safety problems, there can be
no assurance that this therapy will be tolerated over an extended period of
time or that the clinical efficacy of this therapy will be demonstrated.
In October 1995, Cell Genesys signed a worldwide agreement with HMR for the
development and commercialization of Cell Genesys' AIDS gene therapy program.
The agreement could provide more than $160 million in funding for this
program, including $50 million in committed funding and $100 million in
progress-dependent funding for research and development costs, plus a $10
million warrant for future equity. The committed funding included a $20
million equity investment in Cell Genesys Common Stock, representing
approximately 12 percent of the outstanding Cell Genesys Common Stock as of
January 31, 1997. Under the agreement, Cell Genesys is leading product
development in North America and providing worldwide manufacturing services.
HMR has worldwide marketing rights to AIDS gene therapy. In North America,
Cell Genesys will participate in profit sharing and has retained a copromotion
option. Elsewhere in the world, Cell Genesys will receive royalties. Cell
Genesys has retained worldwide rights for cancer gene therapy. In addition to
AIDS gene therapy, HMR also has preferential rights for up to two additional
AIDS gene therapy product candidates that, if exercised, would result in
additional payments to Cell Genesys. The collaboration also provides for
consolidation of intellectual property related to Cell Genesys' gene therapy
technology through a cross-licensing agreement among Cell Genesys, HMR and its
licensor in this field, Massachusetts General Hospital. Through December 1996,
Cell Genesys has received approximately $50 million under its agreement with
HMR. There can be no assurance that Cell Genesys will receive any further
progress-dependent funding from HMR pursuant to this arrangement, or that HMR
will exercise its warrant to purchase additional shares of Cell Genesys'
capital stock.
Cell Processing Capabilities. To commercialize its first gene therapies,
Cell Genesys intends to operate cell processing centers at regional sites
around the United States. This centralization of specialist services is
similar to the centralization of blood processing, in which blood is drawn
from patients at blood banks and processed elsewhere to control the cost,
quality and efficiency of service. Cell Genesys currently provides all cell
processing for its patient-specific AIDS gene therapy clinical trial. Cell
Genesys is currently expanding its cell processing capacity in preparation for
cancer gene therapy clinical studies.
In Vivo Gene Therapy. The accessibility of cardiovascular and inflammatory
conditions through the bloodstream has led Cell Genesys to explore a variety
of new opportunities for gene therapy. Most recently, through a collaboration
with Duke University, Cell Genesys' proprietary adenoviral vectors are being
used as ex vivo and in vivo gene delivery systems to evaluate the potential of
cardiovascular gene therapy. One potential treatment target is inhibition of
restenosis, a potentially damaging blockage of blood flow that may occur after
arteries are unblocked through coronary angioplasty or heart surgery.
In 1997, Cell Genesys' goal is to generate preclinical data to support a
product development decision for an in vivo gene therapy. A number of
opportunities are under evaluation to in-license specific genes for such an in
vivo gene therapy application.
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Stem Cell Gene Therapy. Cell Genesys scientists are also engineering bone
marrow stem cells for potential use in the treatment of cancer and AIDS. Stem
cells give rise to all blood and immune cells. As such, they offer a self-
renewing source of white blood cells, including T cells, and might therefore
involve less frequent treatment than T cell gene therapy. Research results to
date show that the use of tumor-specific stem cells engineered by Cell Genesys
scientists and introduced into laboratory mice prevented the occurrence of
fatal cancers in 80% of the treated animals.
"Universal Donor" Cells. Longer-term, Cell Genesys is conducting research on
universal donor T cells which could be administered to multiple patients
without tissue rejection. Universal donor T cells will require additional
genetic engineering to eliminate or suppress the immunologic fingerprint that
is present on every cell in the body. Tissue rejection occurs when the
recipient's immune system recognizes the unique immunologic fingerprint of a
transplanted cell as foreign.
GOVERNMENT REGULATION
FDA Regulation. The activities required before a pharmaceutical agent may be
marketed in the United States begin with preclinical testing. Preclinical
tests include laboratory evaluation of potential products and animal studies
to assess the potential safety and efficacy of the product and its
formulations. The results of these studies and other information must be
submitted to the FDA as part of an investigational new drug application, which
must be reviewed and approved by the FDA before proposed clinical testing can
begin. Clinical trials involve the administration of the investigational new
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the
investigational new drug application. Further, each clinical study must be
conducted under the auspices of an independent institutional review board at
the institution at which the study will be conducted. The institutional review
board will consider, among other things, ethical factors and the safety of
human subjects. In addition, certain protocols involving the use of
genetically modified human cells must also be reviewed by the Recombinant
Advisory Committee of the National Institutes of Health.
Typically, clinical testing involves a three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early safety profile and pharmacology of the new therapy. Although the
preliminary Phase I/II clinical testing results to date of Cell Genesys' AIDS
gene therapy have shown no significant treatment-related safety problems,
there can be no assurance that such therapy or product will be tolerated at
higher doses or that the clinical efficacy of such therapy or product will be
demonstrated. In Phase II, clinical trials are conducted with groups of
patients afflicted with a specific disease in order to determine preliminary
efficacy, optimal dosages and expanded evidence of safety. In Phase III, large
scale, multicenter, comparative clinical trials are conducted with patients
afflicted with a target disease in order to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others. In
the case of products for life-threatening diseases, the initial human testing
is generally done with diseased patients rather than with healthy volunteers.
Since these patients are already afflicted with the target disease, it is
possible that such studies may provide results traditionally obtained in Phase
II trials. These trials are frequently referred to as Phase I/II trials.
The results of the preclinical and clinical testing, together with chemistry
and manufacturing information, are submitted to the FDA in the form of a new
drug application for a pharmaceutical product, and in the form of a product
license application for a biological product, for approval to commence
commercial sales. In responding to a new drug application or a product license
application, the FDA may grant marketing approvals, request additional
information or further research, or deny the application if it determines that
the application does not satisfy its regulatory approval criteria. Approvals
may not be granted on a timely basis, if at all, or if granted may not cover
all the clinical indications for which Cell Genesys is seeking approval or may
contain significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
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Other Government Regulation. In addition to laws and regulations enforced by
the FDA, Cell Genesys is also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local laws and regulations as Cell Genesys
research and development involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds.
Cell Genesys' manufacturing facility for production of clinical quantities
of its products was licensed in 1994 by the California Department of Health
Services. The California Department of Health Services may inspect the
facility annually. Manufacture of clinical quantities of Cell Genesys'
products does not require an FDA license, although the FDA may at any time
inspect the facility. The continued operation of this facility requires
compliance with FDA standards for this type of manufacturing. A separate
license from the FDA is required for commercial manufacturing of any products.
For Cell Genesys' clinical trial of AIDS gene therapy in twins, Cell Genesys
uses a contract facility for cell processing activities which are required for
the manufacture of clinical materials. The cell processing activities of this
contractor are subject to the above laws and regulations. During 1995, Cell
Genesys completed construction of its clinical scale cell processing facility.
This facility is being used to process cells for Cell Genesys' patient-
specific (autologous) AIDS gene therapy Phase II clinical testing which was
initiated in 1996. The facility is currently being expanded for Cell Genesys'
cancer gene therapy clinical trial planned for 1997. Cell Genesys will
consider contract manufacturing for commercial scale requirements in the
future to the extent possible, or expansion of its own facilities if
necessary.
OTHER ASSETS OF CELL GENESYS
Gene Activation Technology. Separate from gene therapy, Cell Genesys has
developed a novel and proprietary method for protein production referred to as
"gene activation." Gene activation involves the insertion of genetic
regulatory elements at specific sites in chromosomes in proximity to a human
gene responsible for the production ("expression") of a therapeutic protein.
Subsequently, the gene-activated protein could be produced in a cell-based
production system. Gene activation, which may be applied to therapeutic
proteins such as follicle-stimulating hormone or erythropoietin, eliminates
the sometimes difficult and time-consuming process of cloning entire human
genes. For companies engaged in protein manufacturing, this technology may
offer certain production advantages.
In December 1996, Cell Genesys agreed to establish a licensing agreement
with HMR for erythropoietin and a second undisclosed protein. The agreement
provides for up to $26 million in milestone payments and fees, in addition to
any royalties on future sales of these two potential gene-activated protein
products. Cell Genesys received $4 million upon execution of the letter of
intent, subject to execution of a definitive agreement. In February 1997, Cell
Genesys executed the definitive agreement with HMR for this license and
recognized the $4 million previously received as revenue.
In February 1994, Cell Genesys signed a licensing agreement with Theriak
A.G., a subsidiary of Akzo Nobel N.V. ("Akzo Nobel"), to develop and market
Cell Genesys' therapeutic protein product, gene-activated follicle stimulating
hormone ("FSH") for the treatment of infertility. Akzo Nobel was granted
worldwide rights to develop and market gene-activated FSH in exchange for
licensing fees, royalties and other payments to Cell Genesys. Akzo Nobel
currently markets a urine-purified form of FSH, and has also developed a
recombinant form of FSH. During 1995, Akzo Nobel settled a patent dispute with
another party related to recombinant FSH and plans to market this form of FSH
subject to regulatory approval. Pursuant to an amendment to the 1994 agreement
made in November 1996, Cell Genesys expects to receive $5 million in payments
under such agreement.
Abgenix. While Cell Genesys is focused on the commercialization of gene
therapy, Cell Genesys' Abgenix subsidiary is focused on the commercialization
of antibody therapies for inflammation/autoimmune disease, cancer and other
serious illnesses. Cell Genesys formed Abgenix as a separate business
subsidiary in June 1996, contributing $10 million in cash and providing a $4
million convertible loan to the newly formed company. Cell Genesys also
contributed research, development and manufacturing technology, as well as
patents and other intellectual property specific to the antibody therapy
programs. Approximately 40 Cell Genesys employees were transferred to Abgenix,
including employees of Cell Genesys' former Xenotech Division and other Cell
Genesys
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employees who were primarily involved with the antibody program. R. Scott
Greer, who served for over five years at Cell Genesys and was most recently
Senior Vice President of Corporate Development, was named chief executive
officer of Abgenix.
The formation of Abgenix was accompanied by a new agreement with Cell
Genesys' development partner, Japan Tobacco Inc. ("Japan Tobacco"), expanding
commercialization rights. Under the terms of various agreements, Abgenix and
Japan Tobacco are each selecting and developing product candidates based on
the transgenic technology developed through a joint venture with JT Immunotech
USA Inc., a medical subsidiary of Japan Tobacco ("JT Immunotech"). For
products pursued separately by Abgenix, Abgenix has the opportunity to obtain
worldwide rights, opening up prospects for additional corporate alliances and
licensing agreements. Abgenix also has options to the rights in North America
on a select number of Japan Tobacco's products. Rights to jointly targeted
products will be licensed to Abgenix in North America, to Japan Tobacco in
Japan, Taiwan and Korea, and co-exclusively to both Abgenix and Japan Tobacco
elsewhere in the world. Included in this latter arrangement is anti-IL-8
antibody developed through the partnership and expected to enter human testing
during the second half of 1997.
Cell Genesys' relationship with Japan Tobacco was established in July 1991,
when Cell Genesys formed an equally owned worldwide joint venture with JT
Immunotech, Xenotech L.P. ("Xenotech"). This venture focused on developing
strains of transgenic mice capable of producing fully human monoclonal
antibodies and conducting preclinical studies with initial antibodies. Through
1996, Cell Genesys has received $39.9 million in funding through the joint
venture, including an equity investment in Cell Genesys Common Stock
representing approximately six percent of the outstanding Cell Genesys Common
Stock as of January 31, 1997. Committed funding from Japan Tobacco is expected
to be completed in 1997.
On March 27, 1997, Cell Genesys announced that, together with Abgenix'
Xenotech and Japan Tobacco, it had signed a comprehensive patent cross-license
and settlement agreement with GenPharm International Inc. ("GenPharm") that
resolved all related litigation and claims between the parties. The cross-
license agreement includes a worldwide royalty free cross-license to all
issued and related patent applications pertaining to the generation of fully
human monoclonal antibody technologies in genetically modified strains of
mice. See Item 3 "Legal Proceedings".
CORPORATE RELATIONSHIPS
Hoechst Marion Roussel. In October 1995, Cell Genesys signed a worldwide
agreement with HMR for the development and commercialization of Cell Genesys'
AIDS gene therapy program. The agreement could provide more than $160 million
in funding for this program, including $50 million in committed funding and
$100 million in progress-dependent funding for research and development costs,
plus a $10 million warrant for future equity. The committed funding included a
$20 million equity investment in Cell Genesys Common Stock, representing
approximately 12 percent of the outstanding Cell Genesys Common Stock as of
January 31, 1997. Under the agreement, Cell Genesys is leading product
development in North America and providing worldwide manufacturing services.
HMR has worldwide marketing rights to AIDS gene therapy. In North America,
Cell Genesys will participate in profit sharing and has retained a copromotion
option. Elsewhere in the world, Cell Genesys will receive royalties. Cell
Genesys has retained worldwide rights for cancer gene therapy. In addition to
AIDS gene therapy, HMR also has preferential rights for up to two additional T
cell gene therapy product candidates that, if exercised, would result in
additional payments to Cell Genesys. The collaboration also provides for
consolidation of intellectual property related to Cell Genesys' gene therapy
technology through a cross-licensing agreement among Cell Genesys, HMR and its
licensor in this field, Massachusetts General Hospital. Through December 1996,
Cell Genesys has received approximately $50 million under its agreement with
HMR. There can be no assurance that Cell Genesys will receive any further
progress-dependent funding from HMR pursuant to this arrangement, or that HMR
will exercise its warrant to purchase additional shares of Cell Genesys'
capital stock.
In December 1996, Cell Genesys also agreed to establish a licensing
agreement with HMR for use of its gene activation technology in the production
of erythropoietin and a second undisclosed protein. The agreement provides for
up to $26 million in milestone payments and fees, in addition to royalties on
any future sales of these two potential gene-activated protein products. Cell
Genesys received $4 million upon execution of the letter of intent in December
1996 and executed the definitive agreement for the license in February 1997.
9
<PAGE>
Japan Tobacco. Cell Genesys' relationship with Japan Tobacco was established
in July 1991, when Cell Genesys formed an equally owned worldwide joint
venture with JT Immunotech. Through the former Xenotech Division of Cell
Genesys, this venture has focused on developing strains of transgenic mice
capable of producing fully human monoclonal antibodies and conducting
preclinical studies with initial antibodies. Through 1996, Cell Genesys has
received $39.9 million in funding through the joint venture, including an
equity investment in Cell Genesys Common Stock representing approximately six
percent of the outstanding Cell Genesys Common Stock as of January 31, 1997.
Committed funding from Japan Tobacco is expected to be completed in 1997.
GENE THERAPY PATENTS AND TRADE SECRETS
Cell Genesys' success will depend in part on its ability to obtain patent
protection for its products both in the United States and other countries.
Cell Genesys has filed applications for a number of United States and foreign
patents, and has licenses or license options to patents or patent applications
of others. In 1994, Cell Genesys was issued a United States patent for the
disease-specific receptor technology underlying its T cell and stem cell gene
therapy program. In 1995, Cell Genesys received two United States patents for
gene-modified cells related to universal donor cell modifications and a notice
of allowance for a European patent on transgenic technology for the production
of human antibodies. In 1996, Cell Genesys received two United States
patents--one related to gene activation technology, and the other related to
Cell Genesys' universal donor program. Also in 1996, Cell Genesys received two
European patents--one related to the production of proteins through the use of
gene activation technology, and the other related to disease-specific receptor
technology which could be utilized in multiple therapeutic applications and
underlies Cell Genesys' programs in T cell and stem cell gene therapy. Cell
Genesys expects to continue to actively pursue patent prosecution in support
of its technological and scientific innovation in order to develop and
maintain its competitive position.
The patent positions of pharmaceutical and biotechnology firms, including
Cell Genesys, are generally uncertain and involve complex legal and factual
questions. While Cell Genesys is currently prosecuting its patent
applications, the Company does not know whether any given application will
result in the issuance of a patent or, if any patent is issued, whether it
will provide significant proprietary protection or will be invalidated.
Because patent applications in the United States are confidential until
patents issue and publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months, Cell
Genesys cannot be certain that it was the first creator of inventions covered
by pending patent applications or that it was the first to file patent
applications for such inventions.
The commercial success of the Company will also depend in part on not
infringing the patents or proprietary rights of others and not breaching
licenses granted to the Company. The Company may be required to obtain
licenses to third party technology necessary to conduct the Company's
business. Any failure by the Company to license at reasonable cost any
technology required to commercialize its technologies or products may have an
adverse impact on the Company.
Litigation, which could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to the Company or to determine the
scope and validity of other parties' proprietary rights. To determine the
priority of inventions, interference proceedings are frequently declared by
the U.S. Patent Office that could result in substantial costs to the Company
and may result in an adverse decision as to the priority of the Company's
inventions. The Company believes there will continue to be significant
litigation in the industry regarding patent and other intellectual property
rights.
On March 27, 1997, Cell Genesys announced that, together with Abgenix,
Xenotech and Japan Tobacco, it had signed a comprehensive patent cross-license
and settlement agreement with GenPharm that resolved all related litigation
and claims between the parties. See Item 3 "Legal Proceedings".
The Company also relies on unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position. No assurance can be given that others will
not independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or
disclose such technology, or that the Company can meaningfully protect its
rights to its unpatented trade secrets.
10
<PAGE>
Cell Genesys requires each employee and consultant to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. These agreements provide that all confidential
information developed by or made known to an individual during the course of
the employment or consulting relationship generally must be kept confidential.
In the case of employees, the agreements provide that all inventions conceived
by the individual while employed by the Company relating to the Company's
business are the Company's exclusive property. These agreements may not
provide meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
HUMAN RESOURCES
As of December 31, 1996, Cell Genesys employed 147 persons of whom 25 hold
Ph.D. degrees and three hold M.D. degrees. Approximately 115 employees are
engaged in research and development, and 32 support business development,
intellectual property, finance and other administrative functions. Cell
Genesys' senior management and directors have had prior product development
experience in the biotechnology and pharmaceutical industries. Included in the
figures above are 45 persons employed by Cell Genesys' Abgenix subsidiary.
Cell Genesys' success will depend in large part upon its ability to attract
and retain employees. Cell Genesys faces competition in this regard from other
companies, research and academic institutions, government entities and other
organizations. Cell Genesys believes that it maintains good relations with its
employees.
EXECUTIVE OFFICERS
The executive officers of Cell Genesys and their ages as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CELL GENESYS
---- --- --------------------------
<S> <C> <C>
Stephen A. Sherwin, M.D. 48 Chairman of the Board, President and Chief
Executive Officer
Kathleen Sereda Glaub 43 Senior Vice President and Chief Financial
Officer
R. Scott Greer 38 President, Abgenix, Inc.
Daniel F. Hoth, M.D. 50 Senior Vice President and Chief Medical Officer
Bridget P. Binko 45 Vice President--Regulatory Affairs
David Broad, Ph.D. 43 Vice President--Process Development
Mitchell H. Finer, Ph.D. 38 Vice President--Research
Bruce A. Hironaka 42 Vice President--Corporate Development
Christine McKinley 43 Vice President--Human Resources
</TABLE>
Dr. Sherwin has served as the president and chief executive officer and a
director of Cell Genesys since March 1990. In March 1994, Dr. Sherwin was
elected to the additional position of chairman of the board of directors of
Cell Genesys. From 1983 to 1990, Dr. Sherwin held various positions at
Genentech, Inc., a biotechnology company, most recently as Vice President of
Clinical Research. Prior to 1983, Dr. Sherwin held various positions on the
staff of the National Cancer Institute. Dr. Sherwin also currently serves as
an Associate Clinical Professor of Medicine at the University of California,
San Francisco, a position he has held since 1986, and he is currently a
director of the California Healthcare Institute, a non-profit institution. Dr.
Sherwin holds a B.A. in biology from Yale University and an M.D. from Harvard
Medical School.
Ms. Glaub was elected Senior Vice President and Chief Financial Officer of
Cell Genesys in October 1995. Ms. Glaub joined Cell Genesys in September 1993
as Vice President and Chief Financial Officer. From 1985 to 1990, Ms. Glaub
held various financial positions at Genentech, Inc., most recently as
treasurer. From 1980 to 1985, she held various positions in the treasury and
finance departments at Intel Corporation. Ms. Glaub received a B.A. in
psychology from the University of California, Berkeley and an M.B.A. from
Northwestern University.
Mr. Greer has served as president of Abgenix, Inc., a subsidiary of Cell
Genesys, since its inception in June 1996. From 1991 to 1996, he held various
positions at Cell Genesys, most recently as senior vice president of corporate
development. Mr. Greer was director of corporate development at Genetics
Institute and has held positions at Booz, Allen, Hamilton, Inc. and Coopers
and Lybrand. Mr. Greer received a B.A. from Whitman College and an M.B.A. from
Harvard Business School. He is a certified public accountant.
11
<PAGE>
Dr. Hoth joined Cell Genesys in June 1993 as Senior Vice President and Chief
Medical Officer. From March 1994 to 1996, he also served as Chief Operating
Officer of Cell Genesys. In February 1994, he was appointed by the Secretary
of Health and Human Services to the National Task Force on AIDS Drug
Development. From 1987 to 1993, Dr. Hoth served as director of the AIDS
Division of the National Institute of Allergy and Infectious Diseases, which
is the principal federal government agency division for AIDS therapy and
vaccine research. Previously, Dr. Hoth held senior positions at the National
Cancer Institute, including that of chief of the Investigational Drug Branch.
Dr. Hoth received a B.A. in psychology from Franklin and Marshall College and
an M.D. from Georgetown University. Effective June 30, 1997, Dr. Hoth will no
longer be a full-time employee of the company, but will continue as a part-
time consultant under an exclusive consulting agreement in the fields of gene
therapy and cell therapy which was signed in March 1997.
Ms. Binko, Vice President of Regulatory Affairs, joined Cell Genesys in
1993, bringing to Cell Genesys extensive experience in FDA regulations. She
previously worked in a variety of regulatory areas at IDEC Pharmaceuticals for
five years, including human clinical studies of antibodies and the licensure
of manufacturing facilities. Prior to IDEC, Ms. Binko participated in both
investigational new drug application and new drug application filings with the
FDA in the antiviral area at Syntex, where she also worked for five years. She
received a B.S. in biology and an M.A. in microbiology from the State
University of New York at Buffalo.
Dr. Broad has served at Cell Genesys since 1993 and is currently Vice
President of Process Development. His depth of experience in biological
product development includes more than six years at Celltech Limited, where he
specialized in cell-based manufacturing systems for therapeutic proteins and
antibodies. Dr. Broad also served as a Senior Development Scientist at Beecham
Pharmaceuticals. He received his B.S. and Ph.D. in microbiology from the
University of London and served as a postdoctoral research fellow in the
Microbiology Section of the School of Pharmacy, University of London.
Dr. Finer, Vice President of Research at Cell Genesys, has been with Cell
Genesys since 1990, serving in a variety of scientific positions, most
recently as Director of Molecular Biology. He has provided scientific
leadership to both the ex vivo and in vivo gene therapy programs at Cell
Genesys. Prior to joining Cell Genesys, Dr. Finer was an American Cancer
Society postdoctoral fellow at the Whitehead Institute for Biomedical
Research. He received his B.A. in biochemistry, microbiology and immunology
from the University of California, Berkeley and his Ph.D. in biochemistry and
molecular biology from Harvard University. He served as a postdoctoral fellow
at the Whitehead Institute of the Massachusetts Institute of Technology.
Mr. Hironaka, prior to being elected Vice President, Corporate Development
in l996, served as Director of Business Development for Cell Genesys' gene
therapy business, a position which he held since joining Cell Genesys in
August l994. From 1992 to 1994, Mr. Hironaka was with Aviron, a biotechnology
company focusing on viral vaccines, most recently as vice president
responsible for business development, finance, human resource and operations.
Previously, he was a consultant with McKinsey & Company, a leading
international management consulting firm. Mr. Hironaka graduated Phi Beta
Kappa with an A.B. in economics from the University of California, Berkeley
and holds an M.B.A. and J.D. from Stanford University.
Ms. McKinley, who is Vice President of Human Resources at Cell Genesys, has
played an integral role in building and managing Cell Genesys' human resource
function. She joined Cell Genesys in l994 after overseeing corporate human
resources for over eight years at Nellcor Puritan Bennett, Inc. Ms. McKinley
also worked at Genentech, Inc. for seven years in various human resource
positions. She received a B.A. in psychology from the University of
California, Santa Barbara.
ITEM 2. PROPERTIES
Cell Genesys occupies administrative offices and research laboratories
covering approximately 107,000 square feet of space in a research and
development office park located in Foster City, California. Cell Genesys'
lease of these facilities expires in 1998, with an option to renew the lease
for two additional four-year terms. Cell Genesys' laboratories are equipped
for biochemical and tissue culture research and development. Additionally,
Cell Genesys has constructed a facility licensed for Good Manufacturing
Practices manufacturing of clinical quantities of Cell Genesys' products.
12
<PAGE>
In February 1997, Cell Genesys' Abgenix subsidiary moved into newly
constructed facilities in Fremont, California. These new facilities consist of
approximately 52,000 square feet of offices and laboratory facilities which
are leased through 2006, with an option to renew the lease for three
additional three-year terms.
Cell Genesys anticipates that these facilities will be adequate to meet its
and Abgenix' needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On February 1, 1994, Cell Genesys filed a complaint against GenPharm in the
Superior Court for the State of California, Santa Clara County, alleging that
GenPharm and its agents misappropriated Cell Genesys' proprietary technology
used to develop strains of mice which produce human antibodies and that
GenPharm unlawfully filed patent applications covering this technology. On
March 2, 1994, GenPharm filed an answer and cross complaint generally denying
the allegations of the complaint and alleging abuse of process, unfair
competition and interference with prospective advantage and seeking
compensatory and punitive damages, an injunction and attorneys fees. In
October 1996, GenPharm dismissed its cross complaint. One aspect of the
technology at issue related to a method for inactivating a mouse's antibody
genes. On January 7, 1997, GenPharm received United States Patent No.
