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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission file number 0-19472
CELLPRO, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-3087971
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22215 - 26th Avenue S.E.
Bothell, WA 98021
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number including area code: (425) 485-7644
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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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
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, as of May 15, 1997, was approximately $83.4 million (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
NASDAQ Stock Market for that date). Shares of Common Stock held by each officer,
director (and affiliate thereof) and holder of 10% 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.
On May 15, 1997, approximately 14,499,738 shares of the Registrant's
Common Stock, $.001 par value, were outstanding.
Documents Incorporated by Reference
(1) Portions of the Registrant's 1997 Notice of Annual Meeting of
Stockholders and Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on August 1, 1997 are incorporated by reference into
Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
CellPro, Incorporated ("CellPro" or "the Company") has developed a
unique monoclonal antibody-based system that can be used to separate specific
cells from complex cell mixtures for use in a wide range of therapeutic,
diagnostic and research applications. The CellPro technology selects cells in a
continuous flow system by using a high affinity avidin-biotin binding process.
As a result, it combines high levels of throughput with a high degree of
selectivity. On December 6, 1996, the U.S. Food and Drug Administration (the
"FDA") approved CellPro's CEPRATE(R) SC Stem Cell Concentration System (the
"CEPRATE(R) SC System") for use in autologous bone marrow transplantation. The
Company is currently developing numerous additional applications for the
CEPRATE(R) SC System, including use as an adjunct to other cancer treatments,
gene therapy and use in support of treatment of debilitating autoimmune diseases
such as multiple sclerosis, lupus, and rheumatoid arthritis. In addition to stem
cell selection, the Company is developing other new cell therapy applications
for this technology, including T-lymphocyte transplantation and ex vivo
T-lymphocyte adoptive immunotherapy for cancer. The Company is currently selling
the CEPRATE(R) SC System in most European countries, Canada and in certain
Asia-Pacific and Latin American countries. The CEPRATE(R) SC System was approved
for sale in the 18-nation European Economic Area in July, 1995. In February
1997, a new product, the CEPRATE(R) TCD T-Cell Depletion System (the "CEPRATE(R)
TCD System"), was approved for commercial sale in the European Economic Area.
Cell selection plays an increasingly important role in a variety of
medical applications. Cellular therapies, in which purified cell populations
obtained from tissues such as bone marrow or blood are used to treat a variety
of diseases, depend on the collection of specific target cells, or the removal
of particular cellular contaminants, from a mixture of cells. A significant
application of cellular therapy is stem cell transplantation, which is
increasingly being used to treat patients with certain forms of cancer. Stem
cells give rise to most of the other cells in the marrow and ultimately the
blood, and the Company believes that these cells, which represent approximately
one percent of the cells in marrow, are the only cells required for successful
transplantation. Transplantation of certain other cells along with stem cells
can cause harmful side effects or dilute therapeutic benefits. For example, the
marrow of many cancer patients contains tumor cells, which, if transplanted back
into the patient, may contribute to a relapse of the cancer. Alternatively,
donated bone marrow contains cells which may cause a life-threatening immune
reaction in an allogeneic transplant recipient. CellPro's CEPRATE(R) SC System
is designed to provide a supply of purified stem cells that can be used in
cellular therapies while reducing the problems frequently experienced with
current transplantation techniques.
The Company completed its initial Phase III clinical trial in 1993 in
which stem cells purified from bone marrow with the Company's CEPRATE(R) SC
System were transplanted into patients with advanced breast cancer. Data
gathered during the Phase III clinical trial demonstrated successful engraftment
of the transplanted cells. It also indicated significant decreases in the
infusional toxicity normally associated with bone marrow transplantation.
The Company has completed a second Phase III clinical trial to
demonstrate that the CEPRATE(R) SC System can positively select stem cells from
peripheral blood of patients resulting in significant depletion of tumor cells
for the required transplant. The trial was conducted in multiple myeloma
patients undergoing peripheral blood stem cell ("PBSC") transplantation to
restore their marrow with hematopoietic (blood-forming) stem cells following
myeloablative (marrow-killing) chemotherapy. The successful results from this
trial were announced in June 1997, with the estimated filing of the pre-market
approval (PMA) application with the FDA scheduled for fall 1997.
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In October 1996, the Company began a Phase I/II clinical trial with the
CEPRATE(R) TCD System. This device will be used with CellPro's current product,
the CEPRATE(R) SC System, to reduce the number of T-lymphocytes in donor-derived
peripheral blood stem cells for allogeneic transplantation to children with
leukemia. The goal of the trial is to evaluate the proportion of patients with
successful engraftment of donor stem cells and the proportion of patients who
develop graft-versus-host disease, an often fatal side effect of allogeneic
transplants.
The administration of purified stem cells, in conjunction with growth
factors, may allow cancer patients to receive intensified doses of chemotherapy,
an approach which is increasingly being used by physicians to treat certain
cancers. CellPro has begun clinical trials in the U.S. and Germany to test the
use of the CEPRATE(R) SC System for this potential application.
In addition to their present and potential usefulness in cellular
therapy, stem cells are critical to the success of many forms of gene therapy.
The goal of gene therapy is to produce a permanent genetic alteration, which can
only be accomplished if the gene is inserted into self-renewing cells such as
stem cells. CellPro is participating in several clinical trials which
concentrate stem cells for gene therapy in patients with certain cancers,
genetic disorders and AIDS.