5,591,669 (the "'669 patent") which includes claims related to transgenic mice
whose antibody genes have been inactivated. On that same date, GenPharm filed
suit in United States District Court for the Northern District of California
alleging that Cell Genesys' subsidiary, Abgenix, was infringing the '669
patent. In light of these developments, Cell Genesys dismissed without
prejudice its state court action against GenPharm on January 13, 1997. In
dismissing the action, Cell Genesys stated that it would continue to pursue
protection of the technology at issue before the United States Patent and
Trademark Office, in federal court and, if appropriate in the future, in state
court.
The complaint filed by GenPharm alleging infringement of the '669 patent was
consolidated with an action previously filed by GenPharm against Abgenix in
October 1996. This actions alleged that Abgenix was infringing United States
Patent No. 5,545,806 and United States Patent No. 5,569,825 which both relate
to technology pertaining to transgenic mice capable of producing human
antibodies. Cell Genesys and Abgenix have filed patent applications in the
United States and Europe relating to their transgenic technology used to
produce human antibodies. In 1995, Cell Genesys' European patent related to
this technology was allowed.
On February 6, 1996, GenPharm filed an antitrust suit against Cell Genesys
in the United States District Court for the Northern District of California,
alleging that Cell Genesys violated the Federal antitrust laws when it filed
the state court action against GenPharm on February 1, 1994. GenPharm sought
treble damages, attorneys' fees and costs for suit. The Court granted Cell
Genesys' motion to dismiss this lawsuit and entered a judgment of dismissal
without prejudice on December 17, 1996. On January 15, 1997 GenPharm filed an
appeal of this judgment.
On March 27, Cell Genesys announced that, together with Abgenix, Xenotech
and Japan Tobacco, it had signed a comprehensive patent cross-license and
settlement agreement with GenPharm that resolved all related litigation and
claims between the parties. The cross-license agreement includes a worldwide
royalty free cross-license to all issued and related patent applications
pertaining to the generation of fully human monoclonal antibody technologies
in genetically modified strains of mice. Cell Genesys also obtained a license
to certain technology in the field of gene therapy held by GenPharm. As
consideration for the settlement and cross-license agreement, Cell Genesys
agreed to issue a note due September 30, 1998 for $15 million, convertible
into shares of Cell Genesys common stock at $9.00 per share. The conversion
price is subject to adjustment in twelve months. In addition, Japan Tobacco
agreed to make a cash payment to GenPharm. The agreement also calls for two
milestone payments of $7.5 million each based on the issuance certain patents
in the future. These payments would be made by Xenotech, L.P., which is an
equal joint venture of Abgenix and Japan Tobacco.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Cell Genesys Common Stock is traded in the over-the-counter market and
is quoted on The NASDAQ National Market under the symbol "CEGE." The following
table sets forth, for the periods indicated, the high and low bid prices per
share of Cell Genesys Common Stock as quoted on The NASDAQ National Market.
Cell Genesys did not pay any cash dividends with respect to the Cell Genesys
Common Stock during any of the periods indicated below.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Calendar Year 1995
First Quarter.................................................. $ 8.25 $5.25
Second Quarter................................................. $ 5.75 $3.75
Third Quarter.................................................. $ 7.13 $4.50
Fourth Quarter................................................. $10.13 $5.63
Calendar Year 1996
First Quarter.................................................. $12.00 $7.38
Second Quarter................................................. $10.25 $7.25
Third Quarter.................................................. $ 8.38 $6.00
Fourth Quarter................................................. $ 9.25 $6.25
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
(IN THOUSANDS, EXPECT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue under collaborative
agreements--principally from
related parties................ $22,505 $ 13,822 $ 9,416 $ 6,916 $ 5,801
Operating expenses:
Research and development....... 27,587 25,879 21,540 13,963 8,299
General and administrative..... 7,469 5,670 5,316 3,073 2,135
------- -------- -------- ------- -------
Total operating expenses...... 35,056 31,549 26,856 17,036 10,434
------- -------- -------- ------- -------
Operating loss.................. (12,551) (17,727) (17,440) (10,120) (4,633)
Interest income, net............ 3,277 2,739 2,896 1,504 312
------- -------- -------- ------- -------
Net loss........................ $(9,274) $(14,988) $(14,544) $(8,616) $(4,321)
======= ======== ======== ======= =======
Net loss per share.............. $ (0.57) $ (1.07) $ (1.07) $ (0.80) $ (2.38)
======= ======== ======== ======= =======
Shares used in computing net
loss per share................. 16,373 14,025 13,630 10,830 1,814
======= ======== ======== ======= =======
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... $85,584 $ 81,929 $ 70,772 $85,700 $15,495
Working capital................. 64,137 76,098 67,923 82,956 14,438
Total assets.................... 99,809 94,120 82,162 91,599 18,628
Long-term obligations........... 6,133 7,720 5,126 1,648 878
Accumulated deficit............. (56,270) (46,459) (32,405) (17,346) (8,730)
Stockholders' equity............ 71,064 79,393 72,329 86,385 16,353
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OUTLOOK
Cell Genesys (the "Company") is focused on the development and
commercialization of gene therapies to treat major, life-threatening diseases,
including AIDS and cancer. The Company's objective is to commercialize both ex
vivo gene therapy with genetically engineered human immune cells and in vivo
gene therapies. In January 1997, the Company signed a merger agreement with
Somatix Therapy Corporation ("Somatix"). Pending approval by stockholders of
both companies, the merger is expected to strengthen the Company's position in
the field of gene therapy. Since its inception in 1988, the Company has funded
its research and development activities primarily through the sale of equity,
corporate partnerships and leaseline financings. The Company has been
unprofitable since its inception and has incurred a cumulative net loss of
$56.3 million. In June 1996, Cell Genesys announced the establishment of
Abgenix, Inc. ("Abgenix"), a subsidiary which will focus exclusively on the
development and commercialization of the Company's human monoclonal antibodies
for pharmaceutical applications, including inflammation, autoimmune disorders,
and cancer. All partnership interests and intellectual property relating to
the Company's antibody business have been transferred to Abgenix as part of
its initial formation. The following discussion constitutes forward looking
statements insofar as it relates to progress in the Company's research and
development programs and clinical trials, product expectations, in-licensing
plans, expected cash expenditures and expense levels, and the adequacy of the
Company's available resources. Actual results could differ materially from
statements made due to a number of factors, including those set forth in "Risk
Factors" below.
In the Company's lead gene therapy program, safety results for the Company's
Phase I clinical trial testing AIDS gene therapy indicated no significant
treatment-related safety problems. The Company is currently in Phase II
clinical testing of this therapy in an initial proof-of-principle trial in
twins, in which T cells from the healthy twin are modified and infused as
therapy for the HIV-positive twin and in a second Phase II trial of a patient-
specific approach in individuals with HIV infection. Additional clinical
trials of Cell Genesys' AIDS gene therapy will be conducted during 1997. These
include an evaluation of an improved manufacturing process involving the
genetic modification of both killer T cells and helper T cells as well as a
reduction in cell processing time to less than three weeks. In addition, a new
pilot study is planned by Cell Genesys to evaluate whether the combination of
AIDS gene therapy and antiviral drugs can delay the recurrence of HIV
infection, which has been generally observed in patients who stop their
antiviral drug therapy. This pilot study will help determine whether the gene
therapy can reduce the requirement for long-term treatment with combinations
of three or more antiviral drugs. The company anticipates efficacy data from
certain of these trials at the end of 1997. During June 1996, in connection
with the initiation of patient enrollment in the second Phase II clinical
trial to evaluate patient-specific AIDS gene therapy, the Company received a
$2 million milestone payment under its collaboration with Hoechst Marion
Roussel, Inc. ("HMR"). Also in June 1996, the Company initiated product
development of its lead cancer gene therapy product candidate for colon and
other specific cancers. Based on successful preclinical studies, the Company
plans to initiate human clinical testing for its initial cancer gene therapy
product candidate by mid 1997. The Company also has ongoing research programs
in stem cell gene therapy, universal donor cells and other gene delivery
technologies. The Company believes that such programs may provide
opportunities for collaborative arrangements with third parties that could
also provide additional funding to the Company.
In the Company's human monoclonal antibody program (now being pursued
through Abgenix), the Company has developed transgenic technology to create
strains of mice capable of producing fully human monoclonal antibodies. The
Company has created strains of mice which now contain the majority of human
antibody genes and could produce multiple product candidates. The Company
believes that fully human antibodies should avoid the allergic reactions seen
with antibodies containing mouse proteins, which should make them better
suited to long-term therapy and could provide a marketing advantage. In 1995,
the Company initiated preclinical studies of a human antibody to Interleukin-8
(IL-8), which potentially could be used as a treatment to inhibit excess
inflammation in certain diseases such as psoriasis, adult respiratory disease
syndrome (ARDS),
15
<PAGE>
rheumatoid arthritis and reperfusion injury associated with heart attack or
stroke. Based on progress of preclinical studies, Abgenix plans to initiate
human clinical trials for this antibody product candidate during the second
half of 1997.
The Company's net cash expenditures for 1997 in its current operations are
not expected to exceed approximately $20 million, excluding one-time merger
related expenditures, and the Company intends to manage toward this net cash
expenditure target. Pending stockholder approval, significant merger-related
costs will be incurred, including cash payments currently estimated at
approximately $10 million. The Company may from time to time evaluate
opportunities to acquire or in-license other potential products and
technologies. Expenses associated with in-licensing such products may
constitute unbudgeted expenses.
RESULTS OF OPERATIONS
Revenue increased to $22.5 million in 1996 from $13.8 million and $9.4
million in 1995 and 1994, respectively. The increases in 1995 and 1996 reflect
revenues from the collaboration with HMR which was entered into in October
1995 for the Company's AIDS gene therapy program, including a $2.0 million
milestone payment earned during 1996. Also, in 1996 and 1994 the Company
received $2.5 million and $3.1 million, respectively, through its agreements
with Akzo Nobel N.V. for the license of a therapeutic protein product.
Other revenues resulted from the Company's joint venture ("Xenotech") with
JT Immunotech USA Inc. ("JT Immunotech") in its human monoclonal antibody
program (see Note 2 to Financial Statements). Cell Genesys performs research
under contract for the joint venture for which the Company receives revenues,
net of the Company's payments to the joint venture. The joint venture is
funded by JT Immunotech and Cell Genesys on an equal basis. Cell Genesys
accounts for its investment in Xenotech under the equity method--Cell Genesys'
50 percent share of Xenotech's losses, up to the Company's investment amount,
offset related revenues.
During 1997, funding of research by Xenotech is expected to terminate, the
Company will receive a final $2.5 million payment from Akzo Nobel N.V., and
the initial research and development funding committed by HMR will be
completed. There can be no assurance that HMR will continue progress dependent
research and development funding or that the Company will be successful in
attracting new collaborative partners or in generating revenues from
collaboration agreements.
Research and development expenses have increased to $27.6 million during
1996 from $25.9 million and $21.5 million in 1995 and 1994, respectively.
These increases were due to additional research and development staff,
facilities, and contract services related to the Company's human clinical
trials for AIDS and the preclinical studies of human monoclonal antibodies.
Also contributing to the growth were legal fees incurred in defending and
maintaining the Company's intellectual property positions. As a result of the
settlement of litigation with Genpharm International, Inc. in March 1997 (see
Item 3 "Legal Procedings") certain of these legal expenses can be expected to
decrease in 1997. Research and development expenses in each of these three
years represented approximately 80% of total expenses. The Company expects
that its research and development expenditures, including expansion of
facilities, will continue to increase to support additional product
development activities. The rate of increase depends on a number of factors
including stockholder approval of the merger agreement with Somatix and
progress in research and development, especially clinical trials.
General and administrative expenses increased to $7.5 million during 1996
from $5.7 million and $5.3 million in 1995 and 1994, respectively. The
increases also reflect growth in administrative staff and outside services
required to support expanded research and development programs. The Company
expects these expenses to increase as these programs expand.
Interest income increased to $4.4 million in 1996 from $3.8 million and $3.5
million in 1995 and 1994, respectively. The increase in 1996 was due to higher
average cash balances available for investment. Interest expense increased to
$1.2 million in 1996 from $1.1 million and $607,000 in 1995 and 1994,
respectively, due to higher levels of property and equipment financing.
The Company's net loss was $9.3 million in 1996, $15.0 million in 1995, and
$14.5 million in 1994. During 1995 and 1996, higher revenues as a result of
the Company's collaboration for AIDS gene therapy offset higher operating
expenses resulting in net losses during each of those years approximately
level with or less than 1994. Losses are expected to continue and are likely
to increase in future years as operating expenses rise, particularly
16
<PAGE>
as the Company incurs expenses related to expanded manufacturing and human
testing of its potential products. In addition, pending stockholder approval
of the merger with Somatix, the Company expects to record non-recurring
charges to operations consisting of (i) a non-cash charge for acquired in-
process technology estimated at $95 million and (ii) a restructuring charge
estimated in the range of $5 to $10 million, including severance costs and
costs associated with elimination of redundant facilities and assets.
At December 31, 1996, the Company had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$52 million and $2 million, respectively, which expire in the years 2003
through 2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities, funding under collaborative arrangements and equipment financing.
From inception through December 31, 1996, the Company received $125.2 million
in net proceeds from equity financing, $75.3 million under collaborative
agreements and utilized $16.1 million of property and equipment financing.
At December 31, 1996, the Company's cash, cash equivalents and short-term
investments totaled $85.6 million, compared to $81.9 million at December 31,
1995. This increase of $3.7 million was primarily due to $11.1 million
provided by operating activities offset by $3.2 million contributions to
Xenotech joint venture, $2.7 million capital expenditures and $1.0 million net
cash used in financing activities.
The Company expects its cash requirements to increase significantly in the
future. The Company's capital requirements depend on numerous factors,
including stockholder approval of the merger agreement with Somatix; the
progress of the Company's research and development programs; preclinical and
clinical trials; clinical and commercial scale manufacturing requirements; the
attraction and maintenance of collaborative partners; the acquisition of new
products or technologies; and the cost of litigation, patent interference
proceedings or other legal proceedings or their resolution.
In March 1997, Cell Genesys announced that, together with Abgenix, Xenotech
and Japan Tobacco, it had signed a comprehensive patent cross-license and
settlement agreement with GenPharm that resolved all related litigation and
claims between the parties. The cross-license agreement includes a worldwide
royalty free cross-license to all issued and related patent applications
pertaining to the generation of fully human monoclonal antibody technologies
in genetically modified strains of mice. Cell Genesys also obtained a license
to certain technology in the field of gene therapy held by GenPharm. As
consideration for the settlement and cross-license agreement, Cell Genesys
agreed to issue a note due September 30, 1998 for $15 million, convertible
into shares of Cell Genesys common stock at $9.00 per share. The conversion
price is subject to adjustment in twelve months. The agreement also calls for
two milestone payments of $7.5 million each based on the issuance certain
patents in the future. These payments would be made by Xenotech, which is an
equal joint venture of Abgenix and Japan Tobacco.
Under its current collaborations, the Company is responsible for funding a
portion of its research and development efforts. Substantial capital may be
required to carry out additional product development and to commercialize both
products under the current collaborations and the Company's self-funded
efforts.
The Company believes that its available cash, cash equivalents and short-
term investments at December 31, 1996, together with payments to be received
under the Company's collaborative arrangement with HMR, and $2.1 million in
equipment financing available for capital equipment purchases will be
sufficient to meet the Company's operating expenses and capital requirements
at least through 1998. Thereafter, the Company will require substantial
additional funds. Because of the Company's significant long-term cash
requirements, it will seek to raise additional capital if conditions in the
public equity markets are favorable, even if the Company does not have an
immediate need for additional cash at that time.
17
<PAGE>
RISK FACTORS
There are significant risks associated with the Company's plans and goals,
including but not limited to the success of the Company's research and
development programs; the lengthy, expensive and uncertain regulatory approval
process; uncertainties and costs associated with obtaining third party
licenses, obtaining patent protection, protecting trade secrets, enforcing
intellectual property rights important to the Company's business and avoiding
infringement of others' intellectual property; competitive products; and the
availability of capital to fund the Company's operations and capital
requirements. Litigation, which could result in substantial cost to the
Company, may also be necessary to enforce any patents issued to the Company or
to determine the scope and validity of other parties' proprietary rights. See
Item 3 "Legal Proceedings." Some or all of these factors may affect the
Company's goals to file INDs, advance product candidates through the clinical
trial process, to commercialize products and secure financing either through
corporate partnerships or additional equity offerings. Even if the Company's
goals are fully achieved, the Company does not anticipate commercialization of
any product for several years.
Because of the novelty of the Company's gene therapy technology, clinical
trials are more difficult than for products based on more traditional
technologies. In addition, a variety of factors could hinder or delay progress
in clinical trials of the Company's products or require their discontinuance,
including results of ongoing preclinical studies by the Company or others,
technical or manufacturing difficulties, clinical trial results for the
Company's or competing products, intellectual property disputes with third
parties, and/or delays relating to the review process by the FDA. Although
preliminary results of the Company's Phase I clinical testing of AIDS gene
therapy reported to date have shown no significant treatment-related safety
problems, there can be no assurance that this therapy will be tolerated over
an extended period of time or that the clinical efficacy of this therapy will
be demonstrated.
The Company believes that a human antibody product such as that being
developed through its subsidiary, Abgenix, could be clinically superior to
products containing mouse protein, and that it could have marketing advantages
over such other products. However, until human testing has taken place, it is
not certain that human antibody products will demonstrate these advantages.
Countervailing marketing factors, such as relative price, undesirable side
effects, and/or relative marketing expertise, may serve to offset or outweigh
these advantages.
There is no assurance that opportunities for in-licensing products or for
third party collaborations will be available to the Company on acceptable
terms. Finding such opportunities, as well as a variety of other factors, such
as progress in the Company's research and development programs (including
clinical trials), receipt of anticipated contract revenues (some of which are
dependent on milestones), competitive factors, and the costs associated with
prosecuting and defending the Company's intellectual property rights or their
resolution, may affect the Company's ability to manage to its targeted net
cash expenditures in 1997, and also may affect the adequacy of the Company's
resources to fund operations and capital requirements at least through 1998.
Failure to achieve the Company's goals could have a material adverse impact
on the Company's results of operations and financial condition and its ability
to raise additional capital. Stockholders and potential investors should
carefully consider the risks associated with the Company and should be aware
that these risks may negatively impact the Company's stock price.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cell Genesys, Inc.
We have audited the accompanying consolidated balance sheets of Cell Genesys,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cell Genesys,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
January 27, 1997
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $20,935 $ 8,190
Short-term investments..................................... 64,649 73,739
Prepaid expenses and other current assets.................. 1,165 1,176
------- --------
Total current assets........................................ 86,749 83,105
Property and equipment at cost, net......................... 12,485 10,032
Deposits and other assets................................... 575 983
------- --------
$99,809 $ 94,120
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,669 $ 357
Accrued compensation and benefits.......................... 1,414 1,165
Deferred revenue from related parties...................... 12,164 2,104
Accrued construction costs................................. 2,118 --
Accrued legal expenses..................................... 1,986 332
Other accrued liabilities.................................. 439 643
Current portion of property and equipment financing........ 2,822 2,406
------- --------
Total current liabilities................................... 22,612 7,007
Noncurrent portion of property and equipment financing...... 6,133 7,720
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value: 5,000,000 shares
authorized; no shares issued and outstanding.............. -- --
Common stock, $.001 par value: 25,000,000
shares authorized; 16,514,693 and 15,959,171 shares issued
and outstanding in 1996 and 1995, respectively............ 16 16
Additional paid-in capital................................. 127,318 125,836
Accumulated deficit........................................ (56,270) (46,459)
------- --------
Total stockholders' equity.................................. 71,064 79,393
------- --------
$99,809 $ 94,120
======= ========
</TABLE>
20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Revenue under collaborative agreements--
principally
from related parties (net of equity in losses of
the Xenotech joint venture of $3,866,
$1,702 and $78).................................. $22,505 $ 13,822 $ 9,416
Operating expenses:
Research and development......................... 27,587 25,879 21,540
General and administrative....................... 7,469 5,670 5,316
------- -------- --------
Total operating expenses.......................... 35,056 31,549 26,856
Interest income................................... 4,446 3,827 3,503
Interest expense.................................. (1,169) (1,088) (607)
------- -------- --------
Net loss.......................................... $(9,274) $(14,988) $(14,544)
======= ======== ========
Net loss per share................................ $ (0.57) $ (1.07) $ (1.07)
======= ======== ========
Shares used in computing net loss per share....... 16,373 14,025 13,630
======= ======== ========
</TABLE>
21
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION DEFICIT EQUITY
------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1993................... $13 $104,511 $(793) $(17,346) $86,385
Issuance of 274,145
shares of common stock
upon exercise of stock
options and pursuant to
the 1992 Employee Stock
Purchase Plan.......... 1 606 -- -- 607
Amortization of deferred
compensation........... -- -- 396 -- 396
Change in net
unrealized holding
loss on available-for-
sale securities....... -- -- -- (515) (515)
Net loss............... -- -- -- (14,544) (14,544)
--- -------- ----- -------- -------
Balances at December 31,
1994................... 14 105,117 (397) (32,405) 72,329
Issuance of 2,000,000
shares of common stock
to HoechstMarion
Roussel, net of
offering costs of $66. 2 19,932 -- -- 19,934
Issuance of 244,468
shares of common stock
upon exercise of stock
options and pursuant
to the 1992 Employee
Stock Purchase Plan... -- 787 -- -- 787
Amortization of
deferred compensation. -- -- 397 -- 397
Change in net
unrealized holding
loss on available-for-
sale securities....... -- -- -- 934 934
Net loss............... -- -- -- (14,988) (14,988)
--- -------- ----- -------- -------
Balances at December 31,
1995................... 16 125,836 -- (46,459) 79,393
Issuance of 555,522
shares of common stock
upon exercise of stock
options and pursuant
to the 1992 Employee
Stock Purchase Plan... -- 1,482 -- -- 1,482
Change in net
unrealized holding
loss on available-for-
sale securities....... -- -- -- (537) (537)
Net loss............... -- -- -- (9,274) (9,274)
--- -------- ----- -------- -------
Balances at December 31,
1996................... $16 $127,318 $ -- $(56,270) $71,064
=== ======== ===== ======== =======
</TABLE>
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (9,274) $(14,988) $(14,544)
-------- -------- --------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 3,718 3,577 2,894
Equity in losses of Xenotech joint venture..... 3,866 1,702 78
Changes in certain assets and liabilities:
Prepaid expenses and other current assets...... 11 682 (1,036)
Deposits and other assets...................... (261) 56 --
Accounts payable .............................. 1,312 (776) 630
Accrued compensation and benefits.............. 249 110 (186)
Deferred revenue from related parties.......... 10,060 1,604 500
Accrued legal expenses......................... 1,654 99 --
Other accrued liabilities...................... (204) 333 (186)
-------- -------- --------
Net cash provided (used) by operating
activities................................... 11,131 (7,601) (11,850)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments............. (62,946) (98,742) (65,846)
Maturities of short-term investments............ 24,752 19,000 85,187
Sales of short-term investments................. 46,747 54,597 --
Contributions to Xenotech joint venture......... (3,205) (2,357) (25)
Capital expenditures............................ (2,726) (1,737) (2,052)
-------- -------- --------
Net cash provided (used) by investing
activities.................................... 2,622 (29,239) 17,264
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of common stock......... 1,482 20,721 607
Proceeds from long-term debt.................... (750) 2,812 --
Payments under equipment financing obligations.. (1,740) (1,615) (1,093)
-------- -------- --------
Net cash provided (used) by financing
activities.................................... (1,008) 21,918 (486)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 12,745 (14,922) 4,928
Cash and cash equivalents at beginning of year.. 8,190 23,112 18,184
-------- -------- --------
Cash and cash equivalents at end of year........ $ 20,935 $ 8,190 $ 23,112
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest.......... $ 1,169 $ 1,075 $ 430
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING TRANSACTIONS
Furniture and equipment acquired under
financing...................................... $ 1,319 $ 2,326 $ 5,115
Construction payable............................ $ 2,118 $ -- $ 21
</TABLE>
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and basis of presentation
Cell Genesys, Inc., a Delaware corporation, is focused on the development
and commercialization of gene therapies to treat major, life-threatening
diseases, including AIDS and cancer. Abgenix, Inc., a subsidiary of Cell
Genesys, Inc., is focused exclusively on the development and commercialization
of human monoclonal antibodies for pharmaceutical applications, including
inflammation, autoimmune disorders, and cancer. The accompanying consolidated
financial statements include the accounts of Cell Genesys, Inc., including
Abgenix, Inc. (collectively, "the Company"). Intercompany accounts and
transactions have been eliminated in consolidation.
Revenue recognition
Revenue under collaborative agreements, principally from related parties, is
recorded when earned as defined under the terms of the respective
collaborative agreements. Nonrefundable signing or licensing fee payments that
are not dependent on future performance under collaborative agreements are
recognized as revenue when received. Payments for research and development
performed by the Company under contractual arrangements are recognized as
revenue ratably over the period in which the related work is performed.
Revenue from the achievement of milestone events is recognized when the
funding party agrees that the scientific or clinical results stipulated in the
agreement have been achieved. Deferred revenue arises principally due to
timing of cash payments received under research and development contracts.
Revenues from the Company's joint venture ("Xenotech") with JT Immunotech are
recognized net of the Company's related payments to Xenotech.
Research and development
Research and development expenses, including direct and allocated expenses,
consist of independent research and development costs and costs associated
with sponsored research and development. Research and development payments
made by the Company to Xenotech are eliminated against related revenues from
Xenotech.
Depreciation and amortization
The Company depreciates property and equipment using the straight-line
method over the estimated useful lives of the assets, generally five years.
Furniture and equipment leased under capital leases is amortized over the
shorter of the useful lives or the lease term. Amortization of leased assets
is included in depreciation and amortization expense and is combined with
accumulated depreciation and amortization of the Company's owned assets.
Cash, cash equivalents and short-term investments
The Company places its cash, cash equivalents and short-term investments
with high credit quality U.S. and foreign financial institutions, government
and corporate issuers and limits the amount of credit exposure to any one
issuer. The Company considers all highly liquid investments with insignificant
interest rate risk with a maturity of less than three months when purchased to
be cash equivalents. All investments are denominated in U. S. dollars.
The Company's debt securities are classified as available-for-sale and
carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are recorded in accumulated deficit. The
Company determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net loss per share
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options are excluded
from the calculation as their effect is antidilutive.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain items have been reclassified in the prior year financial statements
to conform to the 1996 presentation.
2. COLLABORATIVE AND LICENSE AGREEMENTS
Collaborative agreement with Hoechst Marion Roussel
In October 1995, Cell Genesys entered into a collaboration agreement with
Hoechst Marion Roussel, Inc. ("HMR") for the worldwide development and
commercialization of the Company's AIDS gene therapy program. The agreement
provides for committed payments for research and development during the first
two years, and based on research and development progress, could also extend
to an additional five years.
In connection with the collaboration, HMR paid $20 million for the purchase
of two million shares of common stock at $10.00 per share and has been granted
a warrant for the purchase of 750,000 shares of common stock, exercisable at
$13.00 per share, expiring in 2000.
Under the agreement with HMR, Cell Genesys will conduct research, lead
product development in North America and provide worldwide manufacturing
services. HMR has worldwide marketing rights for AIDS products developed in
this program and Cell Genesys retains a co-promotion option in North America.
Cell Genesys receives payments for research and development, a transfer price
for manufacturing services, milestone payments and profit sharing. The Company
recognized revenue of $15.3 million in fiscal 1996 and $7.6 million in fiscal
1995 pursuant to the agreement.
Joint venture with JT Immunotech
In 1991, the Company and JT Immunotech, a medical subsidiary of Japan
Tobacco Inc. ("JTI"), formed Xenotech, an equally-owned joint venture, to
develop genetically modified strains of mice which can produce human
monoclonal antibodies and to commercialize products generated from these mice.
In June 1996, Cell Genesys transferred its partnership interest in the joint
venture to its subsidiary, Abgenix, as part of the initial formation of
Abgenix. Xenotech funds this research which is generally conducted by Abgenix
on behalf of the joint venture. The Company recognized revenue of $4.7
million, $6.2 million, and $6.2 million in 1996, 1995 and 1994, respectively,
net of its own payments to the joint venture.
Substantially all of the cash capital contributions to Xenotech through June
1995 were made by JT Immunotech. The Company contributed a license to certain
technology for its interest in Xenotech. Since July 1, 1995, the Company has
funded 50% of all Xenotech expenses.
The Company accounts for its investment in Xenotech under the equity method;
50 percent of Xenotech's losses (after adjustment for certain timing
differences) are offset against revenue, as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Cell Genesys' share of Xenotech net loss.............. $3,306 $2,315 $(197)
Difference due to timing and change in deferred
revenue.............................................. 560 (613) 275
------ ------ -----
Equity in losses of Xenotech.......................... $3,866 $1,702 $ 78
====== ====== =====
</TABLE>
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Research and development expenses incurred under collaborative agreements
with HMR were $12.7 million, $10.2 million and $0.0 million and with Xenotech
were $8.9 million, $7.5 million and $7.7 million in 1996, 1995 and 1994,
respectively.
Summarized information for Xenotech at December 31, 1996, 1995 and 1994 and
for the years then ended follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current assets....................................... $ 492 $ 1,099 $ 2,370
Noncurrent assets.................................... -- 258 237
Current liabilities.................................. 59 601 1,959
Total revenue........................................ 1,913 4,747 3,372
Net loss............................................. (6,614) (7,129) (4,605)
</TABLE>
Gene Activation Technology Licenses
In 1994, the Company entered into a license agreement for gene-activated
follicle-stimulating hormone ("FSH") for infertility with Organon, a business
unit of Akzo Nobel Pharma Group. The Company received $3.1 million in 1994 in
connection with this initial license agreement. In November 1996, the Company
renegotiated the license agreement. Under the terms of the new license
agreement the Company received $2.5 million in November 1996 and will receive
an additional $2.5 million in November 1997.
In December 1996, the Company received $4 million from HMR upon execution of
a letter of intent to license the Company's gene activation technology to HMR
for erythropoietin (EPO) and a second undisclosed protein. The agreement
provides for milestone payments and fees, in addition to royalties on any
future sales of these two potential gene-activated protein products, subject
to signature of the license agreement. That amount is included in deferred
revenue as of December 31, 1996. In February 1997, the definitive agreement
was executed.
In March 1997, the Company signed a comprehensive patent cross-license
agreement with GenPharm for human monoclonal antibody and certain gene therapy
technology. This agreement is more fully described in Note 8.
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the Company's available-for-sale securities at
December 31, 1996 and 1995, respectively (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1996 --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and its Agencies...... $53,955 $ 14 $(115) $53, 854
Corporate Notes....................... 4,854 7 (25) 4,836
Commercial Paper...................... 5,958 1 -- 5,959
------- ---- ----- --------
Short-term investments................ $64,767 $ 22 $(140) $64,649
======= ==== ===== ========
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1995 --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and its Agencies...... $54,247 $295 $ (26) $54,516
Corporate Notes....................... 10,152 31 -- 10,183
Commercial Paper...................... 11,900 119 -- 12,019
------- ---- ----- --------
$76,299 $445 $ (26) $76,718
======= ==== ===== ========
Classified as:
Cash equivalents..................... 2,970 9 -- 2,979
Short-term investments............... 73,329 436 (26) 73,739
------- ---- ----- --------
$76,299 $445 $ (26) $76,718
======= ==== ===== ========
</TABLE>
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net unrealized holding loss on these securities at December 31, 1996 is
$118,000 and is included in the Company's accumulated deficit. Gross realized
gains recorded on sales of available-for-sale securities were approximately
$154,000 for the year ended December 31,1996. There were no realized losses
for the same period. Gross realized gains and losses recorded on sales of
available-for-sale securities were immaterial for the year ended December 31,
1995.
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1996, by contractual maturity, are shown below (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less.................................. $38,375 $38,316
Due after one through two years.......................... 26,392 26,333
------- -------
$64,767 $64,649
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Furniture and equipment under equipment financing......... $ 10,554 $ 9,642
Machinery and equipment................................... 3,553 2,495
Leasehold improvements under financing.................... 3,001 3,001
Leasehold improvements.................................... 4,582 3,450
Construction in progress.................................. 3,061 --
-------- -------
24,751 18,588
Accumulated depreciation and amortization................. (12,266) (8,556)
-------- -------
$ 12,485 $10,032
======== =======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Property and Equipment Financing
As of December 31, 1996 the Company has $13.6 million of property and
equipment financed through long-term obligations. These obligations bear
interest ranging from 10 to 14 percent, have up to 5 year terms and contain
various buy-out provisions at term expiration. These obligations are secured
by certain fixed assets at the Company and by certain deposits. Under these
obligations, the Company is required to meet various financial covenants with
which it was in compliance at December 31, 1996.
Future principal payments under property and equipment financing are as
follows as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1997............................................................... $2,963
1998............................................................... 2,323
1999............................................................... 2,543
2000............................................................... 827
2001............................................................... 299
------
Total principal payments............................................ 8,955
Current portion of property and equipment financing................. (2,822)
------
Noncurrent portion of property and equipment financing.............. $6,133
======
</TABLE>
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rental Commitments
The Company leases its facilities and other equipment under noncancelable
operating leases. The leases expire at various dates through 2007 and some
contain options for renewal. Rent expense under operating leases was $1.8
million in 1996 ($1.3 million in 1995 and $1.2 million in 1994).
Future minimum payments under noncancelable operating leases at December 31,
1996 are (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997............................................................. $ 2,766
1998............................................................. 1,031
1999............................................................. 891
2000............................................................. 923
2001............................................................. 955
2002 and thereafter.............................................. 5,347
-------
$11,913
=======
Litigation
In February 1994, the Company filed a complaint against GenPharm
International, Inc. ("GenPharm") alleging that GenPharm and its agents
misappropriated Cell Genesys' proprietary technology used to develop strains of
mice which produce human antibodies and that GenPharm unlawfully filed patent
applications covering this technology. In March 1994, GenPharm filed an answer
and cross complaint generally denying the allegations of the complaint and
alleging abuse of process, unfair competition and interference with prospective
advantage and seeking compensatory and punitive damages, an injunction and
attorneys fees. In October 1996, GenPharm dismissed its cross complaint. One
aspect of the technology at issue related to a method for inactivating a
mouse's antibody genes. On January 7, 1997, GenPharm received a patent (the
"'669 patent") which includes claims related to transgenic mice whose antibody
genes have been inactivated. On that same date, GenPharm filed suit alleging
that the Company's subsidiary, Abgenix, was infringing the '669 patent. In
light of these developments, the Company dismissed without prejudice its state
court action against GenPharm in January 1997.
The complaint filed by GenPharm alleging infringement of the '669 patent has
been consolidated with an action previously filed by GenPharm against Abgenix
in October 1996. This action alleges that Abgenix is infringing GenPharm
patents which relate to technology used to create transgenic mice capable of
producing human antibodies. Cell Genesys and Abgenix have filed patent
applications in the United States and Europe relating to their transgenic
technology used to produce human antibodies. In 1995, Cell Genesys' European
patent related to this technology was allowed.
In February 1996, GenPharm filed an antitrust suit against the Company
alleging that Cell Genesys violated the Federal antitrust laws when it filed
the state court action against GenPharm in February 1994. GenPharm sought
treble damages, attorneys' fees and costs for suit. The Court granted Cell
Genesys' motion to dismiss this lawsuit and entered a judgment of dismissal
without prejudice in December 1996. In January 1997, GenPharm filed an appeal
of this judgment.
On March 27, Cell Genesys announced that, along with Abgenix and JTI, it had
signed a comprehensive patent cross-license and settlement agreement with
GenPharm that resolved all related litigation and claims between the parties.
See Note-8, Subsequent Events.
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options is not below the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
1989 Incentive Stock Plan
The 1989 Incentive Stock Plan ("the Plan") provides for the issuance of
common stock and granting of options for common stock to employees, officers,
directors and consultants of the Company. The Company grants shares of common
stock for issuance under the plan at no less than the fair market value of the
stock (85% of fair market value for non-qualified options). Options granted
under the Plan have a maximum term of ten years and generally vest over four
years at the rate of 25% one year from the grant
date and 1/48 monthly thereafter.
Effective April 1995, the Company offered employees holding outstanding
options the opportunity to exchange each option share for one option share
priced at $7, which approximated 110% of the average market value for a
certain recent trading period. Vesting of the new options re-started upon the
exchange and vest over a four-year period. As a result of the offer, 1,053,000
options were exchanged which are included in the table below.
Information with respect to the Plan activity for the years ending December
31, 1995, and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 2,496 $7.45 2,539 $4.83
Granted.................................. 1,657 6.52 838 9.70
Exercised................................ (181) 2.51 (484) 2.29
Canceled................................. (1,433) 11.67 (558) 8.01
------ -----
Outstanding at end of year............... 2,539 4.83 2,335 6.36
====== =====
Options exercisable at year-end.......... 1,234 1,313
Weighted-average fair value of options
granted during the year................. $3.91 $5.97
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES (000) LIFE PRICE (000) PRICE
------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.05-- 1.50 331 4.5 years $ 1.00 331 $ 1.00
$ 3.00-- 4.38 381 6.7 years $ 3.30 308 $ 3.15
$ 5.13-- 6.75 313 8.5 years $ 6.43 125 $ 6.37
$ 7.00--10.13 1,254 8.6 years $ 8.38 498 $ 7.98
$11.00--19.50 56 6.6 years $12.11 51 $12.16
</TABLE>
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Abgenix Incentive Stock Plan
In connection with the formation of the Company's subsidiary, Abgenix, Inc.,
a stock option plan ("the Abgenix Plan") was created which provides for the
issuance of Abgenix common stock and granting of options for Abgenix common
stock to employees, officers, directors and consultants of Abgenix. Also, as
part of the initial formation of Abgenix, eligible Cell Genesys employees
received a one-time grant of options under the Abgenix Plan. Abgenix grants
shares of common stock for issuance under the plan at no less than the fair
market value of the stock (85% of fair market value for non-qualified
options). Options granted under the Abgenix Plan generally vest over four
years at the rate of 25% one year from the grant
date and 1/48 monthly thereafter.
Information with respect to the Abgenix Plan activity from the date of
inception (July 15, 1996) to December 31, 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
(000) EXERCISE PRICE
------ --------------
<S> <C> <C>
Granted............................................... 1,201 $0.60
Exercised............................................. (1) $0.60
Canceled.............................................. (13) $0.60
-----
Outstanding at end of year............................ 1,187 $0.60
=====
Options exercisable at year-end....................... 108 $0.60
Weighted-average fair value ofoptions granted during
the year............................................. $0.37
</TABLE>
Pro forma information
Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options and those of its subsidiary, Abgenix, under the
fair value method of that Statement. The fair value of Cell Genesys' options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions for 1995 and 1996, respectively: risk-free
interest rates of 7.30% and 5.29%; no dividend yields; volatility factors of
the expected market price of the Company's common stock of 0.68 for both
years; and an expected life of the option of 5 years. The fair value of
Abgenix options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for 1996: risk-free
interest rate of 6.65%; no dividend yield; volatility factors of the expected
market price of the Company's common stock of 0.68; and an expected life of
the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
following table illustrates what net loss would have been had the Company
accounted for its stock options under the provisions of FAS 123. Because
Statement 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1998.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
IN THOUSANDS (EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss As reported $ 9,274 $4,988
Pro forma 11,028 5,787
Net loss per
share As reported $ (0.57) $(1.07)
Pro forma $ (0.67) $(1.13)
</TABLE>
1992 Employee Stock Purchase Plan
The 1992 Employee Stock Purchase Plan (the "Purchase Plan") allows eligible
employees to participate and purchase common stock at 85% of its fair value at
certain specified dates. Employee contributions are limited to 10% of
compensation. A total of 500,000 shares of common stock have been reserved for
issuance under the Purchase Plan. As of December 31, 1996, 176,788 shares have
been issued pursuant to the Purchase Plan. The estimated fair value, pursuant
to Statement 123, of stock purchases under the Purchase Plan is immaterial and
thus excluded from the pro forma net loss disclosure above.
Stockholder Rights Plan
In July 1995, the Board of Directors approved a stockholder rights plan
under which stockholders of record on August 21, 1995 received one preferred
share purchase right for each outstanding share of the Company's Common Stock.
The rights are exercisable only if an acquirer purchases 20% or more of the
Company's Common Stock or announces a tender offer for 20% or more of the
Company's Common Stock. Upon exercise, holders other than the acquirer may
purchase Cell Genesys stock at a discount. The Board of Directors may
terminate the rights plan at any time or under certain circumstances redeem
the rights.
Warrants
As part of certain financing and contract arrangements and in connection
with its collaboration with HMR, the Company has warrants outstanding for the
purchase of common stock as follows: i) a warrant for the purchase of 30,000
shares, exercisable at $7.00 per share, expiring in June 1997, ii) warrants
for the purchase of 81,429 shares, exercisable at $8.05 per share, which
expire in August 1997, and iii) a warrant for the purchase of 750,000 shares,
exercisable at $13.00 per share, which expires in 2000.
7. INCOME TAXES
At December 31, 1996, the Company had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$52 million and $2 million, respectively, which expire in the years 2003
through 2011.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards...................... $ 17,900 $ 12,300
Research credits...................................... 2,500 2,200
Capitalized research expenses......................... 2,200 3,200
Other-net............................................. 1,200 1,900
-------- --------
Total deferred tax assets............................ 23,800 19,600
Valuation allowance for deferred tax assets........... (23,800) (19,600)
-------- --------
Total deferred tax assets............................ $ -- $ --
======== ========
</TABLE>
During 1996, 1995, and 1994, the valuation allowance for deferred tax assets
increased by $4.5 million, $4.5 million and $7.3 million, respectively.
Approximately $1.5 million of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
8. SUBSEQUENT EVENTS
Merger with Somatix
On January 13, 1997, the Company signed a merger agreement with Somatix
Therapy Corporation ("Somatix"). Under the terms of the agreement, Somatix
will become a wholly-owned subsidiary of Cell Genesys in a tax-free
reorganization and stock-for-stock merger. Pending approval by stockholders of
both companies, Somatix stockholders will receive 0.385 shares of Cell Genesys
stock for each share of Somatix stock. The merger is expected to be accounted
for as a purchase and substantially all of the purchase price is expected to
be allocated to in-process-acquired technology and charged as a non-cash
expense item in the quarter in which the acquisition is effective, expected to
be the second quarter of 1997. Based on the number of shares of Somatix common
and preferred stock outstanding at December 31, 1996, it is expected that the
Company will issue approximately 10.6 million shares of common stock to effect
the merger.
Cross License and Litigation Settlement (unaudited)
On March 27, 1997, the Company announced that, along with Abgenix, Xenotech
and JTI, it had signed a comprehensive patent cross-license and settlement
agreement with GenPharm that resolved all related litigation and claims
between the parties. The cross-license agreement includes a worldwide royalty
free cross-license to all issued and related patent applications pertaining to
the generation of fully human monoclonal antibody technologies in genetically
modified strains of mice. The Company also obtained a license to certain
technology in the field of gene therapy held by GenPharm. As consideration for
the settlement and cross-license agreement, Cell Genesys agreed to issue a
note due September 30, 1998 for $15 million, convertible into shares of Cell
Genesys common stock at $9.00 per share. The conversion price is subject to
adjustment in twelve months. In addition, Japan Tobacco agreed to make a cash
payment to GenPharm. The agreement also calls for two milestone payments of
$7.5 million each based on the issuance certain patents in the future. These
payments would be made by Xenotech, L.P., which is an equal joint venture of
Abgenix and Japan Tobacco.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information required by this Item concerning the Company's directors
is incorporated by reference from the sections captioned "Proposal Four:
Election Of Directors" in the Company's Proxy Statement related to the 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the Company's fiscal year end (the "1997
Proxy Statement").
(b) The information required by this Item concerning the Company's executive
officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Employment Contract," "Executive Compensation,"
"Compensation Committee Report on Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Compensation of
Directors" in the Company's 1997 Proxy Statement are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Stock Ownership of Principal Stockholders and
Management" in the Company's 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Transactions" in the Company's 1997 Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Balance Sheets at December 31, 1996 and 1995.......................... 20
Statements of Operations for the years ended December 31, 1996, 1995,
and 1994............................................................. 21
Statement of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.................................................. 22
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994............................................................. 23
Notes to Financial Statements......................................... 24-32
</TABLE>
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is
included in the financial statements or notes thereto.
33
<PAGE>
3. EXHIBITS
NUMBER
2.1* (10) Stock Purchase Agreement, dated as of October 9, 1995, between
the Registrant and Hoechst Marion Roussel, Inc.
2.2 (17) Agreement and plan of merger and reorganization, dated as of
January 12, 1997, among Registrant, S Merger Corp. and Somatix
Therapy Corporation.
3.1 (2) Restated Certificate of Incorporation.
3.2 (1) Bylaws.
10.1 (1) Form of Indemnification Agreement for Directors and Officers.
10.2 (14) Amended 1989 Incentive Stock Plan.
10.3 (14) Amended 1992 Employee Stock Purchase Plan.
10.4 (1) Representative Preferred Stock Purchase Agreement.
10.5 (1) Fourth Amended and Restated Stockholder Rights Agreement.
10.7* (1) License Agreement dated August 13, 1990 between Registrant and
the University of North Carolina at Chapel Hill.
10.7(a) (1) First page only of Exhibit 10.7.
10.8(b)* (9) Amended and Restated Exclusive License Agreement dated
September 5, 1995 between the Company and the Regents of the
University of California.
10.9* (1) License Agreement dated June 28, 1991 between Registrant and
the University of Utah Research Foundation.
10.9(a)* (1) First page only of Exhibit 10.9.
10.11* (1) Joint Venture Agreement dated June 12, 1991 between Registrant
and JT Immunotech USA Inc. (without certain exhibits, which are
filed separately).
10.11(a) (1) First page only of Exhibit 10.11.
10.11(b)* (4) Amendment No. 1 dated January 1, 1994 to Joint Venture
Agreement (Exhibit 10.11).
10.12* (1) Limited Partnership Agreement dated June 12, 1991 among
Registrant, Xenotech, Inc. and JT Immunotech USA Inc. (without
certain exhibits, which are filed separately).
10.12(a) (1) First page only of Exhibit 10.12.
10.12(b)* (4) Amendment No. 2 dated January 1, 1994 to Limited Partnership
Agreement (Exhibit 10.12).
10.12(c) (8) Amendment No. 3 dated July 1, 1995 to Limited Partnership
Agreement (Exhibit 10.12).
10.13* (1) Collaboration Agreement dated June 12, 1991 among Registrant,
Xenotech, Inc. and JT Immunotech USA Inc. (without certain
exhibits, which are filed separately).
10.13(a)* (1) First page only of Exhibit 10.13 and first page of Exhibit C
to Exhibit 10.13 only.
10.13(b)* (3) Amendment No. 1 dated June 30, 1993 to Collaboration Agreement
(Exhibit 10.13).
10.13(c) (4) Amendment No. 2 dated January 1, 1994 to Collaboration
Agreement (Exhibit 10.13).
10.13(d)* (8) Amendment No. 3 dated July 1, 1995 to Collaboration Agreement
(Exhibit 10.13).
10.14 (1) Field License dated June 12, 1991 among Registrant, JT
Immunotech USA Inc. and the Partnership (Xenotech, L.P.).
10.15* (1) Expanded Field License dated June 12, 1991 among Registrant, JT
Immunotech USA Inc. and the Partnership (Xenotech, L.P.).
10.15(a) (1) First page only of Exhibit 10.15.
10.19* (1) License Agreement dated June 17, 1992 between Registrant and
The Dana-Farber Cancer Institute.
10.19(a)* (4) Amendment No. 1 dated December 15, 1993 to License Agreement
between Registrant and the Dana-Farber Cancer Institute
(Exhibit 10.19).
10.20 (2) Amended Employment Agreement with Stephen A. Sherwin, M.D.
10.21 (3) Master Loan and Security Agreement dated April 26, 1993 between
Registrant and Financing for Science International, Inc.
10.21(a) (4) Commitment Letter dated March 1, 1994 between Registrant and
Financing for Science International, Inc.
10.21(b) (5) Amendment dated April 25, 1994 to Commitment Letter with
Financing for Science International, Inc.
10.21(c) (8) Commitment Letter dated April 20, 1995 between the Company and
Financing for Science International, Inc.
10.21(d) (14) Amendment dated January 22, 1996 to Commitment Letter with
Financing for Science International, Inc.
34
<PAGE>
10.22* (4) Assignment of Dana-Farber Cancer Institute License Agreement
dated December 31, 1993 between Registrant and Xenotech L.P.
(Exhibit A was previously filed as Exhibit 10.19).
10.23* (4) Master Research and License Agreement dated January 1, 1994
between Registrant, Japan Tobacco Inc. and Xenotech L.P.
10.24* (4) Xenotech Division Research Agreement dated January 1, 1994
between Registrant, Xenotech L.P. and JT Immunotech USA Inc.
10.24(a) (7) Amendment No. 1 dated as of January 19, 1995 to Xenotech
Division Research Agreement (Exhibit 10.24).
10.26 (6) Research and Development Leases dated November 1, 1994 between
Registrant and Vintage Park Associates and addendums thereto.
10.27* (11) Collaboration Agreement, dated as of October 9, 1995, by and
among the Registrant, Hoechst Aktiengesellschaft and Hoechst
Marion Roussel, Inc., including the letter agreement dated as
of October 9, 1995 between the parties.
10.28* (12) Cross License Agreement, dated as of October 9, 1995, between
the Registrant and Hoechst Aktiengesellschaft.
10.29* (13) Settlement Procedure Agreement, dated as of October 9, 1995, by
and among the Registrant, Hoechst Aktiengesellschaft and
Massachusetts General Hospital.
10.1 (15) Reassignment dated January 1, 1996 of Dana-Farber Cancer Institute
License Agreement between Registrant and Xenotech L.P.
10.30 (15) Reassignment dated January 1, 1996 of Dana-Farber Cancer
Institute License Agreement between Registrant and Xenotech
L.P.
10.31 (15) Amendment No. 1 dated March 22, 1996 to Field License (Exhibit
10.14).
10.32 (15) Amendment No. 2 dated June 28, 1996 to Field License (Exhibit
10.14).
10.33 (15) Amendment No. 1 dated June 28, 1996 to Expanded Field License
(Exhibit
10.34* (15) Amendment No. 2 dated June 28, 1996 to Joint Venture Agreement
(Exhibit 10.11).
10.35 (15) Amendment No. 4 dated June 28, 1996 to Limited Partnership
Agreement (Exhibit 10.12).
10.36* (15) Amendment No. 4 dated June 28, 1996 to Collaboration Agreement
(Exhibit 10.13).
10.37* (15) Agreement dated June 28, 1996 to Terminate Xenotech Division
Research Agreement between Registrant, Xenotech L.P. and JT
Immunotech USA Inc.
10.38* (15) Master Research License and Option Agreement dated June 28, 1996
between Registrant, Japan Tobacco Inc. and Xenotech L.P.
10.39* (15) Universal Receptor License and Option Agreement dated June 28,
1996 between Registrant and Xenotech L.P.
10.40 (16) Amendment No. 1 dated June 7, 1996 to Vintage Park Research and
Development Lease.
10.41 (16) Lease Agreement dated July 31, 1996 between Abgenix, Inc. and
John Arrillaga and Richard T. Peery
10.42 (18) Stock Option Agreement, dated as of January 12, 1997, between
Somatix Therapy Corporation, as grantor, and Registrant, as
grantee.
10.43 (19) Stock Option Agreement, dated as of January 12, 1997, between
Registrant, as grantor, and Somatix Therapy Corporation, as
grantee.
10.44* Release and Settlement Agreement, dated March 26, 1997, among
Cell Genesys, Inc., Abgenix, Inc., Xenotech, L.P., Japan
Tobacco Inc. and GenPharm International, Inc.
10.45* Cross License Agreement, effective as of March 26, 1997, among
Cell Genesys, Inc., Abgenix, Inc., Xenotech, L.P., Japan
Tobacco Inc. and GenPharm International, Inc.
10.46* Interference Settlement Procedure Agreement, effective as of
March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,
Xenotech, L.P., Japan Tobacco Inc. and GenPharm International,
Inc.
10.47 Convertible Note Purchase Agreement, dated as of March 26,
1997, between Cell Genesys, Inc. and GenPharm International,
Inc.
10.48 Convertible Subordinated Promissory Note, dated March 26, 1997,
made by Cell Genesys, Inc. to the order of GenPharm
International, Inc.
23.1(20) Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Reference is made to page 38).
27.1(20) Financial Data Schedule
99.1 Financial Statements of Xenotech, L.P.
35
<PAGE>
* Confidential treatment has been granted with respect to specified portions
of this exhibit.
(1) Incorporated by reference to the same numbered exhibit filed
with the Company's Registration Statement on Form S-1 (Reg. No.
33-46452) as amended.
(2) Incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
(3) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993.
(4) Incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
(5) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994.
(6) Incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
(7) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
(8) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(9) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995.
(10) Incorporated by reference to the same numbered exhibit filed
with the Company's Form 8-K dated October 9, 1995.
(11) Incorporated by reference to Exhibit 10.1 filed with the
Company's Form 8-K dated October 9, 1995.
(12) Incorporated by reference to Exhibit 10.2 filed with the
Company's Form 8-K dated October 9, 1995.
(13) Incorporated by reference to Exhibit 10.3 filed with the
Company's Form 8-K dated October 9, 1995.
(14) Incorporated by reference to the same numbered exhibit filed
with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(15) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996.
(16) Incorporated by reference to the same numbered exhibit filed
with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
(17) Incorporated by reference to Exhibit 2.1 filed with the
Company's Form 8-K dated January 12, 1997.
(18) Incorporated by reference to Exhibit 10.1 filed with the
Company's Form 8-K dated January 12, 1997.
(19) Incorporated by reference to Exhibit 10.2 filed with the
Company's Form 8-K dated January 12, 1997.
(20) Incorporated by reference with the Company's 10-K for the
fiscal year ended December 31, 1996 as filed March 31, 1997.
(b) REPORTS ON FORM 8-K
The Company reported on Form 8-K dated January 12, 1997, the signing of a
merger agreement with Somatix Therapy Corporation.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized:
CELL GENESYS, INC.
Registrant
By: /s/ KATHLEEN SEREDA GLAUB
-------------------------------
Kathleen Sereda Glaub
Senior Vice President and
Chief Financial Officer
(Principal Accounting
Officer)
Date: April 29, 1997
37
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kathleen Sereda Glaub and Stephen A. Sherwin,
M.D., jointly and severally, as his or her attorneys-in-fact, each with full
power of substitution, for him or her, in any and all capacities, to sign each
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his or her substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN A. SHERWIN Chairman, President and March 31, 1997
________________________________ Chief Executive Officer
STEPHEN A. SHERWIN, M.D. (Principal Executive
Officer)
/s/ KATHLEEN SEREDA GLAUB Senior Vice President and March 31, 1997
________________________________ Chief Financial Officer
KATHLEEN SEREDA GLAUB (Principal Financial and
Accounting Officer)
/s/ JAMES GOWER Director March 31, 1997
________________________________
JAMES GOWER
/s/ PETER BARTON HUTT Director March 31, 1997
________________________________
PETER BARTON HUTT
/s/ RAJU S. KUCHERLAPATI Director March 31, 1997
________________________________
RAJU S. KUCHERLAPATI, PH.D.
/s/ JOSEPH E. MAROUN Director March 31, 1997
________________________________
JOSEPH E. MAROUN
/s/ EUGENE L. STEP Director March 31, 1997
________________________________
EUGENE L. STEP
</TABLE>
38
<PAGE>
1163-AR-97
<PAGE>
The symbol "**" is used throughout this exhibit to indicate that a portion of
the exhibit has been omitted and filed separately with the Commission.
Exhibit 10.44
-------------
RELEASE AND SETTLEMENT AGREEMENT
This Release and Settlement Agreement (the "Agreement"), dated March
26, 1997 (the "Effective Date"), is made by and among CELL GENESYS, INC., a
Delaware corporation ("Cell Genesys"), ABGENIX, INC., a Delaware corporation and
subsidiary of Cell Genesys ("Abgenix"), XENOTECH, L.P., a California limited
partnership ("Xenotech"), JAPAN TOBACCO INC., a Japanese corporation ("Japan
Tobacco"), and GENPHARM INTERNATIONAL, INC., a California corporation
("GenPharm"). Cell Genesys, Abgenix, Japan Tobacco, Xenotech and GenPharm are
referred to collectively as the "Parties."
RECITALS
WHEREAS, Cell Genesys, Abgenix, Xenotech and Japan Tobacco, on the one
hand, and GenPharm, on the other hand, each desires to settle any and all claims
and, as part of that settlement, will enter into a patent cross-license.
NOW THEREFORE, for and in consideration of the covenants, conditions
and undertakings hereunder set forth, it is agreed by and among the Parties as
follows:
1. CONSIDERATION. Simultaneously with the execution of this Agreement:
<PAGE>
1.1 Cross License Agreement. The Parties are entering into a patent cross
-----------------------
license in the form attached hereto as Exhibit A.
1.2 Sublicense Agreement. GenPharm and Cell Genesys are entering into a
--------------------
sublicense agreement in the cell mediated therapy field in the form attached
hereto as Exhibit B.
1.3 Dismissal of Infringement Actions. GenPharm is delivering to Abgenix,
---------------------------------
for filing with the United States District Court for the Northern District of
California, executed requests in the form attached hereto as Exhibit C for
dismissal with prejudice of the suit filed by GenPharm against Abgenix in the
United States District Court for the Northern District of California on October
24, 1996 (Case No. C-96-3861 CW, styled GenPharm International, Inc. v. Abgenix,
----------------------------------------
Inc.) and the suit filed by GenPharm against Abgenix in the United States
- ----
District Court for the Northern District of California on January 7, 1997 (Case
No. C-97-0058 CW, styled GenPharm International, Inc. v. Abgenix, Inc.). Each
---------------------------------------------
party shall bear its own costs.
1.4 Dismissal of Antitrust Appeal. GenPharm is delivering to Cell Genesys
-----------------------------
and Japan Tobacco by delivery to O'Melveny & Myers for filing, promptly upon
receipt of the payments under Section 1.6 of this Agreement and Section 3.1 of
the Cross License Agreement, with the United States Court of Appeals for the
Ninth Circuit, an executed agreement in the form attached hereto as Exhibit D
for the dismissal with prejudice of the
2
<PAGE>
appeal currently pending before the United States Court of Appeals for the Ninth
Circuit (Docket No. 97-15108) of the dismissal by the United States District
Court for the Northern District of California of the suit filed by GenPharm
against Cell Genesys and Japan Tobacco (Case No. C-96-0487 CW, styled GenPharm
--------
International, Inc. v. Japan Tobacco Inc., et al.). Each party shall bear its
- -------------------------------------------------
own costs.
1.5 Interference Settlement Procedure Agreement. The Parties are entering
-------------------------------------------
into an agreement regarding potential interference proceedings in the United
States, the terms of which are attached hereto as Exhibit E.
1.6 Payment. In partial consideration of this Agreement, Japan Tobacco
-------
will pay GenPharm [**] within fifteen business days of the Effective Date of
this Agreement. Time shall be of the essence with respect to the time period for
this payment. Upon payment, GenPharm shall promptly provide a written
acknowledgment thereof to Japan Tobacco.
1.7 No Deduction or Set-off, etc. All payments under Section 1.6 shall be
----------------------------
made without any set-off and without deduction whatsoever for or on account of
any non-United States taxes or similar governmental charges or costs of
transfer.
[**] Confidential Treatment Requested
3
<PAGE>
2. RELEASES.
2.1 GenPharm's Release. GenPharm hereby releases Cell Genesys, Abgenix,
------------------
Xenotech and Japan Tobacco, and their successors and assigns, parents,
subsidiaries, divisions, affiliated corporations, directors, officers,
shareholders, agents, representatives, employees, consultants and attorneys,
past and present, and each of them, from all claims, duties, obligations or
causes of action, known or unknown, suspected or unsuspected, concealed or not,
arising prior to the date of this Agreement. This release includes, but is not
limited to, claims for damages, equitable relief, costs and fees related to
allegations of patent infringement, trade secret misappropriation, unfair
business practices, abuse of process, malicious prosecution, breach of contract,
and violation of federal or state antitrust laws. This release shall, at
GenPharm's option, be void nunc pro tunc, if, by fifteen business days following
---- --- ----
the Effective Date, the payments provided in Section 1.6 of this Agreement and
Section 3.1 of the Cross License Agreement have not been made. Time shall be of
the essence with respect to the time period for these payments.
2.2 Cell Genesys' and Abgenix' Release. Cell Genesys and Abgenix hereby
----------------------------------
each releases GenPharm, and its successors and assigns, parents, subsidiaries,
divisions, affiliated corporations, directors, officers, shareholders, agents,
representatives, employees, consultants and attorneys, past and
4
<PAGE>
present, and each of them, from all claims, duties, obligations or causes of
action, known or unknown, suspected or unsuspected, concealed or not, arising
prior to the date of this Agreement. This release includes, but is not limited
to, claims for damages, equitable relief, costs and fees related to allegations
of patent infringement, trade secret misappropriation, unfair business
practices, abuse of process, malicious prosecution, breach of contract, and
violation of federal or state antitrust laws.
2.3 Xenotech's Release. Xenotech hereby releases GenPharm, and its
------------------
successors and assigns, parents, subsidiaries, divisions, affiliated
corporations, directors, officers, shareholders, agents, representatives,
employees, consultants and attorneys, past and present, and each of them, from
all claims, duties, obligations or causes of action, known or unknown, suspected
or unsuspected, concealed or not, arising prior to the date of this Agreement.
This release includes, but is not limited to, claims for damages, equitable
relief, costs and fees related to allegations of patent infringement, trade
secret misappropriation, unfair business practices, abuse of process, malicious
prosecution, breach of contract, and violation of federal or state antitrust
laws.
2.4 Japan Tobacco's Release. Japan Tobacco hereby releases GenPharm, and
-----------------------
its successors and assigns, parents, subsidiaries, divisions, affiliated
corporations, directors, officers, shareholders, agents, representatives,
employees, consultants and
5
<PAGE>
attorneys, past and present, and each of them, from all claims, duties,
obligations or causes of action, known or unknown, suspected or unsuspected,
concealed or not, arising prior to the date of this Agreement. This release
includes, but is not limited to, claims for damages, equitable relief, costs and
fees related to allegations of patent infringement, trade secret
misappropriation, unfair business practices, abuse of process, malicious
prosecution, breach of contract, and violation of federal or state antitrust
laws.
2.5 Civil Code (S) 1542. In order to make the releases set forth in
-------------------
Sections 2.1, 2.2, 2.3 and 2.4 hereof effective as to unknown, unsuspected or
concealed claims, Cell Genesys, Abgenix, GenPharm, Xenotech and Japan Tobacco
each expressly waives the benefits of California Civil Code (S) 1542:
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.
Cell Genesys, Abgenix, GenPharm, Xenotech and Japan Tobacco have each been
advised by their respective legal counsel and understand the significance of
this waiver of California Civil Code (S) 1542 relating to unknown, unsuspected
and concealed claims.
6
<PAGE>
3. SETTLEMENT; NO ADMISSION. This Agreement in part constitutes a settlement
of disputed claims. By entering into this Agreement and documents referred to
in Article 1 hereof, none of the Parties admits any wrongdoing, liability or the
merit or lack of merit of any claims or defenses arising from or in connection
with any past or pending litigation between or among any of the Parties. The
Parties agree that this Agreement and documents referred to in Article 1 hereof
shall not be offered or used as evidence of liability nor as an admission of
liability, responsibility or wrongdoing, at any time in any proceeding
whatsoever.
4. CONFIDENTIALITY; PUBLICITY.
4.1 Japan Tobacco, Abgenix, Xenotech and Cell Genesys, on the one hand,
and GenPharm, on the other hand, each agree that it will make no assertion of
wrongdoing against the other in connection with any claim released hereunder,
notwithstanding the allegations set forth in any past or pending litigation
between or among any of the Parties.
4.2 The Parties shall keep the terms of this Agreement confidential except
where disclosure is required by law, legal process or tax purposes or where the
disclosure is made pursuant to an undertaking or understanding of
confidentiality.
7
<PAGE>
4.3 Each of the Parties agrees that, if it chooses to make a public
announcment of this Agreement, it shall issue at a coordinated time the joint
announcement attached hereto as Exhibit F. The Parties agree, and agree to
cause their directors, officers and attorneys, not to make any statements to the
media inconsistent with the joint announcement and the undertaking set forth in
Section 4.1 above.
4.4 The Parties agree that nothing herein shall limit the discretion of
any Party to give references with respect to the activities of its employees,
past or present. No breach, or alleged breach, of any provision of Section 3 or
this Section 4 shall be deemed to be so material a breach of this Agreement, or
of any of the documents being executed contemporaneously herewith, as to provide
a basis for termination or cancellation of this Agreement, or of any of the
documents being executed contemporaneously herewith, or of any part of any of
them. No Party shall have the right of setoff by reason of any breach, or
alleged breach, of any provision of Section 3 or this Section 4.
4.5 Notwithstanding anything in this Section 4, each Party may disclose to
its shareholders (and its directors may disclose to the general and limited
partners of investment funds that are shareholders of such Party, if applicable)
the payments to be made by the Parties under this Agreement and the documents
that are referred to in Article 1 hereof and the exhibits to such documents, the
contingencies and other material terms with
8
<PAGE>
respect to future payments described in Section 3.2 of the Cross License
Agreement, and the terms of the convertible subordinated promissory note of Cell
Genesys, as well as any other information disclosed publicly by any of the other
Parties, including disclosures to public shareholders or in publicly available
government filings.
5. NOTICE. Any notice required or permitted to be given to the Parties hereto
shall be given in writing and shall be deemed to have been properly given if
delivered in person or when received if mailed by first class certified mail to
the other party at the appropriate address as set forth below or to such other
addresses as may be designated in writing by the parties from time to time
during the term of this Agreement.
Xenotech: Xenotech, L.P.
7601 Dumbarton Circle
Fremont, CA 94555
Attn: Chief Financial Officer
Japan Tobacco Inc.: Japan Tobacco Inc.
JT Building
2-1 Toranomon 2-chome
Minato-ku, Tokyo 105
Japan
Attn: Vice President,
Pharmaceutical Division
with a copy to: JT America Inc.
1825 South Grant Street, Suite 220
San Mateo, CA 94402
Attn: President
9
<PAGE>
and to: Gilbert, Segall and Young LLP
430 Park Avenue
New York, NY 10022
Attn: Neal N. Beaton, Esq.
Cell Genesys, Inc.: Cell Genesys, Inc.
342 Lakeside Drive
Foster City, California 94404
Attn: President and CEO
with a copy to: O'Melveny & Myers
275 Battery Street
San Francisco, California 94111
Attn: George A. Riley, Esq.
Abgenix, Inc. Abgenix, Inc.
7601 Dumbarton Circle
Fremont, CA 94555
Attn: President and CEO
with a copy to: O'Melveny & Myers
275 Battery Street
San Francisco, California 94111
Attn: George A. Riley, Esq.
GenPharm International, GenPharm International, Inc.
Inc. 855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
6. MISCELLANEOUS.
6.1 No Prior Transfer. Each of the Parties represents and warrants that
-----------------
they have not previously transferred any claim released in this Agreement.
6.2 Complete Agreement; Amendments. This Agreement, together with the
------------------------------
Exhibits hereto, is complete. There are no warranties, representations,
agreements or understandings not set forth in it. Any prior negotiations,
statements, representations or agreements that are inconsistent with any
provision in this
10
<PAGE>
Agreement are merged into and superseded by this Agreement, and neither
GenPharm, Japan Tobacco, Cell Genesys, Xenotech nor Abgenix has relied on any
representation or promise, oral or otherwise, which is not set forth in this
Agreement. This Agreement may only be amended, modified, waived or terminated
by a writing signed and delivered by authorized representatives of each of the
Parties, which writing specifically refers to this Agreement.
6.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original.
6.4 Governing Law. This Agreement is to be governed by and construed
-------------
under the laws of the State of California, without regard to conflicts of law
principles.
6.5 Attorneys' Fees. Each Party shall bear its own costs, including
---------------
attorneys' fees incurred in the negotiation and execution of this Agreement.
6.6 Heirs, Successors and Assigns. This Agreement shall be binding upon
-----------------------------
and inure to the benefit of the heirs, successors, representatives and permitted
assigns of the Parties.
6.7 No Party Drafter. The Parties each warrant, represent and agree that,
----------------
in executing and delivering this Agreement, it has done so freely and
voluntarily, with independent legal advice
11
<PAGE>
from its attorneys, and that this Agreement shall not be construed against any
Party on the basis that such Party drafted it.
6.8 Severable. In the event that any provision of this Agreement becomes,
---------
or is declared by a court of competent jurisdiction to be, illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision and the Parties shall discuss in good faith appropriate
revised arrangements.
6.9 Authority to Execute. This Agreement and all documents, certificates
--------------------
and instruments executed or to be executed by GenPharm, Japan Tobacco, Abgenix,
Xenotech or Cell Genesys in furtherance of the transactions contemplated by this
Agreement have been or will be duly authorized, executed and delivered by the
applicable Party.
6.10 Authorization. GenPharm, Japan Tobacco, Abgenix, Xenotech and Cell
-------------
Genesys each represents and warrants that it has the full right, power and
authority to execute and perform this Agreement on its own behalf.
12
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement, their
respective officers hereunto duly authorized, as of the day and year first above
written.
CELL GENESYS, INC. JAPAN TOBACCO, INC.
By: /s/ Stephen A. Sherwin By: /s/ Masakazu Kakei
------------------------------ ----------------------------
Name: Stephen A. Sherwin Name: Masakazu Kakei
---------------------------- --------------------------
Title: Chairman & CEO Title: Managing Director, Pharmaceutical
--------------------------- Business
---------------------------------
ABGENIX, INC. GENPHARM INTERNATIONAL, INC.
By: /s/ R. Scott Greer By: /s/ Jonathan MacQuitty
------------------------------ ----------------------------
Name: R. Scott Greer Name: Jonathan MacQuitty
---------------------------- --------------------------
Title: President & CEO Title: CEO
--------------------------- -------------------------
XENOTECH, L.P.
BY: XENOTECH, INC.
ITS GENERAL PARTNER
By: /s/ Raymond M. Withy By: /s/ Takashi Kamiya
------------------------------ ----------------------------
Name: Raymond M. Withy Name: Takashi Kamiya
---------------------------- --------------------------
Title: Chairman Title: President & CEO
--------------------------- -------------------------
Approved as to form:
O'MELVENY & MYERS, LLP GILBERT, SEGALL AND YOUNG LLP
By: /s/ George Riley By: /s/ Neal N. Beaton
------------------------------ ----------------------------
Attorneys for Attorneys for Japan
Cell Genesys, Inc. and Tobacco Inc.
Abgenix, Inc.
LASKY, HAAS & COHLER, P.C.
By: /s/ Charles B. Cohler
_______________________
Attorneys for GenPharm
International, Inc.
13
<PAGE>
The symbol "**" is used throughout this exhibit to indicate that a portion of
the exhibit has been omitted and filed separately with the Commission.
Exhibit 10.45
-------------
CROSS LICENSE AGREEMENT
-----------------------
THIS CROSS LICENSE AGREEMENT (the "Agreement") effective the 26/th/ day of
March, 1997 (the "Effective Date") is made by and between CELL GENESYS, INC., a
Delaware corporation ("Cell Genesys"), ABGENIX, INC., a Delaware corporation and
subsidiary of Cell Genesys ("Abgenix"), XENOTECH, L.P., a California limited
partnership ("Xenotech"), and JAPAN TOBACCO INC., a Japanese corporation ("Japan
Tobacco"), on the one hand, and GENPHARM INTERNATIONAL, INC., a California
corporation ("GenPharm"), on the other hand.
RECITALS
WHEREAS, the parties have entered into that certain Release and Settlement
Agreement dated March 26, 1997 (the "Settlement Agreement"); and
WHEREAS, in partial consideration of the Settlement Agreement, GenPharm
desires to grant to Xenotech and the other parties desire to grant to GenPharm
cross licenses under certain patent rights, on the terms and conditions set
forth herein.
NOW, THEREFORE, for and in consideration of the covenants, conditions, and
undertakings hereinafter set forth, it is agreed by and between the parties as
follows:
<PAGE>
1. DEFINITIONS
For purposes of this Agreement, the terms set forth in this Article, when
capitalized, shall have the meanings set forth below.
1.1 "Affiliate" shall mean any entity which directly or indirectly
---------
controls, is controlled by or is under common control with any one of the
parties. An entity shall be regarded as in control of another entity if it owns
or controls at least fifty percent (50%) of the shares of the subject entity
entitled to vote in the election of directors or if it has the contractual power
to designate fifty percent (50%)or more of the directors of a corporation (or,
in the case of an entity that is not a corporation, for the election or
designation of the corresponding managing authority). [**]
1.2 "Antibody" shall mean a composition [**] said antibody [**] having
--------
been generated from a [**] or having been derived from nucleotide sequences
encoding, or amino acid sequences of, an antibody obtained from a [**].
1.3 "Antibody Product" shall mean [**]
-----------------
** Confidential Treatment Requested
-2-
<PAGE>
[**].
1.4 "[**]" shall mean a [**].
----
1.5 "[**]" shall mean [**].
----
1.6 "Excluded Claims" shall mean only those claims [**] which [**] to: (a)
---------------
[**] ; (b) [**], wherein the [**] or
** Confidential Treatment Requested
-3-
<PAGE>
[**] and wherein [**] (notwithstanding the foregoing, [**]); (c) [**]; (d) [**];
(e) a [**]; (f)(i) [**] on its [**], the [**], a [**] wherein the [**] and [**]
or the [**] and (ii) [**]. As used herein, [**]
** Confidential Treatment Requested
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<PAGE>
[**].
1.7 "Genetic Material" shall mean a [**].
----------------
1.8 "Human Antibody [**]" shall mean [**].
** Confidential Treatment Requested
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<PAGE>
1.9 "Human Non-Endogenous Antibody [**]" shall mean [**].
----------------------------------
1.10 "Interference Settlement Procedure Agreement" shall mean the
-------------------------------------------
Interference Settlement Procedure Agreement among the parties of even date
herewith.
1.11 "Knock-out [**]" shall mean [**].
-------------
** Confidential Treatment Requested
-6-
<PAGE>
1.12 "Licensee" shall mean [**].
--------
1.13 "Licensed Product" shall mean an Antibody Product or a Transgenic
----------------
Product.
1.14 "Licensor" shall mean [**].
--------
1.15 "Party" shall mean GenPharm, on the one hand, and the Xenotech Group,
-----
on the other hand.
1.16 "Patent Rights" shall mean all claims, other than Excluded Claims, in
-------------
(a) patent applications filed in any country of the world and patents issued or
issuing thereon, owned by, or licensed to a Licensor with a right to sublicense,
pursuant to a Third-Party License Agreement, that [**]; (b) all continuations,
continuations-in-part, patents of addition, divisionals, reexamination
certificates, reissues or extensions, including supplemental protection
certificates, of
** Confidential Treatment Requested
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<PAGE>
any of (a) above; and (c) all foreign counterparts applied for, issued or
issuing on any of (a) or (b) above. [**].
1.17 "Patent Rights [**]" shall mean the [**].
------------------
1.18 "Relevant Patent" shall mean a [**].
---------------
1.19 "Third-Party License Agreement" shall mean an agreement between a
-----------------------------
Licensor and a non-Affiliate third party that conveys to the Licensor an
interest in any Patent Rights covering a [**].
1.20 "Transgenic Product" shall mean any product [**].
------------------
** Confidential Treatment Requested
-8-
<PAGE>
1.21 "Transgenic [**]" shall mean [**].
---------------
1.22 "Xenotech Group" shall mean Cell Genesys, Abgenix, Xenotech and Japan
--------------
Tobacco, collectively.
2. LICENSE GRANTS
2.1 Grant by Xenotech Group for [**]. Subject to the terms and conditions
--------------------------------
of this Agreement, each and every member of the Xenotech Group hereby grants to
GenPharm a non-exclusive (except that such grant shall be exclusive even as to
each member of the Xenotech Group as to [**]), worldwide, royalty-free, fully
paid up, perpetual, license or sublicense, as the case may be (with the right to
sublicense as set forth in Section 2.5) under its Patent Rights, to use for
research, and to develop, make, have made, use, import, export or otherwise
transfer physical possession of (but not to sell, lease, offer to sell or lease,
or otherwise transfer title to) [**]; provided, however, that the license
granted hereunder shall not include the right to use for research, or to
develop, make, have made, use, import, export or otherwise transfer physical
possession of [**] in connection with an [**]. In the event the [**]
** Confidential Treatment Requested
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<PAGE>
[**].
2.2 Grant by GenPharm for [**]. Subject to the terms and conditions of
---------------------------
this Agreement, GenPharm hereby grants to Xenotech a non-exclusive (except that
such grant shall be exclusive even as to GenPharm as to [**]), worldwide,
royalty-free, fully paid up, perpetual, license or sublicense, as the case may
be (with the right to sublicense as set forth in Section 2.5) under its Patent
Rights, to use for research, and to develop, make, have made, use, import,
export or otherwise transfer physical possession of (but not to sell, lease,
offer to sell or lease, or otherwise transfer title to) [**]; provided, however,
that the license granted hereunder shall not include the right to use for
research, or to develop, make, have made, use, import, export or otherwise
transfer physical possession of [**].
2.3 Grant by Xenotech Group for [**]. Subject to the terms and conditions
---------------------------------
of this Agreement, each and every member of the Xenotech Group hereby grants to
GenPharm a non-exclusive (except that such grant shall be exclusive even as to
each member of the Xenotech Group as to [**]), worldwide, royalty-free, fully
paid up, perpetual, license or sublicense, as the case may be (with the right to
sublicense as
** Confidential Treatment Requested
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<PAGE>
set forth in Section 2.5) under its Patent Rights, to use for research, and to
develop, make, have made, use, import, export, otherwise transfer physical
possession of, sell, lease, offer to sell or lease, or otherwise transfer title
to [**]; provided, however, that the license granted hereunder, shall not
include the rights to use for research or to develop, make, have made, use,
import, export, otherwise transfer physical possession of, sell, lease, offer to
sell or lease, or otherwise transfer title to [**] to the [**].
2.4 Grant by GenPharm for [**]. Subject to the terms and conditions of
--------------------------
this Agreement, GenPharm hereby grants to Xenotech a non-exclusive (except that
such grant shall be exclusive even as to GenPharm as to [**] selected pursuant
to Section 2.1), worldwide, royalty-free, fully paid up, perpetual, license or
sublicense, as the case may be (with the right to sublicense as set forth in
Section 2.5) under its Patent Rights, to use for research, and to develop, make,
have made, use, import, export or otherwise transfer physical possession of,
sell, lease, offer to sell or lease, or otherwise transfer title to [**];
provided, however, that the license granted hereunder shall not include the
rights to use for research, or to develop, make, have made, use, import, export
or otherwise transfer physical possession of, sell, lease, offer to sell or
lease, or otherwise transfer title to [**] to the [**].
** Confidential Treatment Requested
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<PAGE>
2.5 Sublicenses.
-----------
(a) Each Licensee shall have the right to grant sublicenses of the
Patent Rights licensed hereunder to its Affiliates [**].
(b) [**] shall have the right to grant sublicenses to [**].
(c) [**] shall have the right to grant sublicenses of [**] and with
respect to [**]:
** Confidential Treatment Requested
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<PAGE>
[**]:
(i) as part of a [**]
(ii) where [**]
(iii) where [**] the parties [**]
(iv) as part [**] pursuant to [**] shall include [**].
2.6 Termination of Sublicenses. In the event that a license granted
--------------------------
hereunder is terminated, any sublicense granted by the Licensee or by its
Affiliates (other than from a Licensee to an Affiliate) and any further
sublicenses thereunder shall, upon the written request of such sublicensee,
remain in full force and effect, provided that such sublicensee is not then in
** Confidential Treatment Requested
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<PAGE>
breach of its sublicense agreement and such sublicensee agrees to be bound to
the Licensor under the terms and conditions of such sublicense agreement.
Further, the termination of a license granted hereunder to a party shall not
affect a sublicense granted to a party whose rights have not been terminated
hereunder.
2.7 Grants by Affiliates. Each Party shall cause its Affiliates to grant
--------------------
the Licenses provided in this Article 2 to the extent such Affiliates possess or
may acquire such rights.
2.8 Excluded Patent Rights. Notwithstanding the foregoing, the license
----------------------
grants made by the Parties in this Article 2 shall not include Patent Rights
licensed prior to the Effective Date to any of the parties pursuant to licenses
listed on Schedule 1.
2.9 [**]. Japan Tobacco shall use commercially reasonable efforts, [**]
----
to provide for a [**]. In the event that Japan Tobacco is [**].
2.10 [**]. The Xenotech Group shall [**]
----
** Confidential Treatment Requested
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<PAGE>
[**].
2.11 [**]. GenPharm shall have an option to obtain the grant of a
----
sublicense pursuant to the [**]. If such option is exercised, [**] such option
is exercised. In such event, [**] royalties as set forth in [**] and to other
terms and conditions of the [**] applicable to sublicensees.
2.12 [**] As long as [**] is an [**] if requested by a [**] regarding
----
obtaining [**] provided such [**].
** Confidential Treatment Requested
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<PAGE>
3. PAYMENTS TO GENPHARM
3.1 Initial Payments. In consideration of this Agreement and the
----------------
Settlement and Release Agreement among the parties effective as of the Effective
Date, the Xenotech Group will pay to GenPharm [**]. Of this payment [**] shall
be paid in cash within fifteen business days after execution of this Agreement
(as to which time is of the essence) and $15,000,000 by delivery on the
Effective Date of a convertible note from Cell Genesys in the form attached as
Exhibit A hereto. Upon such cash payment, GenPharm shall promptly provide a
written acknowledgement thereof to each member of the Xenotech Group.
3.2 Payments for Relevant Patent. Xenotech shall make the following
----------------------------
payments to GenPharm:
(a) $7,500,000, within thirty business days after notice by GenPharm
to each member of the Xenotech Group including [**]
(b) $7,500,000, within thirty business days after the earlier of (1)
notice by GenPharm to each member of the Xenotech Group including [**]
** Confidential Treatment Requested
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[**].
(c) Any payments to be made to GenPharm pursuant to this Section 3.2
shall be in cash. Time shall be of the essence with respect to the time period
for each such payment.
(d) Japan Tobacco agrees (i) that it shall provide funding, or cause
one of its subsidiaries to provide funding, to Xenotech, to the extent needed,
for one-half of each payment under Sections 3.2 (a) and (b) as it becomes due
(the "Japan Tobacco Share"), (ii) that it shall cause Xenotech to make payment
of such funds to GenPharm, and (iii) if Xenotech fails to make either such
payment as it becomes due, upon demand by GenPharm, that it shall forthwith pay
to GenPharm the Japan Tobacco Share specified in this Section 3.2(d) in
immediately available funds. Cell Genesys and Abgenix each agrees (i) to
provide funding to Xenotech, to the extent needed, for the other one-half of
each payment under Sections 3.2 (a) and (b) as it becomes due (the "Cell
Genesys/ Abgenix Share"), (ii) that each of them and they together shall cause
Xenotech to make payment of such funds to GenPharm, and (iii) if Xenotech fails
to make either such payment as it becomes due, upon demand by GenPharm, that
they shall be jointly and severally obliged forthwith to pay to GenPharm the
Cell Genesys/ Abgenix Share specified in this
** Confidential Treatment Requested
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Section 3.2(d) in immediately available funds. Japan Tobacco, Cell Genesys and
Abgenix each agrees and acknowledges that their respective covenants and
obligations under this Section 3.2(d) are its direct covenants and obligations
and each hereby waives any claims or rights which might arise or be implied if
these obligations were construed to be guarantees or if any other party hereto
were to become subject to a proceeding under bankruptcy law. Without limiting
the generality of the foregoing, each of Japan Tobacco, Cell Genesys and Abgenix
agrees that its respective obligations to make the payments specified in this
Section 3.2(d) are in no way conditioned on or contingent upon any attempt to
enforce in whole or in part any of the payments due to GenPharm or the existence
or continuance of Xenotech as a legal entity, and the respective obligations to
make such payments are not lessened or abrogated by the consolidation or merger
of Xenotech with or into any other entity, the sale, lease or disposition by
Xenotech of all or substantially all of its assets to any other entity, the
bankruptcy or insolvency of Xenotech (or any amendment, modification or stay of
GenPharm's rights which may occur in any bankruptcy or reorganization case,
whether or not assented to by GenPharm), the admission by Xenotech of its
inability to pay its debts as they mature, or the making by Xenotech of a
general assignment for the benefit of, or entering into a composition or
arrangement with, creditors. Each of Japan Tobacco, Cell Genesys and Abgenix
acknowledges that to the extent of its respective obligations set forth in this
Section 3.2(d), such party has specifically assumed any and all risks of a
bankruptcy or reorganization case or proceeding with
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<PAGE>
respect to Xenotech. Each of Japan Tobacco, Cell Genesys and Abgenix further
waives, to the extent permitted by applicable law, (i) any defense resulting
from the absence, impairment or loss of any right of reimbursement, subrogation,
contribution or other right or remedy of such party against Xenotech; (ii) any
set off or counterclaim or any defense which results from any disability of
Xenotech; (iii) any right to exoneration of sureties which would otherwise be
applicable; (iv) any right of subrogation or reimbursement, but only for so long
as GenPharm has not been paid in full; and (v) any right to be informed by
GenPharm of the financial condition of Xenotech or any other circumstances
bearing upon the risk of nonpayment by Xenotech. GenPharm agrees and
acknowledges that, if it receives the payments under this Section 3.2(d) from or
on behalf of either Japan Tobacco or Cell Genesys and Abgenix, but not the
other, the party or parties which made or caused to be made any such payments
shall continue, subject to the terms hereof, to be entitled to all rights under
this Agreement or any sublicense to it from Xenotech under this Agreement.
3.3 No Deduction or Set-off, etc. All payments under this Article 3 shall
-----------------------------
be made without any set-off and without deduction whatsoever for or on account
of any non-United States taxes or similar governmental charges or costs of
transfer.
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<PAGE>
4. THIRD-PARTY LICENSES
4.1 Rights under Third-Party Licenses. Each Licensor shall have the
---------------------------------
following obligations to ensure that a Licensee shall have all rights under
Third-Party License Agreements anticipated by the license granted hereunder:
(a) In the event that a Licensor elects to [**], Licensor shall take
all such actions as may be reasonably necessary to [**] under such Third-Party
License Agreement.
(b) In the event that Licensor receives [**], Licensor shall [**].
(c) In the event that Licensor receives [**] proposes to [**] or
has [**] and, if requested by Licensee, shall [**].
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<PAGE>
(d) No Licensor shall [**] Third-Party License Agreement [**]
Third-Party License Agreement [**].
(e) Schedule 2 includes a complete list of each Third-Party License
Agreement (excluding those Third-Party License Agreements Listed on Schedule 1)
to which each Licensor is a party and for which such Licensor has sublicensing
rights. Each Licensor will provide, within 30 days after the Effective Date a
revised Schedule 2 setting forth all royalties, license fees, milestone
payments, and similar payments due to any third party for which Licensee may
become obligated under Section 4.2, which Schedule 2 shall be updated on a semi-
annual basis.
4.2 Obligations to Third Parties.
----------------------------
(a) Each Licensee receiving sublicense rights hereunder shall be
responsible for any payments or other obligations of a sublicensee arising under
Third-Party License Agreements in connection with the commercialization of a
Licensed Product by such Licensee, its Affiliates and sublicensees. Such
Licensee shall provide to Licensor copies of all royalty reports required to be
delivered under a Third-Party License Agreement.
(b) Each Licensee shall be responsible for any incremental payments
that may result from Licensor granting to or
** Confidential Treatment Requested
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obtaining for Licensee sublicense rights in any Third-Party License Agreement
to which such Licensee has consented (lack of consent to negate any such
sublicense rights).
4.3 Notice of Third-Party Licenses. Licensor shall give Licensee written
------------------------------
notice within 30 days after execution of the material terms of any Third-Party
License Agreement entered into after the Effective Date of this Agreement that
affects such Licensee.
5. PATENTS
5.1 Patent Enforcement. Each Party shall have the [**] and patent
------------------
applications worldwide relating to [**] and, subject to the Interference
Settlement Procedure Agreement, conducting any interferences, oppositions,
reexaminations, or requesting reissues or patent term extensions with respect to
such Patent Rights. Each Party shall have the exclusive right to enforce, or
defend any declaratory judgment action, at its expense, involving its own Patent
Rights. Such Party shall have the right to retain any recovery received as a
result of any such claim, suit or proceeding.
5.2 Infringement Claims. If the development, production, sale or use of
-------------------
any Licensed Product pursuant to this Agreement results in any claim, suit or
proceeding alleging patent
** Confidential Treatment Requested
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<PAGE>
infringement against a Licensee (or its Affiliates or sublicensees), the
Licensee shall have the exclusive right to defend and control the defense of any
such claim, suit or proceeding, at its own expense. Licensee shall not be
entitled as part of the settlement of any such claim, suit or proceeding, to
admit the invalidity of another party's Patent Rights without that other party's
written consent.
5.3 Patent Marking. Licensee agrees to mark and have its Affiliates and
--------------
sublicensees mark all Licensed Products sold pursuant to this Agreement in
accordance with the applicable statutes or regulations in the country or
countries of manufacture and sale thereof.
6. REPRESENTATIONS AND WARRANTIES
6.1 Representations of Each Party. Each party represents and warrants
-----------------------------
that:
(i) it has the full right and authority to enter into this
Agreement and grant each of the rights, licenses and sublicenses that it has
granted herein;
(ii) as of the Effective Date, it will not have in effect any grant,
and will not grant in the future, any rights inconsistent or in conflict with
the rights, licenses and sublicenses granted or to be granted herein, nor does
any of its Affiliates have any rights inconsistent, or in conflict with, the
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rights, licenses and sublicenses granted or to be granted herein by a party;
(iii) upon proper execution, delivery and performance of the
Settlement Agreement, there will be no existing or threatened actions, suits or
claims pending against such party with respect to its Patent Rights or the right
of such party to enter into and perform its obligations under this Cross License
Agreement;
(iv) except as set forth on Schedule 3, prior to the Effective Date,
it has made no grant, assignment, transfer, license or sublicense, or taken any
other action with respect to any invention, patent or patent application (other
than actions in the normal course of patent prosecution) which would have been
included in the grant of Patent Rights under Article 2 but for such grant,
assignment, transfer, license, sublicense or action;
(v) it will not make any grant, assignment, transfer, license or
sublicense, or take any other action with respect to any invention, patent or
patent application which would be in conflict with the grant of Patent Rights
under Article 2; and
(vi) to best of the knowledge of its officers and directors, no
employee, consultant, former employee or former consultant of such Party, in the
course of their employment or consultancy, is the inventor or co-inventor or has
any rights to
-24-
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any invention, patent application [**].
6.2 Representations of GenPharm. GenPharm represents and warrants that:
---------------------------
(i) Pharming B.V. has been granted no rights by GenPharm that, but
for such grant, would be within the grant of Patent Rights made by GenPharm
under Article 2, and, to the best of GenPharm's knowledge, Pharming B.V. has no
rights within the grants of Patent Rights made under Article 2, outside of those
set forth on Schedule 2 hereto.
(ii) to the best of GenPharm's knowledge and belief, any jointly
owned Research Inventions (as defined in the Agreement between GenPharm and
LeukoSite, Inc. ("LeukoSite") dated January 1, 1995, as amended (the "LeukoSite
Agreement")) that have been created under the LeukoSite Agreement which, if
wholly owned by GenPharm would have been included in the grant of Patent Rights
made by GenPharm under Article 2, are so included, and nothing in the LeukoSite
Agreement or in any other agreement between LeukoSite and GenPharm conflicts
with GenPharm's grants of Patent Rights under Article 2.
(iii) attached hereto as Exhibit B is an [**].
6.3 Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS
----------
AGREEMENT, EACH PARTY MAKES NO REPRESENTATIONS AND EXTENDS
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NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR VALIDITY
OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING.
7. INDEMNITY
Each Licensee agrees to indemnify and hold harmless the Licensor, its
Affiliates and their directors, officers, employees and agents from and against
any liabilities suffered or incurred in connection with third-party claims
arising from the manufacture, use, sale, import or other distribution of any
Licensed Product by such Licensee, its Affiliates or their sublicensees.
Promptly after receipt by an indemnified party under this Section 7 of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made for indemnification against a Licensee under this
Section 7, notify the Licensee in writing of the commencement thereof and
generally summarize such action. Licensee shall have the right to assume the
defense of such claim. The failure to notify a Licensee promptly of the
commencement of any such action shall not relieve the Licensee of its
obligations under this Section 7 unless such failure is prejudicial to the
ability of the Licensee to defend such action.
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8. TERM AND TERMINATION
8.1 Effectiveness. This Agreement shall become effective as of the
-------------
Effective Date and the license rights granted under Article 2 above shall be in
full force and effect as of such date.
8.2 Term. Unless earlier terminated as to the other provisions of this
----
Article 8, this Agreement shall continue in full force and effect until the
expiration of the last to expire patent within the Patent Rights.
8.3 Termination for Breach. In the event a party shall have materially
----------------------
breached or defaulted in the performance of any of its material obligations
hereunder, and such breach shall have continued for sixty days after written
notice thereof was provided to the breaching party by a nonbreaching party, such
nonbreaching party may terminate this Agreement as to such breaching party. Any
termination shall become effective at the end of such 60-day period unless the
breaching party has cured any such breach or default prior to the expiration of
the sixty day period.
8.4 Specific Enforcement. In the event of breach of any provision herein
--------------------
by a party, the nonbreaching party shall have, in addition to all other rights
and remedies in law or in equity, the right to have this Agreement and any
provision herein specifically enforced by any court having equity jurisdiction,
it
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being stipulated by the parties that any such breach will cause irreparable
injury to the non-breaching party and that money damages will not provide an
adequate remedy.
8.5 Survivability. Article 6, Article 7, Section 8.4, this Section 8.5,
-------------
Section 9.1, Section 9.7 and Section 9.8 shall survive the expiration and any
termination of this Agreement for any reason.
9. MISCELLANEOUS
9.1 Governing Laws. This Agreement shall be interpreted and construed in
--------------
accordance with the laws of the State of California, without regard to conflicts
of law principles.
9.2 Waiver. It is agreed that no waiver by any party hereto of any breach
------
or default of any of the covenants or agreements herein set forth shall be
deemed a waiver as to any subsequent and/or similar breach or default.
9.3 Assignment. This Agreement and the license granted hereunder may not
----------
be assigned, except by a party to (a) an Affiliate of such party or (b) an
entity that acquires all or substantially all of the business segment of such
party to which this Agreement relates; provided, however, that any acquiring
entity shall agree in writing to be bound by the terms of this Agreement. The
terms and conditions of this Agreement shall be
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binding on and inure to the benefit of the permitted successors and assigns of
the parties.
9.4 Compliance with Laws. In exercising their rights under this license,
--------------------
the parties shall fully comply with the requirements of any and all applicable
laws, regulations, rules and orders of any governmental body having jurisdiction
over the exercise of rights under this license.
9.5 Notices. Any notice required or permitted to be given to the parties
-------
hereto shall be given in writing and shall be deemed to have been properly given
if delivered in person or when received if mailed by first class certified mail
to the other party at the appropriate address as set forth below or to such
other addresses as may be designated in writing by the parties from time to time
during the term of this Agreement.
Xenotech: Xenotech, L.P.
7601 Dumbarton Circle
Fremont, CA 94555
Attn: Chief Financial Officer
Japan Tobacco Inc.: Japan Tobacco Inc.
JT Building
2-1 Toranomon 2-chome
Minato-ku, Tokyo 105
Japan
Attn: Vice President,
Pharmaceutical Division
with a copy to: JT America Inc.
1825 South Grant Street, Suite 220
San Mateo, CA 94402
Attn: President
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<PAGE>
and to: Gilbert, Segall and Young LLP
430 Park Avenue
New York, NY 10022
Attn: Neal N. Beaton, Esq.
Cell Genesys, Inc.: Cell Genesys, Inc.
342 Lakeside Drive
Foster City, California 94404
Attn: President and CEO
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attn: Julian N. Stern, Esq.
Abgenix, Inc. Abgenix, Inc.
7601 Dumbarton Circle
Fremont, CA 94555
Attn: President and CEO
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attn: Julian N. Stern, Esq.
GenPharm International, GenPharm International, Inc.
Inc. 855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
9.6 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision and the parties shall discuss in good faith appropriate
revised arrangements.
9.7 Waiver of Jury Trial. EACH PARTY, TO THE FULLEST EXTENT PERMITTED BY
--------------------
APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY
ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING OR COUNTERCLAIM.
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9.8 Limitation on Liability. NO PARTY SHALL BE LIABLE TO ANOTHER FOR ANY
-----------------------
PUNITIVE DAMAGES ARISING OUT OF THIS AGREEMENT OR ANY OBLIGATION RESULTING
HEREFROM.
9.9 Complete Agreement. It is understood and agreed that this Agreement
------------------
constitutes the entire agreement, both written and oral, among the parties with
respect to the subject matter hereof, and that all prior agreements respecting
the subject matter hereof, either written or oral, expressed or implied, shall
be abrogated, canceled, and are null and void and of no effect. No amendment or
change hereof or addition hereto shall be effective or binding on any of the
parties hereto unless reduced to writing and executed by the respective duly
authorized representatives of all of the parties.
9.10 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and both together shall be deemed to be
one and the same agreement.
9.11 Headings. The captions to the several Articles and Sections hereof
--------
are not a part of this Agreement, but are included merely for convenience of
reference only and shall not affect its meaning or interpretation.
9.12 No Territorial Restriction. Nothing in this Agreement shall impose a
--------------------------
territorial restriction on a Party's right to manufacture, use or market any
product or technology within the European Union.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, their
respective officers hereunto duly authorized, as of the day and year first above
written.
XENOTECH, L.P. JAPAN TOBACCO INC.
BY: XENOTECH, INC.
ITS GENERAL PARTNER By: /s/ Masakazu Kakei
---------------------------
By: /s/ Raymond M. Withy Name: Masakazu Kakei
-------------------------- -------------------------
Name: Raymond M. Withy Title: Managing Director
------------------------ Pharmaceutical Business
-----------------------
Title: Chairman
-----------------------
CELL GENESYS, INC.
By: /s/ Takashi Kamiya By: /s/ Stephen A. Sherwin
-------------------------- ---------------------------
Name: Takashi Kamiya Name: Stephen A. Sherwin
------------------------ ------------------------
Title: President and CEO Title: Chairman and CEO
----------------------- ------------------------
ABGENIX, INC. GENPHARM INTERNATIONAL, INC.
By: /s/ R. Scott Greer By: /s/ Jonathan MacQuitty
-------------------------- ---------------------------
Name: R. Scott Greer Name: Jonathan MacQuitty
------------------------ ------------------------
Title: President & CEO Title: CEO
----------------------- ------------------------
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Schedule 1
----------
[**]
** Confidential Treatment Requested
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Schedule 2
----------
[**]
** Confidential Treatment Requested
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Schedule 3
----------
[**]
** Confidential Treatment Requested
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Exhibit A
---------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN TAKEN FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION THEREOF. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN
SPECIFIC LIMITED CIRCUMSTANCES, AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
----------------------------------------
$15,000,000 Foster City, California
March 26, 1997
Cell Genesys, Inc., a Delaware corporation ("Company"), for value received,
hereby promises to pay to the order of GenPharm International, Inc. ("Holder")
in lawful money of the United States at the address of Holder set forth below,
the principal sum of Fifteen Million Dollars ($15,000,000), together with
interest on the unpaid principal at the rate of seven percent (7%) per annum,
payable semi-annually, beginning on September 30, 1997 until the Maturity Date,
as defined below. All outstanding principal and interest shall be payable in
full on the Maturity Date.
The Maturity Date shall be September 30, 1998; provided that if the Company
does not elect to adjust the Conversion Price (as defined below) as provided in
Section 1.4(a) by providing notice of such election to the Holder no later than
February 28, 1998, the Maturity Date shall be March 31, 1998. If the Company
does so elect, the Conversion Price (as defined below) shall be adjusted as set
forth in Section 1.4(a). The Maturity Date May,
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<PAGE>
at the election of the Holder, be extended as provided in Section 5.
If any payment of principal or interest on this Note shall become due on a
Saturday, Sunday, or a public holiday under the laws of the State of California,
such payment shall be made on the next succeeding business day and such
extension of time shall be included in computing interest in connection with
such payment.
Upon payment in full of all principal and interest payable hereunder, this
Note shall be surrendered to Company for cancellation.
The Company waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Holder in exercising any right hereunder shall operate as a waiver
of such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, the Company agrees to pay, in addition to the principal and
interest payable hereon, reasonable attorneys fees and costs incurred by Holder.
In addition, the Holder of this Note by acceptance hereof agrees to the
following terms and conditions:
1. CONVERTIBILITY
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<PAGE>
1.1 Conversion. Subject to the provisions of this Note, at any time prior
----------
to 12:00 p.m., Pacific Time, on the earlier of the Maturity Date or the
Redemption Date, at the option of the Holder all or any portion of not less than
$90,000 of the outstanding principal amount of this Note and all or any portion
of accrued and unpaid interest on this Note shall be converted from time to time
into shares of Common Stock of the Company (or such other security into which
this Note becomes convertible pursuant to Section 1.4 below, in either case, the
"Shares") at a conversion price (the "Conversion Price") equal to $9.00 per
share (adjusted as provided in Section 1.4 below).
1.2 Mechanics of Conversion. This Note or a specified portion thereof
-----------------------
shall be converted by the Holder, pursuant to Section 1.1, by surrender of this
Note to the Company at the address set forth below together with a notice of
election to convert all or a specified portion of the principal and a specified
portion of the accrued and unpaid interest into Shares. If only a specified
portion of the Note is so converted, a notation of such amount shall be placed
on the Note and the Note shall be returned to the Holder. From and after the
date of the surrender, (i) the rights of the Holder of the surrendered Note or
the specified portion thereof as such shall (to the extent of such principal
amount and any accrued and unpaid interest converted) cease, and (ii) Holder
shall be treated for all purposes as the record holder of the Shares into which
such principal and/or interest has been converted. The Company shall, as soon
as practicable after the conversion issue and deliver to the Holder of the
surrendered Note or specified portion thereof,
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<PAGE>
at the address designated by such Holder, a certificate or certificates (issued
as of the date of conversion) for the Shares into which the principal amount and
any accrued and unpaid interest has been converted.
1.3 Fractional Shares. No fractional shares shall be issued upon
-----------------
conversion of the outstanding principal amount of this Note and any accrued and
unpaid interest on this Note. In lieu of any fractional shares to which the
Holder of this Note would otherwise be entitled, this Company shall pay cash
equal to such fraction multiplied by the Conversion Price.
1.4 Adjustments.
-----------
(a) Adjustment for Extension of Maturity Date. If the Company
-----------------------------------------
elects to adjust the Conversion Price and gives notice of such election to
Holder no later than February 28, 1998, it shall be adjusted to equal the lower
of (x) $9.00 or (y) 115% of the average of the closing prices of the Shares on
the Nasdaq National Market (or such other securities market which is the
principal trading market for the Shares) over the 30 trading days immediately
preceding February 28, 1998.
(b) Equitable Adjustments. The number of Shares to be issued upon
---------------------
conversion of this Note and the Conversion Price shall be equitably adjusted for
stock splits, stock dividends, subdivisions, and the like. In the case of any
merger, consolidation, sale of all or substantially all of the assets, or
similar transaction in which the holders of the Company's Common Stock would
receive securities other than Company Common Stock, this Note shall become
convertible into the number and kind of securities as the Holder would have
received in such transaction
-39-
<PAGE>
in exchange for the shares of Company Common Stock into which this Note was
convertible immediately prior to the closing such transaction, and the
Conversion Price shall be equitably adjusted.
2. REDEMPTION
2.1 Redemption. This Note may be redeemed at any time on or after August
----------
31, 1997 if the closing price of the Shares on the Nasdaq National Market (or
such other securities market which is the principal trading market for the
Shares) is at least 130 percent of the Conversion Price on at least 20 of the 30
trading days immediately preceding the date of notice of redemption.
2.2 Notice of Redemption. The Company shall, at least 30 days prior to
--------------------
the date fixed by the Company for redemption (the "Redemption Date"), notify the
Holder of such Redemption Date. The notice of redemption shall state:
(a) the Redemption Date,
(b) the accrued interest to the Redemption Date, and
(c) that on the Redemption Date the Note will become due and payable,
and that interest thereon shall cease to accrue on and after said date. To the
extent permitted by applicable law, the Company's notice of redemption shall be
irrevocable. The Holder may convert this Note pursuant to Section 1 above at
any time prior to 12:00 p.m., Pacific Time, on the Redemption Date. The Holder
may extend the Redemption Date as provided in Section 5.
3. NOTE AGREEMENT; SUBORDINATION This Note is issued pursuant to that certain
Convertible Note Purchase Agreement of even date between the Company and the
Holder (the "Note Agreement") and is
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<PAGE>
subject to the terms thereof. This Note and the indebtedness evidenced hereby
is subordinate to any and all Senior Debt, as defined in the Note Agreement, on
the terms set forth in the Note Agreement and in any subordination agreement
entered into pursuant thereto by the Holder, which Senior Debt subordination
agreement shall not restrict the Holder from enforcing its rights under this
Note even though the Company may be in default under its Senior Debt
subordination agreement.
4. EVENTS OF DEFAULT; ACCELERATION The occurrence of any of the following
shall constitute an "Event of Default" under this Note:
(a) The Company shall fail to pay any interest or other payment required
under the terms of this Note on the date due and such default is not cured by
the Company within five days after the Holder has give the Company notice of
such default; or
(b) The Company shall breach the covenant set forth in Section 7.1 under
the Note Agreement; or
(c) There shall occur any Change of Control of the Company. For purposes
of this Section 4, "Change of Control" means any of the following results in the
shareholders of the Company, immediately preceding such event (or combination of
events), ceasing to hold, by reason of their holding of Company shares before
the event, a majority of the voting interest of the Company or the Successor
Company: (i) a merger or consolidation of the Company with another corporation
or entity, whether or not the Company is the survivor, (ii) a transfer by the
Company of substantially all its operating assets, whether in a single
transaction or series of transactions, or (iii) the transfer of a
-41-
<PAGE>
majority of the outstanding voting shares of the Company pursuant to a tender
offer or exchange offer, or multiple offers. The term "Successor Company" in
the preceding sentence means any of (A) a company into which the Company is
merged or consolidated resulting in the Change of Control, (B) a company to
which the majority of the operating assets of the Company are transferred
resulting in the Change of Control, (C) a company which makes an exchange offer
resulting in the Change of Control or (D) a company which owns all of the
outstanding shares of a company described in clause (A), (B) or (C); or
(d) The Company shall (i) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian of itself or of all or a substantial
part of its property; (ii) be unable, or admit in writing its inability, to pay
its debts generally as they mature; (iii) make a general assignment for the
benefit of its or any of its creditors; (iv) be dissolved or liquidated in full
or in part, (v) become insolvent (as such term may be defined or interpreted
under any applicable statute); (vi) commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or consent to any such relief or to the appointment of or
taking possession of its property by any official in an involuntary case or
other proceeding commenced against it, or (vii) take any action for the purpose
of effecting any of the foregoing; or
(e) Proceedings for the appointment of a receiver, trustee, liquidator or
custodian of the Company or of all or a substantial
-42-
<PAGE>
part of the property thereof, or an involuntary case or other proceedings
seeking liquidation, reorganization or other relief with respect to the Company
or the debts thereof under any bankruptcy, insolvency or other similar law now
or hereafter in effect shall be commenced and an order for relief entered or
such proceeding shall not be dismissed or discharged within 30 days of
commencement.
Upon the occurrence or existence of an Event of Default (other than an
Event of Default referred to in clauses (d) or (e) above) and at any time
thereafter during the continuance of such Event of Default, Holder may, by
written notice to the Company, declare all outstanding obligations payable by
Company hereunder to be immediately due and payable without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived. Upon the occurrence of any Event of Default referred to in clauses (d)
or (e), all outstanding obligations payable by the Company hereunder shall be
immediately due and payable with presentation of demand, protest or any other
notice of any kind, all of which are hereby expressly waived. Upon the
occurrence or existence of any Event of Default, Holder may exercise any other
right, power or remedy permitted to it by law, either by suit in equity or by
action at law, or both.
5. HOLDERS' RIGHT TO EXTEND MATURITY DATE OR REDEMPTION DATE
Notwithstanding anything to the contrary in this Note, the Holder, by
notice to the Company given at least ten days before the Maturity Date or the
Redemption Date, as the case may be, may elect to extend the Maturity Date or
Redemption Date for such number of days, if any, that during the 30 days
immediately prior
-43-
<PAGE>
to such Maturity Date or Redemption Date the Holder was disabled from selling
Registrable Securities pursuant to the Registration in accordance with Section
5.3 of the Note Agreement by reason of either (i) a notification described in
clause (d) of subsection 5.3.3 of the Note Agreement (relating to a deficiency
in the prospectus), or (ii) the market stand-off obligations in Section 6.2 of
the Note Agreement.
6. NOTICES Any notice or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been given upon written
confirmation of telex or telecopy or upon delivery if personally delivered or
upon deposit if deposited in the United States mail for mailing by certified
mail, postage prepaid, and addressed as follows:
If to Holder GenPharm International, Inc.
855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
Address for payment: GenPharm International, Inc.
855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
If to the Company: Cell Genesys, Inc.
342 Lakeside Drive
Foster City, California 94404
Attn: President and CEO
Each of the above addresses may change its address for purposes of this
paragraph by giving to the other addressee notice in conformance with this
paragraph of such new address.
-44-
<PAGE>
7. DEFAULT RATE: USURY. During any period in which an Event of Default has
occurred and is continuing, Company shall pay interest on the unpaid principal
balance hereof at a rate per annum equal to the rate otherwise applicable
hereunder plus two percent (2%). In the event any interest is paid on this Note
which is deemed to be in excess of the then legal maximum rate, then that
portion of the interest payment representing an amount in excess of the then
legal maximum rate shall be deemed a payment of principal and applied against
the principal of this Note.
8. EXPENSES. If action is instituted to collect this Note, Company promises
to pay all costs and expenses, including, without limitation, reasonable
attorneys' fees and costs, incurred in connection with such action whether or
not a lawsuit is actually filed.
9. GOVERNING LAW. This Note shall be governed by the laws of the State of
California (without giving effect to its conflict of law provisions).
CELL GENESYS, INC.
By: ____________________________________
Title: President and
Chief Executive Officer
-45-
<PAGE>
Exhibit B
---------
[**]
** Confidential Treatment Requested
-46-
<PAGE>
The symbol "**" is used throughout this exhibit to indicate that a portion of
the exhibit has been omitted and filed separately with the Commission.
EXHIBIT 10.46
-------------
INTERFERENCE SETTLEMENT PROCEDURE AGREEMENT
-------------------------------------------
This Interference Settlement Procedure Agreement (the "Agreement"),
effective as of March 26, 1997 (the "Effective Date"), is made by and between
CELL GENESYS, INC., a Delaware corporation ("Cell Genesys"), ABGENIX, INC., a
Delaware corporation and subsidiary of Cell Genesys ("Abgenix"), XENOTECH, L.P.,
a California limited partnership ("Xenotech") and JAPAN TOBACCO INC., a Japanese
corporation ("Japan Tobacco") (collectively, Cell Genesys, Abgenix, Xenotech and
Japan Tobacco are sometimes referred to as the "Xenotech Group"), on the one
hand, and GENPHARM INTERNATIONAL, INC., a California corporation ("GenPharm"),
on the other hand.
R E C I T A L S
WHEREAS, the Parties wish to establish procedures under which any
Interference Proceedings which are declared by the Board of Patent Appeals and
Interferences ("Board") of the United States Patent and Trademark Office ("PTO")
between patents or patent applications under the control of GenPharm and the
Xenotech Group are amicably and expeditiously resolved.
NOW, THEREFORE, for and in consideration of the covenants, conditions, and
undertakings hereinafter set forth, it is agreed by and between the Parties as
follows:
<PAGE>
1. DEFINITIONS
For purposes of this Agreement, the terms set forth in this Article, when
capitalized, shall have the meanings set forth below.
1.1 "Affiliate" shall mean any entity which directly or indirectly
---------
controls, is controlled by or is under common control with any one of the
parties. An entity shall be regarded as in control of another entity if it owns
or controls at least fifty percent (50%) of the shares of the subject entity
entitled to vote in the election of directors or if it has the contractual power
to designate fifty percent (50%) or more of the directors of a corporation (or,
in the case of an entity that is not a corporation, for the election or
designation of the corresponding managing authority). [**].
1.2 "Antibody" shall mean a composition [**], said antibody [**] having
--------
been generated from a [**] or having been derived from nucleotide sequences
encoding, or amino acid sequences of, an antibody obtained from a Transgenic
[**].
1.3 "Antibody Product" shall mean [**].
----------------
** Confidential Treatment Requested
-2-
<PAGE>
1.4 "[**]" shall mean a [**].
----
1.5 "[**]" shall mean [**].
----
1.6 "Excluded Claims" shall mean only those claims [**] which [**] to: (a)
---------------
[**]; (b) [**], wherein the [**], or [**], and wherein [**] (notwithstanding the
foregoing, [**]
** Confidential Treatment Requested
-3-
<PAGE>
[**]); (c) [**]; (d) [**]; (e) a [**]; (f)(i) [**] on its [**], the [**], a [**]
wherein the [**] and [**] or the [**] and (ii) [**]. As used herein, [**].
** Confidential Treatment Requested
-4-
<PAGE>
1.7 "Genetic Material" shall mean a [**].
----------------
1.8 "Human Antibody [**]" shall mean [**].
-------------------
1.9 "Human Non-Endogenous Antibody [**]" shall mean [**]
----------------------------------
** Confidential Treatment Requested
-5-
<PAGE>
[**].
1.10 "Interference" shall mean an interference declared pursuant to 35
------------
U.S.C. (S) 135 between a patent application of a Party and a patent application
or patent of the other Party within the Patent Rights involving a Licensed
Product.
1.11 "Interference Proceeding" shall mean a proceeding before the Board to
-----------------------
resolve an Interference.
1.12 "Knock-out [**]" shall mean [**].
--------------
** Confidential Treatment Requested
-6-
<PAGE>
1.13 "Licensed Product" shall mean an Antibody Product or a Transgenic
---- -----------------
Product.
1.14 "Licensor" shall mean [**].
--------
1.15 "Party" shall mean each and every member of the Xenotech Group or
-----
GenPharm.
1.16 "Patent Rights" shall mean all claims, other than Excluded Claims, in
-------------
(a) patent applications filed in any country of the world and patents issued or
issuing thereon, owned by, or licensed to a Licensor with a right to sublicense,
pursuant to a Third-Party License Agreement, that [**]; (b) all continuations,
continuations-in-part, patents of addition, divisionals, reexamination
certificates, reissues or extensions, including supplemental protection
certificates, of any of (a) above; and (c) all foreign counterparts applied for,
issued or issuing on any of (a) or (b) above. [**]
** Confidential Treatment Requested
-7-
<PAGE>
[**].
1.17 "Patent Rights [**]" shall mean the [**].
------------------
1.18 "Third-Party License Agreement" shall mean an agreement between a
-----------------------------
Licensor and a non-Affiliate third party that conveys to the Licensor an
interest in any Patent Rights covering a [**].
1.19 "Transgenic Product" shall mean any product [**].
------------------
1.20 "Transgenic [**]" shall mean [**].
---------------
2. PROCEDURE
2.1 Parties' Responsibilities. The following procedures shall be followed
-------------------------
in any Interference Proceeding involving patents or patent applications:
** Confidential Treatment Requested
-8-
<PAGE>
(a) In lieu of filing any preliminary motions, the Parties agree that
priority shall be decided based on count(s) designated by the PTO or, if the
Parties can agree within forty-five (45) days of the Interference Proceeding,
one or more mutually acceptable substituted counts, and determination of which
claims do or do not correspond to the count(s).
(b) Within twenty-five (25) days after the end of (a) above, the
Parties shall indicate reliance for priority on an application filing date or
provide the preliminary statement referred to in 37 Code of Federal Regulations
to the other party.
(c) Within thirty (30) days after the exchange indicated in (b)
above, evidence in the form of documents, summation of testimony and the like
shall be exchanged and reviewed by counsel for each party.
(d) Within ten (10) days after the exchange indicated in (c) above,
counsel for the Parties will make a conscientious good faith effort to reach
agreement as to the proper determination of priority of invention and
correspondence of the claims to the count(s), and other pertinent matters, in
the Interference Proceeding in accordance with applicable laws and rules of the
PTO. On any matter that agreement is not reached, counsel for each Party shall
promptly indicate what is believed to be lacking in the evidence of the opposing
Party.
(e) Within ten (10) days after the end of the time in (d) above,
counsel for the opposing Party may produce additional evidence, if available,
for consideration of the other Party for determination of outstanding issues.
-9-
<PAGE>
(f) (i) If counsel for the Parties cannot agree within ten (10) days
after the end of (e) above, then all of the evidence will be reviewed by a third
person who shall be an independent patent attorney, mutually agreeable to both
Parties and experienced in patent interference matters who shall decide which
Party is entitled to priority, which claims correspond to the count and other
outstanding matters. The Parties shall promptly select such third person and
share equally the expenses incurred in obtaining this review, and agree to limit
the time for study of the evidence and decision on priority to forty (40) hours,
which time may include, at the discretion of the Parties, a one (1) hour
presentation by each counsel of record. The decision of the third person shall
be in writing with sufficient detail to file with the PTO, if necessary, and
shall be final.
(ii) In selecting the third person pursuant to (f)(i), each Party
shall propose a list of three (3) candidates, each with an appropriate technical
background and a familiarity with biotechnology law and interference practice.
If there is a single candidate common to both lists, that candidate will be
selected as the third person. In the event there is more than one (1) common
candidate, the Parties shall vote as to their preference and, if the Parties
cannot agree as to the third person, the Parties will list all six (6)
candidates in order of preference and the candidate with the highest preference
total will be selected as the third person. If this still does not result in a
selection, the top preference on each list shall jointly choose the third person
from the others listed.
-10-
<PAGE>
Whenever both Parties agree that it is appropriate during this
procedure, the Parties can prepare and enter into a written settlement agreement
(the "Interference Settlement Agreement").
(g) Upon determination of the issues of priority, correspondence or
noncorrespondence of claims to the count(s), and other matters, whether by
mutual agreement of the Parties or by final decision by the third person, the
Parties will promptly cause to be filed in the PTO the Interference Settlement
Agreement or any other appropriate document, including factual recitations and
supporting statements from the record and/or a request for adverse judgment in
the interference. Each Party agrees to use its best efforts to cause the PTO to
accept all such documents.
(h) Throughout the entire procedure outlined above, the Parties agree
to cooperate in obtaining all necessary time extensions from the PTO.
2.2 Dates, Times, and Locations. Within the time-frames outlined in this
---------------------------
Article 2, the Parties shall mutually agree upon the dates, times, and locations
of the meetings set forth in this Article 2. Each Party shall bear its own
travel, lodging, and other per diem expenses incurred in connection with
attendance of personnel and counsel of such Party at such meetings.
3. DISPUTE RESOLUTION; ARBITRATION
Any dispute under this Agreement shall be finally settled by binding
arbitration conducted in accordance with the then
-11-
<PAGE>
applicable Patent Arbitration Rules of the American Arbitration Association
(excluding Rule 15 thereof) by one arbitrator appointed in accordance with said
rules. No punitive or consequential damages shall be awarded in any arbitration
proceeding. The arbitration proceedings and all pleadings and written evidence
shall be in the English language. Any written evidence originally in a language
other than English shall be submitted in English translation accompanied by the
original or a true copy thereof. The costs of the arbitration, including
administrative and arbitrators' fees, shall be shared equally by the Parties.
Each Party shall bear its own costs and attorneys' and witness' fees. The
prevailing Party in any arbitration, as determined by the arbitration panel,
shall be entitled to an award against the other Party in the amount of the
prevailing Party's costs and reasonable attorneys' fees. The arbitration shall
be held in San Francisco, California. A disputed performance or suspended
performances pending the resolution of the arbitration must be completed within
thirty days following the final decision of the arbitrators. Any arbitration
shall be completed by the issuance of a written decision within six months from
the filing of notice of a request for such arbitration.
4. BREACH
4.1 Termination for Breach. Either Party to this Agreement may terminate
----------------------
this Agreement in the event the other Party shall have materially breached or
defaulted in the performance of any of its obligations hereunder, and such shall
have continued for
-12-
<PAGE>
sixty days after written notice thereof was provided to the breaching Party by
the nonbreaching Party that terminates the Agreement as to such Party. Any
termination shall become effective at the end of such sixty day period unless
the breaching Party has cured any such breach or default prior to the expiration
of the sixty day period. However, if the Party alleged to be in breach of this
Agreement disputes such breach within such sixty day period, the non-breaching
Party shall not have the right to terminate this Agreement unless it has been
determined by an arbitration proceeding in accordance with Article 3 above below
that this Agreement was materially breached, and the breaching party fails to
cure such breach within thirty days following the final decision of the
arbitrators or such other time as directed by the arbitrators.
4.2 Specific Enforcement. In the event of breach of any provision herein
--------------------
by any Party, the nonbreaching Party shall have, in addition to all other rights
and remedies in law or in equity, the right to have this agreement and any
provision herein specifically enforced by any court having equity jurisdiction,
it being stipulated by the Parties that any such breach will cause irreparable
injury to the non-breaching Party and that money damages will not provide an
adequate remedy.
5. CONFIDENTIALITY
5.1 Confidential Information. Except as expressly provided herein, the
------------------------
Parties agree that the receiving Party of information
-13-
<PAGE>
shall not publish or otherwise disclose and shall not use, for any purpose, such
information which, if disclosed in tangible form, is marked "confidential" or
with other similar designation to indicate its confidential or proprietary
nature or if disclosed orally, is indicated orally to be confidential or
proprietary by the Party disclosing such information at the time of such
disclosure or is confirmed in writing as confidential or proprietary by the
disclosing Party within a reasonable time after such disclosure ("Confidential
Information"). Notwithstanding the foregoing, Confidential Information shall
not include information that, in each case, as demonstrated by contemporaneous
written documentation:
(a) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure;
(b) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving Party;
(c) became generally available to the public or otherwise part of the
public domain after its disclosure hereunder through other than an act or
omission of the receiving Party in breach of this Agreement; or
(d) was subsequently lawfully disclosed to the receiving Party by a
person other than a Party or developed by
-14-
<PAGE>
the receiving Party without reference to any information or materials disclosed
by the disclosing Party.
5.2 Permitted Disclosures. Notwithstanding the provisions of Section 5.1
---------------------
above, each Party hereto may disclose another Party's Confidential Information
to the extent that such disclosure is reasonably necessary in securing such
Party's performance under this Agreement and/or exercising such Party's rights
hereunder; provided, however, that if a Party is required to make such a
disclosure, as required by law, legal process or tax purposes of another Party's
Confidential Information, to the extent it may legally do so, it will give
reasonable advance notice to the Party whose Confidential Information is being
disclosed, and will use its reasonable efforts to secure confidential treatment
of such Confidential Information prior to its disclosure (whether through
protective order or otherwise).
6. MISCELLANEOUS
6.1 U.S. Patent Rights Only. It is understood and agreed that the
-----------------------
provisions of this Agreement apply only to the Parties' Patent Rights in the
United States.
6.2 No Implied Waivers; Rights Cumulative. No failure on the part of
-------------------------------------
Xenotech Group or GenPharm to exercise and no delay in exercising any right
under this Agreement, or provided by statute or at law or in equity or
otherwise, shall impair, prejudice, or constitute a waiver of any such right,
nor shall
-15-
<PAGE>
any partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right.
6.3 Notices. Any notice required or permitted to be given to the Parties
-------
hereto shall be given in writing and shall be deemed to have been properly given
if delivered in person or when received if mailed by first class certified mail
to the other Party at the appropriate address as set forth below or to such
other addresses as may be designated in writing by the Parties from time to time
during the term of this Agreement.
Xenotech: Xenotech, L.P.
7601 Dumbarton Circle
Fremont, CA 94555
Attn: Chief Financial Officer
Japan Tobacco Inc.: Japan Tobacco Inc.
JT Building
2-1 Toranomon 2-chome
Minato-ku, Tokyo 105
Japan
Attn: Vice President,
Pharmaceutical Division
with a copy to: JT America Inc.
1825 South Grant Street, Suite 220
San Mateo, CA 94402
Attn: President
and to: Gilbert, Segall and Young LLP
430 Park Avenue
New York, NY 10022
Attn: Neal N. Beaton, Esq.
Cell Genesys, Inc.: Cell Genesys, Inc.
322 Lakeside Drive
Foster City, California 94404
Attn: President and CEO
-16-
<PAGE>
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attn: Julian N. Stern, Esq.
Abgenix, Inc. Abgenix, Inc.
7601 Dumbarton Circle
Fremont, CA 94555
Attn: President and CEO
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attn: Julian N. Stern, Esq.
GenPharm International, GenPharm International, Inc.
Inc. 855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
with a copy to: Townsend and Townsend and Crew, LLP
379 Lytton Avenue
Palo Alto, CA 94301
Attn: William M. Smith, Esq.
6.4 Assignment. This Agreement and the license granted hereunder may not
----------
be assigned, except to (a) an Affiliate of such assignor or (b) an entity that
acquires all or substantially all of the business segment of such assignor;
provided, however, that any acquiring entity shall agree in writing to be bound
by the terms of this Agreement. The terms and conditions of this Agreement
shall be binding on and inure to the benefit of the permitted successors and
assigns of the Parties.
6.5 Complete Agreement. It is understood and agreed that this Agreement
------------------
constitutes the entire agreement, both written and oral, among the Parties with
respect to the subject matter hereof, and that all prior agreements respecting
the subject matter hereof, either written or oral, expressed or implied, shall
be abrogated, canceled, and are null and void and of no
-17-
<PAGE>
effect. No amendment or change hereof or addition hereto shall be effective or
binding on either of the parties hereto unless reduced to writing and executed
by the respective duly authorized representatives of all of the Parties.
6.6 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and both together shall be deemed to be
one and the same agreement.
6.7 Headings. The captions to the several Articles and Sections hereof
--------
are not a part of this Agreement, but are included merely for convenience of
reference only and shall not affect its meaning or interpretation.
6.8 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of California, without regard to conflict of laws principles, except that
Article 3 shall be governed by the U.S. Federal Arbitration Act.
6.9 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable, or void, this Agreement shall continue in full force and effect
without said provision and the Parties shall discuss in good faith appropriate
revised arrangements.
-18-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement, their
respective officers hereunto duly authorized, as of the day and year first above
written.
XENOTECH, L.P.
BY: XENOTECH, INC.
ITS GENERAL PARTNER
By: /s/ Raymond M. Withy
------------------------
Name: Raymond M. Withy
----------------------
Title: Chairman
---------------------
By: /s/ Takashi Kamiya
------------------------
Name: Takashi Kamiya
----------------------
Title: President and CEO
---------------------
JAPAN TOBACCO INC.
By: /s/ Masakazu Kakei
--------------------------------
Name: Masakazu Kakei
------------------------------
Title: Managing Director,
Pharmaceutical Business
----------------------------
CELL GENESYS, INC.
By: /s/ Stephen A. Sherwin
--------------------------------
Name: Stephen A. Sherwin
------------------------------
Title: Chairman and CEO
-----------------------------
ABGENIX, INC.
By: /s/ R. Scott Greer
--------------------------------
Name: R. Scott Greer
------------------------------
Title: President and CEO
-----------------------------
GENPHARM INTERNATIONAL, INC.
By: /s/ Jonathan MacQuitty
--------------------------------
Name: Jonathan MacQuitty
------------------------------
Title: CEO
-----------------------------
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<PAGE>
EXHIBIT 10.47
CONVERTIBLE NOTE PURCHASE AGREEMENT
THIS CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is made as of
the 26th day of March, 1997, between CELL GENESYS, INC., a Delaware corporation
("Cell Genesys" or the "Company") and GENPHARM INTERNATIONAL, INC., a California
corporation ("GenPharm").
RECITALS
WHEREAS, the parties, along with Abgenix, Inc., a subsidiary of Cell
Genesys, Xenotech, L.P., and Japan Tobacco Inc., have entered into that certain
Release and Settlement Agreement (which includes a Cross-License Agreement)
dated March 26, 1997 (the "Settlement Agreement"); and
WHEREAS, in partial consideration of the Settlement Agreement and the
Cross-License Agreement that is an exhibit thereto, Cell Genesys has agreed to
issue to GenPharm a Convertible Subordinated Promissory Note (the "Note") in the
form attached hereto as Exhibit A.
---------
NOW, THEREFORE, for and in consideration of the covenants, conditions, and
undertakings hereinafter set forth, it is agreed by and between the parties as
follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "Affiliate" shall mean any entity which directly or indirectly
---------
controls, is controlled by or is under common control with any one of the
parties.
<PAGE>
1.2 "Company" shall mean Cell Genesys, Inc., a Delaware corporation.
-------
1.3 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations adopted by the SEC under that statute.
1.4 "Holder" shall mean GenPharm if GenPharm holds Registrable Securities
------
and any other person to whom Registrable Securities have been transferred by
GenPharm, provided, however, that any person who acquires any of the Registrable
Securities in a distribution pursuant to a registration statement filed by the
Company under the Act or pursuant to a sale under Rule 144 under the Act shall
not be considered a Holder.
1.5 "Indebtedness" shall mean and include the aggregate amount of, without
------------
duplication (i) all obligations for borrowed money, (ii) all obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations to pay the deferred purchase price of property or services (other
than accounts payable incurred in the ordinary course of business determined in
accordance with generally accepted accounting principles), (iv) all obligations
with respect to capital leases, (v) all obligations created or arising under any
conditional sale or other title retention agreement with respect to property
acquired, (vi) all reimbursement and other payment obligations, contingent or
otherwise, in respect of letters of credit; and (vii) all guaranty obligations
with respect to the types of Indebtedness listed in clauses (i) through (vi)
above. Notwithstanding the preceding sentence, "Indebtedness" does not include
------------
(a) any obligations pursuant to the Cross License
-2-
<PAGE>
Agreement dated March 26, 1997, among the Company, GenPharm and other parties,
(b) obligations incurred for the purpose of financing the acquisition or leasing
of tangible or intangible assets in the aggregate amount not exceeding $40
million, or (c) this Note.
1.6 "Register," "Registered" and "Registration" refers to a registration
-------- ---------- ------------
effected by preparing and filing a registration statement in compliance with the
Securities Act ("Registration Statement"), and the declaration or ordering of
the effectiveness of such Registration Statement.
1.7 "Registrable Securities" shall mean the Shares and shares of Common
----------------------
Stock of the Company issued pursuant to stock splits, stock dividends and
similar distributions with respect to the Shares.
1.8 "Registration Expenses" shall mean all expenses incurred in complying
---------------------
with Section 5.3 of this Agreement, including, without limitation, all federal
and state registration, qualification and filing fees, printing expenses, fees
and disbursements of counsel for the Company, blue sky fees and expenses.
1.9 "SEC" shall mean the United States Securities and Exchange Commission.
---
1.10 "Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and the rules and regulations adopted by the SEC under that statute.
1.11 "Selling Expenses" shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale of Registrable Securities pursuant to Section
5.3 of this Agreement.
-3-
<PAGE>
1.12 "Senior Debt" shall have the meaning given in Section 7.
-----------
1.13 "Shares" shall mean the shares of the Company's Common Stock $.001 per
------
share par value, if any, issued to GenPharm upon conversion of the Note.
1.14 "Standstill Period" shall mean the period commencing with the date of
-----------------
this Agreement and ending at the later of (a) such time as GenPharm has sold or
otherwise transferred the Note or all of the Shares that it may receive upon
conversion of the Note or (b) GenPharm has received payment in full of the Note.
1.15 "Voting Securities" shall mean: (i) the Shares and any other issued
-----------------
and outstanding securities of the Company generally entitled to vote for the
election of directors of the Company or other matters for which the stock
holders of the Shares are entitled to vote; (ii) securities of the Company
convertible into or exchangeable for such securities; and (iii) options, rights
and warrants issued by the Company to acquire such securities.
2. PURCHASE OF NOTE
Cell Genesys is hereby issuing to GenPharm, and GenPharm is hereby
acquiring from Cell Genesys, the Note in partial consideration of GenPharm's
execution and delivery of the Settlement Agreement including the Cross-License
Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to GenPharm:
3.1 Corporate Existence and Power. The Company is a corporation duly
-----------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite
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<PAGE>
corporate power to carry on its business as now conducted. Cell Genesys has
been duly qualified as a foreign corporation for the transaction of business and
is in good standing under the laws of each other jurisdiction where failure to
so qualify would have a material adverse effect on the financial condition,
results of operations or assets of the Company.
3.2 Corporate Authorization. The Company has and will have all requisite
-----------------------
corporate power and authority to execute and deliver this Agreement and the Note
and to perform its obligations under this Agreement and the Note. The
execution, delivery and performance by the Company of this Agreement and the
Note, and the consummation by the Company of the transactions contemplated
hereby and thereby, have been duly authorized and approved by the Company's
Board of Directors. This Agreement and the Note have been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms, subject
to applicable bankruptcy, insolvency, reorganization, equity or redemption,
moratorium or similar laws now or hereafter in effect affecting the enforcement
of creditors' rights generally and to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
3.3 Validity of the Note and the Shares. The Note and the Shares will,
-----------------------------------
when issued and delivered in accordance with the terms hereof and thereof, be
validly issued, fully paid and nonassessable and free of preemptive rights,
rights of first refusal and other similar rights.
-5-
<PAGE>
3.4 Governmental Authorization. No consent, approval or authorization of,
--------------------------
or filing with, any governmental authority by or on the part of the Company is
required in connection with the execution and delivery of this Agreement or the
consummation by the Company of the transactions contemplated hereby other than
as required by applicable federal or state securities laws.
3.5 SEC Filings. (a) The Company has delivered to GenPharm true and
-----------
complete copies of: (i) the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1995; (ii) the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1996; (iii) the Company's proxy statement
for its 1995 Annual Meeting of Stockholders; (iv) all of the Company's other
reports, statements, schedules and final registration statements since filed
with the SEC; and (v) a copy of the proposed proxy statement relating to the
Company's pending merger with Somatix Therapy, Inc. ("Somatix"), which has not
yet been commented upon by the SEC.
(b) As of its filing date, no such report, schedule or statement
(including all exhibits and schedules thereto and documents incorporated by
reference therein) referred to in clauses (a) (i)-(iv), as amended or
supplemented if applicable, filed pursuant to the Exchange Act contained any
untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
3.6 No Material Adverse Changes. Except as contemplated by the pending
---------------------------
merger with Somatix, this Agreement and the
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<PAGE>
Settlement Agreement (and for expenses incurred in connection herewith and
therewith) since September 30, 1996, the Company has conducted its business in
all material respects in the ordinary course and there has not been any material
adverse change in the financial condition, results of operations or assets of
the Company, other than continuing losses in amounts consistent with prior
periods.
3.7 Non-Contravention. The execution, delivery and performance by the
-----------------
Company of this Agreement and the Note and the consummation by the Company of
the transactions contemplated hereby and thereby do not and will not violate or
conflict with any charter document or material agreement, instrument or
understanding to which the Company is a party or by which the Company may be
bound or violate any material law or regulation of any court, governmental body
or administrative or other agency having jurisdiction over the Company.
3.8 Litigation. Except with respect to pending litigation and threatened
----------
litigation between the Company and GenPharm, as of the date hereof, there are no
outstanding orders, judgments, injunctions, awards or decrees of any court,
governmental or regulatory body or arbitration tribunal against or involving the
Company. As of the date hereof, there are no material actions, suits or claims
or legal, administrative or arbitral proceedings pending or, to the knowledge of
the Company threatened, against or involving the Company or any of its assets or
properties.
3.9 Compliance with Laws. To the knowledge of the Company, the Company is
--------------------
not in violation in any material respect of any
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<PAGE>
federal, state or local law, statute, ordinance or regulation applicable to the
Company or its business.
3.10 Capitalization. There have been no material changes to the Company's
--------------
capitalization, including rights to acquire Company stock, from those described
in the SEC filings and proposed SEC filings listed in Section 3.5.
3.11 Exemption. The offer, issuance and delivery to GenPharm of the Note
---------
and the Shares to be issued on conversion of the Note pursuant to the terms of
this Agreement and the Note are exempt from Registration under the Securities
Act. GenPharm shall have certain rights to Registration of the Shares for
resale, as provided in Section 5.3 hereof.
3.12 Prior Registration Rights. The Company is under no contractual
-------------------------
obligation to Register under the Securities Act any of its presently outstanding
securities or any of its securities that may subsequently be issued, which
obligation would conflict with the rights being granted to GenPharm hereunder.
4. REPRESENTATIONS AND WARRANTIES OF GENPHARM
GenPharm represents and warrants to the Company that:
4.1 Corporate Existence and Power. GenPharm is a corporation duly
-----------------------------
incorporated, validly existing and in good standing under the laws of the State
of California and has all requisite corporate power to carry on its business as
now conducted.
4.2 Corporate Authorization. GenPharm has all requisite corporate power
-----------------------
and authority to execute and deliver this Agreement and to perform its
obligations under the Agreement and to consummate the transactions contemplated
hereby. The
-8-
<PAGE>
execution, delivery and performance by GenPharm of this Agreement and the
consummation by GenPharm of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of GenPharm and no
other corporate action on the part of GenPharm is necessary to authorize the
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by GenPharm and constitutes the valid and binding obligation of
GenPharm, enforceable against GenPharm in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, equity or redemption,
moratorium or similar laws now or hereafter in effect, affecting the enforcement
of creditors' rights generally and to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
4.3 Governmental Authorization. No consent, approval or authorization of,
--------------------------
or filing with, any governmental authority by or on the part of the GenPharm is
required in connection with the execution and delivery of this Agreement or the
consummation by GenPharm of the transactions contemplated hereby.
4.4 Non-Contravention. The execution, delivery and performance by
-----------------
GenPharm of this Agreement and the consummation by GenPharm of the transactions
contemplated hereby do not and will not violate or conflict with any charter
document or material agreement, instrument or understanding to which GenPharm is
a party or by which GenPharm may be bound or violate any material law or
regulation of any court, governmental body or administrative or other agency
having jurisdiction over GenPharm.
-9-
<PAGE>
4.5 Purchase for Investment; Legend.
-------------------------------
4.5.1 GenPharm hereby:
(a) acknowledges that it has been advised that the Note and any Shares
that it may acquire on conversion of the Note have not been and will not be
registered under the Securities Act or under any state securities laws except as
provided in Section 5.3 hereof;
(b) represents and warrants that the Note and any Shares that it may
so acquire will be acquired by it for its own account for investment and not
with a view to, or for resale in connection with, a public offering or
distribution thereof in violation of the Securities Act;
(c) represents and warrants that it has had the opportunity to discuss
the Company's business, management and financial affairs with the Company's
management and to obtain all information which it believes necessary to an
informed decision to purchase the Note;
(d) understands that the investment in the Note and the Shares that it
may acquire on conversion of the Note involve a high degree of risk as set forth
in the documents listed in Section 3.5;
(e) agrees that the Note and any Shares that it may acquire on
conversion of the Note will not be sold or otherwise disposed of except in
compliance with any applicable securities or other similar laws in the United
States or elsewhere;
(f) consents that stop transfer instructions in respect of any Shares
issued on conversion of the Note may be
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<PAGE>
issued to any transfer agent, registrar or other agent at any time acting for
the Company;
(g) consents that the certificate or certificates representing any
Shares that it may acquire on conversion of the Note will bear legends in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES MAY NOT BE
PLEDGED, HYPOTHECATED, SOLD, OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER SUCH ACT OR AN
EXEMPTION THEREFROM OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE COMPANY THAT NO SUCH REGISTRATION IS REQUIRED."
4.5.2 The Company agrees that an opinion of counsel shall not be
required for a sale or transfer of the Note or Shares meeting the requirements
of SEC Rule 144 or Rule 144A, provided that the Company receives representation
letters from the seller and broker reasonably satisfactory to Company counsel.
5. SECURITIES MATTERS
5.1 Standstill
----------
5.1.1 Standstill. GenPharm covenants and agrees that during the
----------
Standstill Period, without the written consent of the Company, GenPharm will
not, and will not cause any Affiliate of GenPharm to:
(a) directly or indirectly acquire, agree to acquire, make any
proposal to acquire or announce or disclose any intention to make a proposal to
acquire, directly or indirectly, any Voting Securities except the Registrable
Securities;
(b) directly or indirectly (i) make, or in any way participate in, any
"solicitation" of "proxies" (as such terms are defined or used in Regulation 14A
of the Exchange Act)
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<PAGE>
to vote, or seek to advise or influence any person with respect to the voting
of, any Voting Securities, or (ii) become a "participant" in any "election
contest" (as such terms are used or defined in Regulation 14A of the Exchange
Act) relating to the election of directors of the Company;
(c) directly or indirectly form, join in or in any way participate in
a group (within the meaning of Section 13(d)(3) of the Exchange Act) or
otherwise act in concert with any person, (i) for the purpose of circumventing
the provisions of this Agreement or assist any other party in performing any act
which GenPharm is prohibited from performing pursuant to this Agreement, or (ii)
for the purpose of acquiring, holding, voting or disposing of any Voting
Securities; or
(d) directly or indirectly arrange, or participate in the arranging
of, financing for the purchase of any Voting Securities except the Registrable
Securities by any individual, partnership, or other entity.
5.1.2 Amendment of Articles. During the Standstill Period, GenPharm
---------------------
will not, and will not cause any Affiliate of GenPharm to, propose, sponsor or
participate in any action to amend the Company's certificate of incorporation or
by-laws, except in accordance with the recommendation of the Company's Board of
Directors.
5.1.3 Transfers. During the Standstill Period, GenPharm shall not
---------
knowingly sell or otherwise transfer any Voting Securities to any person or
member of a group (as defined in Section 13(d) of the Exchange Act) which person
or group, as a result of such sale or other transfer, would own or acquire
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<PAGE>
Voting Securities representing three percent or more of the aggregate number of
issued and outstanding Voting Securities; provided, that GenPharm may sell
Voting Securities (i) to an offerer (other than (a) GenPharm, (b) a person who
is presently or is at such time an Affiliate of GenPharm, or (c) a group of
which any of the foregoing is a member) in a tender offer made to purchase
outstanding Voting Securities which, when added to any Voting Securities owned
by the offeror or its affiliates, would equal at least 60% of all Voting
Securities, or (ii) to a person that is a qualified institutional buyer as
defined in SEC Rule 144A. For purposes of this Section 5.1.3, GenPharm shall
not have any duty to make any investigation or inquiry regarding the ownership
of Voting Securities by its transferee, and the knowledge (if any) of GenPharm's
broker or selling agent shall not be attributable to GenPharm. The provisions
of this Section 5.1.3 shall not apply to any transfer by GenPharm as part of a
liquidation of substantially all its assets.
5.1.4 Distribution to Shareholders. GenPharm shall provide 20 days
----------------------------
notice to the Company if it intends to distribute any Voting Securities to its
shareholders.
5.2 Irrevocable Proxy. GenPharm agrees that during the Standstill Period
-----------------
(a) if Voting Securities owned by GenPharm are represented at an annual or
special meeting of stockholders it will not vote or cause to be voted such
Voting Securities on any matter properly brought before such annual or special
meeting for which the management of the Company has not solicited proxies in
accordance with Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder unless specifically requested
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<PAGE>
to do so by the Company and (b) GenPharm will not call or cause to be called any
annual or special meeting of stockholders. As security for GenPharm's
obligation hereunder, GenPharm hereby grants during the Standstill Period the
President and Chief Executive Officer of the Company and his successors in
office, with full power of substitution, a power of attorney and irrevocable
proxy to vote the Voting Securities owned by GenPharm and its Affiliates
represented at any such annual or special meeting of shareholders on all matters
submitted to stockholders for which the Company has not solicited proxies, but
only if GenPharm breaches its covenant in the preceding sentence. This is
intended to be a power coupled with an interest. Upon request by the Company,
GenPharm shall promptly execute a written proxy for use at any such meeting on
the terms set forth above.
5.3 Registration Rights.
-------------------
5.3.1(a) Registration on Form S-3. Subject to the terms of this
------------------------
Section 5.3, the Company shall use diligence to effect Registration of the
Registrable Securities by (i) filing a Registration Statement on Form S-3 (or
Form S-1, if Form S-3 is not available for the Registration for any reason) with
the SEC within 30 days from the date of this Agreement, and (ii) using
reasonable diligence to cause the Registration to become effective as soon as
practicable thereafter, and in any event within 45 days thereafter if the filing
is reviewed by the SEC staff. GenPharm shall have the right to distribute the
Registrable Securities by means of an underwritten offering only on terms and
with an underwriter reasonably acceptable to the Company.
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<PAGE>
(b) Piggyback Registration. Subject to the provisions of Section
----------------------
5.3.6 of this Agreement, if at any time the Company proposes to register any of
its securities under the Act, either for its own account or for the account of
others who are not Holders, in connection with the public offering of such
securities solely for cash, on a registration form that would also permit the
registration of Registrable Securities, the Company shall, each such time,
promptly give each Holder written notice of such proposal. Upon the written
request of any Holder given within fifteen days after mailing of any such notice
by the Company, the Company shall use its reasonable best efforts to cause to be
included in such registration under the Act all the Registrable Securities that
each such Holder has requested be registered.
5.3.2 Expenses of Registration. All Registration Expenses incurred
------------------------
in connection with the Registration pursuant to Section 5.3.1 shall be borne by
the Company. All Selling Expenses shall be borne by GenPharm.
5.3.3 Registration Procedures. The Company will keep GenPharm and
-----------------------
any other Holder advised as to the initiation and completion of such
Registration. The Company will: (a) use its best efforts to keep such
registration effective until the earlier of the Maturity Date or Redemption Date
of the Note (as such terms are defined therein) or until the distribution
described in the Registration Statement has been completed, whichever first
occurs; provided, however, that if the distribution described in the
Registration Statement has not been completed and there has occurred during the
period of 90 days
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<PAGE>
prior to the Maturity Date or Redemption Date any period during which sales of
Registrable Securities pursuant to the Registration (if the Note had been
converted) could not be made either because the prospectus provided by the
Company was the subject of a notice pursuant to clause (d) below, or because the
Holder was precluded from selling by the terms of the market standoff covenant
in Section 6.2 below, the Registration shall be extended for a number of days
equal to the number of such days that sales could not be made during such 90-day
period (less the number of days, if any, that the Maturity Date or Redemption
Date was extended by the Holder of the Note); (b) furnish such number of
prospectuses (including preliminary prospectuses) and other documents as Holder
from time to time may reasonably request; (c) prepare and file with the SEC
amendments and supplements to such Registration Statement and the prospectus
used in connection with such Registration Statement as may be necessary to
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement; (d) notify the Holder
of Registrable Securities covered by such Registration Statement at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act of the happening of any event as a result of which the prospectus
included in such Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing and (e) promptly prepare, file and
furnish to a Holder a reasonable number of
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<PAGE>
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of the Registrable
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in light of the circumstances then
existing. Subject to Section 5.3.1, if GenPharm notifies the Company that it
intends to distribute all or a portion of the Registrable Securities in an
underwritten offering, the Company shall enter into an underwriting agreement
containing customary terms (including representations and warranties, market
standoff covenants, delivery of accountants comfort letters and delivery of
legal opinions) and shall reasonably cooperate with the managing underwriters
with regard to their due diligence investigation, the preparation of an
appropriate amended prospectus, and participation in meetings with prospective
institutional investors.
5.3.4 Information Furnished by GenPharm. It shall be a condition
---------------------------------
precedent of the Company's obligations under this Section 5.3 that each Holder
furnish to the Company such information regarding such Holder and the
distribution proposed as the Company may reasonably request.
5.3.5 Indemnification.
---------------
(a) To the extent permitted by law, the Company will indemnify
GenPharm, its officers and directors and each person controlling GenPharm and
each other Holder, with respect to which any Registration, qualification or
compliance of Registrable Securities has been effected pursuant to this Section
-17-
<PAGE>
5.3, and each underwriter, if any, and each person who controls any underwriter
against all claims, losses, damages or liabilities (or actions in respect
thereof) to the extent such claims, losses, damages or liabilities arising out
of or based upon any untrue statement (or alleged untrue statement) of a
material fact contained in any such Registration Statement, prospectus, offering
circular or other document incident to any such Registration, qualification or
compliance, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or any violation by the Company of the Securities Act, the
Exchange Act, or any state securities law, or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law,
applicable to the Company and relating to action or inaction required of the
Company in connection with any such Registration, qualification or compliance;
and the Company will reimburse GenPharm, its officers and directors, each other
Holder and each such underwriter, and each person who controls GenPharm or such
underwriter, for any legal and any other expenses reasonably incurred, as
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action; provided, however, that the indemnity contained in
this Section 5.3.5 shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability or action if settlement is effected without the
consent of the Company (which consent shall not unreasonably be withheld); and
provided, further, that the Company will not be liable in any such case to the
extent that any such claim, loss,
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<PAGE>
damage, liability or expense arises out of or is based upon any untrue statement
or omission based upon written information furnished to the Company by GenPharm,
its officers, directors, such underwriter or controlling person, or each other
Holder and stated to be specifically for use in connection with the offering of
securities of the Company. Upon request, the Company will execute a separate
agreement with any person who may be deemed to be an underwriter with respect to
the sale of the Registrable Securities to indemnify such person to the same
effect as set forth above in this Section 5.3.5.
(b) To the extent permitted by law, each Holder will indemnify
the Company, each of its directors and officers, each legal counsel and
independent accountant of the Company, each underwriter, if any, of the
Company's securities covered by a Registration Statement effected pursuant to
this Section 5.3, each person who controls the Company or such underwriter
within the meaning of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based upon any
untrue statement (or alleged untrue statement) of a material fact contained in
any such Registration Statement, prospectus, offering circular or other document
(including any related Registration Statement) incident to any such
Registration, qualification or compliance, or any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Holder of
the Securities Act, the Exchange Act or any state securities law, or any rule or
regulation promulgated under the Securities Act, the Exchange Act
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<PAGE>
or any state securities law, applicable to the Holder and relating to action or
inaction required of the Holder in connection with any such Registration,
qualification or compliance; and will reimburse the Company, such directors,
officers, legal and accounting firms, underwriters or control persons for any
legal and any other expenses reasonably incurred, as incurred, in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such Registration Statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by or on behalf of GenPharm, and stated to be specifically for
use in connection with the offering of securities of the Company; provided that
the indemnity contained in this Section 5.3.5 shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability or action if settlement is
effected without the consent of GenPharm (which consent shall not unreasonably
be withheld).
(c) Promptly after receipt by an indemnified party under this
Section 5.3.5 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party under this Section 5.3.5, notify the indemnifying party in writing of the
commencement thereof and generally summarize such action. The indemnifying
party shall have the right to assume the defense of such claim. The failure to
notify an indemnifying party promptly of the commencement of any such action
shall not relieve the
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<PAGE>
indemnifying party of its obligations under this Section 5.3.5 unless such
failure is prejudicial to the ability of the indemnifying party to defend such
action. Notwithstanding the foregoing, to the extent that the provisions on
indemnification contained in an underwriting agreement entered into in
connection with a Registration of the Shares are inconsistent with the foregoing
provisions, the underwriting agreement shall be controlling.
(d) If the indemnification provided for in this Section 5.3.5 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, will contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party will be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
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<PAGE>
5.3.6 Marketing Limitation in Piggyback Registration. In the event
----------------------------------------------
the underwriters' representative advises the Holders seeking Registration of
Registrable Securities pursuant to Section 5.3.1(b) in writing that market
factors (including, without limitation, the aggregate number of shares of Common
Stock requested to be Registered or the general condition of the market) require
a limitation of the number of shares to be underwritten, the underwriters'
representative may:
(a) in the case of the first public offering after the date of
this Agreement (the "First Public Offering"), exclude some or all Registrable
Securities from such Registration and underwriting, provided that all other
stockholders participating in the Registration are similarly limited on a pro
rata basis; and
(b) in the case of any Registered public offering subsequent to
the First Public Offering, limit the number of shares of Registrable Securities
to be included in such Registration and underwriting to not less than 25% of the
total number of shares included in such Registration.
5.3.7 Termination. The Company's obligations hereunder shall
-----------
terminate at such time as the Shares are freely transferable without regard to
volume limitations.
6. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934; MARKET STANDOFF
6.1 Reports. The Company represents to GenPharm that it currently meets
-------
the registrant requirements in the General Instructions to Form S-3. With a
view to making available to GenPharm the benefits of Rule 144 and any other rule
or
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<PAGE>
regulation of the SEC that may at any time permit GenPharm to sell securities of
the Company to the public without Registration or pursuant to a Registration on
Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to GenPharm, so long as GenPharm owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, or that it qualifies as a registrant whose securities may
be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing GenPharm of any rule or regulation of
the Commission which permits the selling of any such securities without
registration.
6.2 Market Stand-Off. GenPharm hereby agrees that, if so requested by the
----------------
Company and the underwriters' representative, GenPharm shall not publicly sell,
make any short sale or otherwise transfer (other than to donees who agree to be
similarly bound) any Registrable Securities during the 45 day-period following
the effective date of a Registration Statement of the Company filed under the
Securities Act, plus such
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<PAGE>
additional days thereafter, up to 30, as the underwriters continue making a
stabilizing bid with respect to the offering, provided that all officers and
directors of the Company similarly agree and are not excused from their
agreements, and provided further, that GenPharm is not limited in its
participation in such Registration by any advice from the underwriters'
representative as contemplated in Section 5.3.6 (whether or not such
Registration is the First Public Offering, as defined in Section 5.3.6) to
selling Registrable Securities constituting fewer than 20% of the total
underwritten shares in the offering (excluding shares issuable pursuant to an
underwriters' over-allotment option). If GenPharm has become subject to such
market stand-off, it shall not again become subject thereto unless a period of
six months has expired since the expiration of a prior market standoff to which
it is subject.
7. COVENANT RE INDEBTEDNESS; SUBORDINATION
7.1 Limitation on Incurrence of Indebtedness. Until the Note has been
----------------------------------------
converted or paid in full, the Company (and its wholly or majority-owned
subsidiaries) shall not incur or permit to exist Indebtedness in an aggregate
principal amount in excess of $15 million.
7.2 Subordination. GenPharm agrees that the Note and the indebtedness
-------------
represented thereby will be subordinate to up to $15 million of Indebtedness of
the Company outstanding from time to time ("Senior Debt"). GenPharm agrees to
the terms and conditions set forth in the form of subordination agreement
attached hereto as Exhibit B (the "SVB Subordination Agreement") and agrees from
time to time at the request of the Company to
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<PAGE>
enter into subordination agreements with respect to other Senior Debt on
material terms and conditions no less favorable to GenPharm than those set forth
in the SVB Subordination Agreement.
8. MISCELLANEOUS
8.1 Governing Laws. This Agreement and the Note shall be interpreted and
--------------
construed in accordance with the laws of the State of California, without regard
to conflicts of law principles.
8.2 Waiver. It is agreed that no waiver by any party hereto of any breach
------
or default of any of the covenants or agreements herein set forth shall be
deemed a waiver as to any subsequent and/or similar breach or default.
8.3 Assignment. Neither this Agreement nor any rights granted hereunder
----------
may be assigned by a party except with the written consent of the other party
except that no consent shall be required to transfer the Note or the
Registration rights under Section 5.3 to a shareholder of GenPharm or any other
transferee of at least 250,000 Shares, provided that notice of the transfer is
given to the Company prior to the transfer. The terms and conditions of this
Agreement shall be binding on and inure to the benefit of the permitted
successors and assigns of the parties.
8.4 Notices. Any notice required or permitted to be given to the parties
-------
hereto shall be given in writing and shall be deemed to have been properly given
if delivered in person or when received if mailed by first class certified mail
to the other party at the appropriate address as set forth below or to such
other addresses as may be designated in writing by the parties from time to time
during the term of this Agreement.
-25-
<PAGE>
Cell Genesys, Inc.: Cell Genesys, Inc.
342 Lakeside Drive
Foster City, California 94404
Attn: President and CEO
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attn: File No. 21647-0003 (SAO)
GenPharm International, GenPharm International, Inc.
Inc.: 855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Robert Jack
8.5 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision and the parties shall discuss in good faith appropriate
revised arrangements.
8.6 Complete Agreement. It is understood and agreed that this Agreement
------------------
and the Note constitute the entire agreement, both written and oral, between the
parties with respect to the specific subject matter hereof, and that all prior
agreements respecting the subject matter hereof, either written or oral,
expressed or implied, shall be abrogated, canceled, and are null and void and of
no effect. No amendment or change hereof or addition hereto shall be effective
or binding on either of the parties hereto unless reduced to writing and
executed by the respective duly authorized representatives of all of the
parties.
-26-
<PAGE>
8.7 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and both together shall be deemed to be
one and the same agreement.
8.8 Headings. The captions to the several Articles and Sections hereof
--------
are not a part of this Agreement, but are included merely for convenience of
reference only and shall not affect its meaning or interpretation.
8.9 Company to Reserve Common Stock. The Company shall at all times
-------------------------------
reserve and keep available, free from preemptive rights, out of its authorized
but unissued Common Stock, for the purpose of effecting the conversion of the
Note, the full number of shares of Common Stock then issuable upon the
conversion of the Note.
-27-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, by their
respective officers hereunto duly authorized, as of the day and year first above
written.
CELL GENESYS, INC.
By: /s/ Stephen A. Sherwin
________________________________
Name: Stephen A. Sherwin
______________________________
Title: Chairman & CEO
_____________________________
GENPHARM INTERNATIONAL, INC.
By: /s/ Jonathan MacQuitty
________________________________
Name: Jonathan MacQuitty
______________________________
Title: CEO
_____________________________
-28-
<PAGE>
EXHIBIT 10.48
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN TAKEN FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION THEREOF. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN
SPECIFIC LIMITED CIRCUMSTANCES, AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
----------------------------------------
$15,000,000 Foster City, California
March 26, 1997
Cell Genesys, Inc., a Delaware corporation ("Company"), for value received,
hereby promises to pay to the order of GenPharm International, Inc. ("Holder")
in lawful money of the United States at the address of Holder set forth below,
the principal sum of Fifteen Million Dollars ($15,000,000), together with
interest on the unpaid principal at the rate of seven percent (7%) per annum,
payable semi-annually, beginning on September 30, 1997 until the Maturity Date,
as defined below. All outstanding principal and interest shall be payable in
full on the Maturity Date.
The Maturity Date shall be September 30, 1998; provided that if the Company
does not elect to adjust the Conversion Price (as defined below) as provided in
Section 1.4(a) by providing notice of such election to the Holder no later than
February 28, 1998, the Maturity Date shall be March 31, 1998. If the Company
does so elect, the Conversion Price (as defined below) shall be adjusted as set
forth in Section 1.4(a). The Maturity Date may, at the election of the Holder,
be extended as provided in Section 5.
<PAGE>
If any payment of principal or interest on this Note shall become due on a
Saturday, Sunday, or a public holiday under the laws of the State of California,
such payment shall be made on the next succeeding business day and such
extension of time shall be included in computing interest in connection with
such payment.
Upon payment in full of all principal and interest payable hereunder, this
Note shall be surrendered to Company for cancellation.
The Company waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Holder in exercising any right hereunder shall operate as a waiver
of such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, the Company agrees to pay, in addition to the principal and
interest payable hereon, reasonable attorneys fees and costs incurred by Holder.
In addition, the Holder of this Note by acceptance hereof agrees to the
following terms and conditions:
1. CONVERTIBILITY
1.1 Conversion. Subject to the provisions of this Note, at any time prior
----------
to 12:00 p.m., Pacific Time, on the earlier of the Maturity Date or the
Redemption Date, at the option of the Holder
-2-
<PAGE>
all or any portion of not less than $90,000 of the outstanding principal amount
of this Note and all or any portion of accrued and unpaid interest on this Note
shall be converted from time to time into shares of Common Stock of the Company
(or such other security into which this Note becomes convertible pursuant to
Section 1.4 below, in either case, the "Shares") at a conversion price (the
"Conversion Price") equal to $9.00 per share (adjusted as provided in Section
1.4 below).
1.2 Mechanics of Conversion. This Note or a specified portion thereof
-----------------------
shall be converted by the Holder, pursuant to Section 1.1, by surrender of this
Note to the Company at the address set forth below together with a notice of
election to convert all or a specified portion of the principal and a specified
portion of the accrued and unpaid interest into Shares. If only a specified
portion of the Note is so converted, a notation of such amount shall be placed
on the Note and the Note shall be returned to the Holder. From and after the
date of the surrender, (i) the rights of the Holder of the surrendered Note or
the specified portion thereof as such shall (to the extent of such principal
amount and any accrued and unpaid interest converted) cease, and (ii) Holder
shall be treated for all purposes as the record holder of the Shares into which
such principal and/or interest has been converted. The Company shall, as soon
as practicable after the conversion issue and deliver to the Holder of the
surrendered Note or specified portion thereof, at the address designated by such
Holder, a certificate or certificates (issued as of the date of conversion) for
the Shares
-3-
<PAGE>
into which the principal amount and any accrued and unpaid interest has been
converted.
1.3 Fractional Shares. No fractional shares shall be issued upon
-----------------
conversion of the outstanding principal amount of this Note and any accrued and
unpaid interest on this Note. In lieu of any fractional shares to which the
Holder of this Note would otherwise be entitled, this Company shall pay cash
equal to such fraction multiplied by the Conversion Price.
1.4 Adjustments.
-----------
(a) Adjustment for Extension of Maturity Date. If the Company elects to
-----------------------------------------
adjust the Conversion Price and gives notice of such election to Holder no later
than February 28, 1998, it shall be adjusted to equal the lower of (x) $9.00 or
(y) 115% of the average of the closing prices of the Shares on the Nasdaq
National Market (or such other securities market which is the principal trading
market for the Shares) over the 30 trading days immediately preceding February
28, 1998.
(b) Equitable Adjustments. The number of Shares to be issued upon
----------------------
conversion of this Note and the Conversion Price shall be equitably adjusted for
stock splits, stock dividends, subdivisions, and the like. In the case of any
merger, consolidation, sale of all or substantially all of the assets, or
similar transaction in which the holders of the Company's Common Stock would
receive securities other than Company Common Stock, this Note shall become
convertible into the number and kind of securities as the Holder would have
received in such transaction in exchange for the shares of Company Common Stock
into which this Note was convertible immediately prior to the closing such
-4-
<PAGE>
transaction, and the Conversion Price shall be equitably adjusted.
2. REDEMPTION
2.1 Redemption. This Note may be redeemed at any time on or after August
----------
31, 1997 if the closing price of the Shares on the Nasdaq National Market (or
such other securities market which is the principal trading market for the
Shares) is at least 130 percent of the Conversion Price on at least 20 of the 30
trading days immediately preceding the date of notice of redemption.
2.2 Notice of Redemption. The Company shall, at least 30 days prior to
--------------------
the date fixed by the Company for redemption (the "Redemption Date"), notify the
Holder of such Redemption Date. The notice of redemption shall state:
(a) the Redemption Date,
(b) the accrued interest to the Redemption Date, and
(c) that on the Redemption Date the Note will become due and payable,
and that interest thereon shall cease to accrue on and after said date. To the
extent permitted by applicable law, the Company's notice of redemption shall be
irrevocable. The Holder may convert this Note pursuant to Section 1 above at
any time prior to 12:00 p.m., Pacific Time, on the Redemption Date. The Holder
may extend the Redemption Date as provided in Section 5.
3. NOTE AGREEMENT; SUBORDINATION This Note is issued pursuant to that certain
Convertible Note Purchase Agreement of even date between the Company and the
Holder (the "Note Agreement") and is subject to the terms thereof. This Note
and the indebtedness evidenced hereby is subordinate to any and all Senior Debt,
as
-5-
<PAGE>
defined in the Note Agreement, on the terms set forth in the Note Agreement and
in any subordination agreement entered into pursuant thereto by the Holder,
which Senior Debt subordination agreement shall not restrict the Holder from
enforcing its rights under this Note even though the Company may be in default
under its Senior Debt subordination agreement.
4. EVENTS OF DEFAULT; ACCELERATION The occurrence of any of the following
shall constitute an "Event of Default" under this Note:
(a) The Company shall fail to pay any interest or other payment required
under the terms of this Note on the date due and such default is not cured by
the Company within five days after the Holder has give the Company notice of
such default; or
(b) The Company shall breach the covenant set forth in Section 7.1 under
the Note Agreement; or
(c) There shall occur any Change of Control of the Company. For purposes
of this Section 4, "Change of Control" means any of the following results in the
shareholders of the Company, immediately preceding such event (or combination of
events), ceasing to hold, by reason of their holding of Company shares before
the event, a majority of the voting interest of the Company or the Successor
Company: (i) a merger or consolidation of the Company with another corporation
or entity, whether or not the Company is the survivor, (ii) a transfer by the
Company of substantially all its operating assets, whether in a single
transaction or series of transactions, or (iii) the transfer of a majority of
the outstanding voting shares of the Company pursuant to a tender offer or
exchange offer, or multiple offers. The
-6-
<PAGE>
term "Successor Company" in the preceding sentence means any of (A) a company
into which the Company is merged or consolidated resulting in the Change of
Control, (B) a company to which the majority of the operating assets of the
Company are transferred resulting in the Change of Control, (C) a company which
makes an exchange offer resulting in the Change of Control or (D) a company
which owns all of the outstanding shares of a company described in clause (A),
(B) or (C); or
(d) The Company shall (i) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian of itself or of all or a substantial
part of its property; (ii) be unable, or admit in writing its inability, to pay
its debts generally as they mature; (iii) make a general assignment for the
benefit of its or any of its creditors; (iv) be dissolved or liquidated in full
or in part, (v) become insolvent (as such term may be defined or interpreted
under any applicable statute); (vi) commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or consent to any such relief or to the appointment of or
taking possession of its property by any official in an involuntary case or
other proceeding commenced against it, or (vii) take any action for the purpose
of effecting any of the foregoing; or
(e) Proceedings for the appointment of a receiver, trustee, liquidator or
custodian of the Company or of all or a substantial part of the property
thereof, or an involuntary case or other proceedings seeking liquidation,
reorganization or other relief
-7-
<PAGE>
with respect to the Company or the debts thereof under any bankruptcy,
insolvency or other similar law now or hereafter in effect shall be commenced
and an order for relief entered or such proceeding shall not be dismissed or
discharged within 30 days of commencement.
Upon the occurrence or existence of an Event of Default (other than an
Event of Default referred to in clauses (d) or (e) above) and at any time
thereafter during the continuance of such Event of Default, Holder may, by
written notice to the Company, declare all outstanding obligations payable by
Company hereunder to be immediately due and payable without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived. Upon the occurrence of any Event of Default referred to in clauses (d)
or (e), all outstanding obligations payable by the Company hereunder shall be
immediately due and payable with presentation of demand, protest or any other
notice of any kind, all of which are hereby expressly waived. Upon the
occurrence or existence of any Event of Default, Holder may exercise any other
right, power or remedy permitted to it by law, either by suit in equity or by
action at law, or both.
5. HOLDERS' RIGHT TO EXTEND MATURITY DATE OR REDEMPTION DATE
Notwithstanding anything to the contrary in this Note, the Holder, by
notice to the Company given at least ten days before the Maturity Date or the
Redemption Date, as the case may be, may elect to extend the Maturity Date or
Redemption Date for such number of days, if any, that during the 30 days
immediately prior to such Maturity Date or Redemption Date the Holder was
disabled from selling Registrable Securities pursuant to the Registration
-8-
<PAGE>
in accordance with Section 5.3 of the Note Agreement by reason of either (i) a
notification described in clause (d) of subsection 5.3.3 of the Note Agreement
(relating to a deficiency in the prospectus), or (ii) the market stand-off
obligations in Section 6.2 of the Note Agreement.
6. NOTICES Any notice or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been given upon written
confirmation of telex or telecopy or upon delivery if personally delivered or
upon deposit if deposited in the United States mail for mailing by certified
mail, postage prepaid, and addressed as follows:
If to Holder GenPharm International, Inc.
855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
Address for payment: GenPharm International, Inc.
855 California Ave., Suite C
Palo Alto, CA 94304
Attn: CEO
If to the Company: Cell Genesys, Inc.
342 Lakeside Drive
Foster City, California 94404
Attn: President and CEO
Each of the above addresses may change its address for purposes of this
paragraph by giving to the other addressee notice in conformance with this
paragraph of such new address.
-9-
<PAGE>
7. DEFAULT RATE: USURY. During any period in which an Event of Default has
occurred and is continuing, Company shall pay interest on the unpaid principal
balance hereof at a rate per annum equal to the rate otherwise applicable
hereunder plus two percent (2%). In the event any interest is paid on this Note
which is deemed to be in excess of the then legal maximum rate, then that
portion of the interest payment representing an amount in excess of the then
legal maximum rate shall be deemed a payment of principal and applied against
the principal of this Note.
8. EXPENSES. If action is instituted to collect this Note, Company promises
to pay all costs and expenses, including, without limitation, reasonable
attorneys' fees and costs, incurred in connection with such action whether or
not a lawsuit is actually filed.
9. GOVERNING LAW This Note shall be governed by the laws of the State of
California (without giving effect to its conflict of law provisions).
CELL GENESYS, INC.
By: /s/ Stephen A. Sherwin
______________________________________
Title: President and
Chief Executive Officer
-10-
<PAGE>
EXHIBIT 99.1
Xenotech, L.P.
(a development stage enterprise)
Financial Statements
Years ended December 31, 1996, 1995, and 1994 and
period from inception (June 12, 1991)
to December 31, 1996
with Report of Ernst & Young LLP, Independent Auditors
Xenotech, L.P.
(a development stage enterprise)
Financial Statements
Years ended December 31, 1996, 1995, and 1994 and
period from inception (June 12, 1991)
to December 31, 1996
CONTENTS
Report of Ernst & Young LLP, Independent Auditors.................... 1
<PAGE>
Audited Financial Statements
Balance Sheets....................................................... 2
Statements of Operations............................................. 3
Statement of Partners' Capital....................................... 4
Statements of Cash Flows............................................. 5
Notes to Financial Statements........................................ 6
Report of Ernst & Young LLP, Independent Auditors
The Partners
Xenotech, L.P.
We have audited the accompanying balance sheets of Xenotech, L.P. (a development
stage enterprise) as of December 31, 1996 and 1995, and the related statements
of operations, partners' capital and cash flows for the years ended December 31,
1996, 1995, and 1994 and the period from inception (June 12, 1991) to December
31, 1996. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Xenotech, L.P. (a development
stage enterprise) at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994 and the period from inception (June 12, 1991) to December 31, 1996, in
conformity with generally accepted accounting principles.
<PAGE>
ERNST & YOUNG LLP
Palo Alto, California
January 27, 1997
Xenotech, L.P.
(a development stage enterprise)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---------------------
<S> <C> <C>
ASSETS
Cash $292,592 $ 949,931
Prepaid expenses and other current assets 199,857 148,997
---------------------
Total current assets 492,449 1,098,928
Equipment at cost - 324,274
Accumulated depreciation - (96,097)
---------------------
Equipment, net - 228,177
Note receivable - 30,000
---------------------
$492,449 1,357,105
=====================
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 58,629 $ 351,224
Deferred revenue received from partners - 250,000
---------------------
Total current liabilities 58,629 601,224
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Partners' capital:
Paid - in capital 36,486,391 30,194,570
0
Deficit accumulated during the development stage (36,052,571) (29,438,689)
-----------------------------
Total partners' capital 433,820 755,881
-----------------------------
$ 492,449 $ 1,357,105
=============================
</TABLE>
See accompanying notes.
Xenotech, L.P.
(a development stage enterprise)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 12, 1991) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research revenues from partners $10,031,572 $1,912,500 $ 4,746,606 $ 3,372,466
Expenses:
Research and development 44,711,706 8,239,497 11,270,109 7,710,411
General and administrative 1,541,194 307,532 656,363 316,193
-------------------------------------------------------------------
Total expenses 46,252,900 8,547,029 11,926,472 8,026,604
Interest income 168,757 20,647 50,518 48,704
</TABLE>
<PAGE>
<TABLE>
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $36,052,571 $6,613,882 $ 7,129,348 4,605,434
==================================================================
</TABLE>
XENOTECH, L.P.
(a development stage enterprise)
Statement of Partners' Capital
<TABLE>
<CAPTION>
GENERAL LIMITED PARTNERS TOTAL PARTNERS
PARTNER JT CG CAPITAL
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital contribution at inception $ 60,000 $ 4,750,000 $ - $ 4,810,000
Capital distribution of interest
income - - (33,660) (33,660)
Net loss (47,203) (4,705,222) 32,149 (4,720,276)
----------------------------------------------------------------
Balance at December 31, 1991 12,797 44,778 (1,511) 56,064
Capital contribution 130,000 5,500,000 - 5,630,000
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Capital distribution of interest
income - - (1,211) (1,211)
Net loss (55,317) (5,480,576) 4,223 (5,531,670)
----------------------------------------------------------------
Balance at December 31, 1992 87,480 64,202 1,501 153,183
Capital contribution 12,000 6,800,000 700,000 7,512,000
Net loss (74,520) (6,770,071) (607,370) (7,451,961)
----------------------------------------------------------------
Balance at December 31, 1993 24,960 94,131 94,131 213,222
Capital contribution 40,072 5,000,000 - 5,040,072
Net loss (46,054) (4,779,690) 220,310 (4,605,434)
----------------------------------------------------------------
Balance at December 31, 1994 $ 18,978 $ 314,441 $ 314,441 $ 647,860
Capital contribution 72,369 4,832,500 2,332,500 7,237,369
Net loss (71,294) (4,779,027) (2,279,027) (7,129,348)
----------------------------------------------------------------
Balance at December 31, 1995 $ 20,053 $ 367,914 $ 367,914 $ 755,881
Capital contribution 63,027 3,114,397 3,114,397 6,291,821
Net loss (66,139) (3,273,872) (3,273,872) (6,613,882)
----------------------------------------------------------------
Balance at December 31, 1996 16,941 208,439 208,439 433,820
================================================================
</TABLE>
See accompanying notes.
XENOTECH, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS
<PAGE>
Xenotech, L.P., a California limited partnership and a development stage
enterprise, (the "Partnership"), was organized on June 12, 1991 pursuant to a
Limited Partnership Agreement between Xenotech, Inc. (the "General Partner"),
Cell Genesys, Inc., ("Cell Genesys") and JTI Immunotech USA Inc. ("JTI"), (the
"Limited Partners"), to develop genetically modified strains of mice which can
produce human monoclonal antibodies, and to commercialize products generated
therefrom. On July 15, 1996, CG transferred its partnership interest to Abgenix
Inc. ("Abgenix"), its wholly-owned subsidiary. Together, Cell Genesys and
Abgenix are referred to as ("CG").
The General Partner made an initial capital contribution of $60,000 to the
Partnership, JTI made an initial capital contribution of $2.5 million to the
Partnership and CG contributed a license to certain technology. In connection
with its organization, the Partnership paid $1,250,000 to CG as a license fee
for such technology and $1,250,000 was paid to CG for benchmarks achieved in
1991. From July 1991 through June 1993, eight quarterly capital contributions
of $1,125,000 each were made by JTI to the Partnership and from July 1993
through June 1995, additional research support capital contributions were made
by JTI to the Partnership in eight quarterly installments of $1,250,000 each.
JTI has also contributed $2 million to the Partnership to fund benchmark
payments to CG by the Partnership under a collaboration agreement. From July
1995 to December 1996, JTI and CG each made capital contributions of $5.4
million to the Partnership to support ongoing research activities.
The General Partner must make cash contributions as necessary to maintain a
minimum capital balance of 1% of the total positive capital account balances for
the Partnership. Since July 1995, net losses are allocated 49.5% to CG , 49.5%
to JTI and 1% to the General Partner. Prior to July 1995, operating expenses
were allocated 99% to JTI and 1% to the General Partner until JTI had been
allocated, on a cumulative basis, partnership losses and deductions in an amount
equal to the sum of JTI's total research support capital contributions and 50%
of JTIs initial capital contribution. Since 1992 interest income has been
allocated 49.5% to CG, 49.5% to JTI and 1% to the General Partner. No
allocation of expenses and losses shall create a deficit in the Limited Partners
capital accounts. Such item, to the extent it would increase or create such a
deficit, shall be allocated 100% to the General Partner. Cash distributions are
generally to be made in accordance with the percentage interests.
See related discussion in footnote 3 Related Party Transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
<PAGE>
Research revenues from partners or their affiliates are recorded when earned as
defined under the terms of the respective collaboration agreements. Payments
received in advance under these agreements are recorded as deferred revenue
until earned (see Notes 3 and 4).
DEPRECIATION
The Partnership depreciates equipment using the straight-line method over the
estimated useful lives of the asset, generally four years.
INCOME TAXES
The financial statements include no provision for income taxes as Partnership
income or loss is reported in the Partners' separate income tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
CG provides contract research and development services to the Partnership to
develop genetically modified strains of mice which can produce human monoclonal
antibodies pursuant to a collaboration agreement under which CG receives certain
minimum payments. During 1996, 1995, and 1994, the Partnership paid CG $1.2
million, $5.3 million, and $5.0 million, respectively ($23.4 million for the
period from inception to December 31, 1996) to perform research. Also, in both
1993 and 1992 the Partnership paid CG $1.0 million for milestone payments and in
1993 paid $1.14 million for a one-time license fee, in addition to assuming
certain contingent payments in connection with the license.
In January 1994, the Partnership, CG and JTI executed an agreement creating the
Xenotech Division within CG to conduct ongoing preclinical research of human
monoclonal antibodies derived from the genetically modified strains of mice.
CG and Japan Tobacco Inc. ("JT"), the indirect parent company of JTI, are
providing significant funding to the Partnership for research funding and in
consideration of the Partnership granting marketing rights for specified
products in certain territories to CG and
<PAGE>
JT (see Note 4). The Partnership reimbursed CG for the costs of the operation of
the Xenotech Division. During 1996, 1995, and 1994, the Partnership recognized
expenses of $5.5 million, $5.5 million, and $2.3 million, respectively, ($13.3
million for the period from inception to December 31, 1996) which were paid to
CG for the costs of operating the Xenotech Division.
Pursuant to an agreement dated June 28, 1996, the Xenotech Division was
terminated as of December 31, 1996. In conjunction with this agreement, Xenotech
paid Abgenix $1.2 million to satisfy Xenotech's obligations under the Xenotech
Division Research Agreement. In addition, Abgenix purchased Xenotech's capital
equipment at net book value, and was assigned Xenotech's note receivable, which
was reflected as a reduction of capital contributions.
4. RESEARCH REVENUES
The Partnership recorded research revenues of $1.9 million, $4.7 million, and
$3.4 million for the years ended December 31, 1996, 1995, and 1994,
respectively. The research revenues were derived from research payments made by
JT and CG. Of research payments made by JT and CG, $250,000 and $1.9 million was
deferred revenue at December 31, 1995 and 1994, respectively.
5. SUBSEQUENT EVENT (UNAUDITED)
Cross License and Litigation Settlement
On March 27, 1997, Cell Genesys announced that, along with Abgenix and JTI, it
had signed a comprehensive patent cross-license and settlement agreement with
GenPharm International for human monoclonal antibody technology and resolving
all related litigation and claims between the parties. The cross-license
agreement includes a worldwide royalty free cross-license to all issued and
related patent applications pertaining to the generation of fully human
monoclonal antibody technologies in genetically modified strains of mice. As
consideration for the settlement and cross-license agreement, Cell Genesys
agreed to issue a note due September 30, 1998 for $15 million, convertible into
shares of Cell Genesys common stock at $9.00 per share. The conversion price is
subject to adjustment in twelve months. In addition, JTI agreed to make a cash
payment to GenPharm. The agreement also calls for the Partnership to pay two
potential milestone payments of $7.5 million each based on the issuance of
certain foreign patents in the future.