CellPro's cellular immunotherapy program exemplifies what the Company
believes will become a trend toward graft engineering. Namely, a bone marrow or
PBSC graft will be fractionated into multiple cellular components that are
administered to the patient at different time points to restore marrow function
(stem and progenitor cells), eradicate residual malignant disease (CD4
lymphocytes, NK cells), and prevent the emergence of viral and fungal diseases
common in the immediate post-transplant setting (CD8 lymphocytes). The Company
believes that its cell selection technology platform is ideally suited to graft
engineering since it allows multiple cell types to be recovered separately in
clinically useful quantities, enabling the clinician to manipulate the
composition of the graft to suit the patient's needs. Ultimately, the Company
envisions that the various cellular components obtained using the CEPRATE(R) SC
System may be activated, expanded in number, or otherwise manipulated ex vivo,
prior to infusion, to render them more effective.
CELL THERAPY IN MEDICINE
OVERVIEW
Cell selection plays an increasingly important role in a variety of
medical applications. Both existing and developing therapeutic and diagnostic
technologies depend on the ready availability of purified cell populations
resulting from the collection of specific target cells, or the removal of
particular cell contaminants, from a mixture of cells. The increasing use of
stem cell transplantation in cancer treatment, as well as the development of new
technologies such as gene therapy and growth factors, has created a need for a
cell selection technology that has a degree of cell selectivity and a scale of
cell recovery not available from traditional cell-selection methods. Monoclonal
antibodies have provided the mechanism that makes it possible to selectively
identify a large number of different types of cells. A practical technology
capable of selecting antibody-labeled cells from complex tissues, such as blood
or bone marrow, could not only improve the efficacy of current therapies, such
as stem cell transplantation, but may also enable the more novel therapeutic and
diagnostic approaches that require purified cell populations, such as gene
therapy.
The use of cells as therapeutics represents a fundamental change in the
practice of medicine. Such cell therapy approaches are based upon the ability to
isolate, manipulate and deliver specific cells to the patient. Until recently,
physicians typically relied on small molecule-based drugs in treating patients.
To the extent these drugs are poor analogs of natural structures in the body,
they are limited in their therapeutic effect and are often associated with
significant toxicity. Recombinant DNA technology has made it possible to clone
genes and thereby produce significant amounts of naturally occurring therapeutic
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substances, such as hormones and growth factors. These substances stimulate the
natural functions of the body and have proven more effective than conventional
drugs in the treatment of many clinical conditions, including anemia, diabetes
and cancer. These substances are not self-regulating, however, and can cause
significant toxicity when other organs in addition to the target tissue are
exposed to these agents. The use of cells for therapy represents a more
effective and safer form of treatment for many diseases because cells represent
self-contained units that perform the body's natural functions and provide
stimulation only when needed. Furthermore, target cells can be exposed
specifically to peptides and growth factors outside of the body, thereby
maximizing the therapeutic effects while minimizing toxicity to other organs of
the body. While still in its early developmental phase, cell therapy has already
had a clinical impact by allowing more aggressive treatment of certain cancers
and debilitating autoimmune diseases, and providing more effective treatment
modalities for other diseases, including gene therapy research.
The tissues used in cellular therapy, such as blood and bone marrow,
consist of many types of cells. Successful cellular therapy requires the
identification and isolation of the beneficial cells in these tissues and the
elimination of cell types with undesirable or harmful side effects. For example,
when bone marrow is utilized for transplantation, the collected aggregate of
several billion cells contains hundreds of different cell types. In conventional
bone marrow transplantation, healthy, blood-generating cells are returned to a
patient whose marrow is either diseased, or has been damaged by radiation or
chemotherapy. Stem cells are the only cells necessary to allow the patient to
generate new blood and immune cells, but they only constitute approximately one
percent of the cells in the marrow. The remainder of the marrow consists of
cells that are either unnecessary or potentially harmful when transplanted. For
example, in an autologous bone marrow transplant, which utilizes the patient's
own bone marrow, that marrow may contain cancer cells that could cause relapse
following transplantation back into the patient. In the case of stem cell
transplantation from other donors, graft-versus-host disease often results
because the donor lymphocytes in the transplanted cells attack the patient's
tissues. Thus, it becomes clinically important either to select the desired
cells, or to remove the offending cells.
Gene therapy depends on inserting genes into specific cells, such as
rare stem cells that are capable of long-term survival in the patient. The
ability to concentrate these rare target stem cells, greatly facilitates the
successful application of this technology because the genes can be targeted into
the stem cells themselves instead of treating whole marrow or blood.
In order for a cell-selection technology to be clinically useful, it
must be capable of processing billions of cells (in the case of therapeutic
applications), or several hundred million cells (in the case of most diagnostic
and research applications). It must also have sufficient specificity to achieve
isolation of rare target cells such as tumor cells, or stem cells, that may
represent only a small fraction of the cell population. Finally, it must be able
to accomplish these tasks in a timely and cost-effective fashion. CellPro's
cell-selection technology offers a practical solution to these challenges
because its unique continuous-flow system allows rapid throughput, while
maintaining a high degree of selectivity for the target cells.
CELLPRO TECHNOLOGY
CellPro's avidin-biotin immunoaffinity cell-selection system, which is
embodied in the CEPRATE(R) SC System, takes advantage of monoclonal antibodies
for selectivity and the strong affinity between avidin (a protein) and biotin (a
vitamin) to allow cell selection to be performed in a high-volume,
continuous-flow, closed processing system. In CellPro's CEPRATE(R) SC System,
biotin molecules attached to monoclonal antibodies (which are themselves
selective for the cells of interest) are introduced into a cellular mixture. The
biotin-conjugated antibodies bind selectively to the target cells. The resulting
antibody-cell suspension is then rapidly passed through a column containing
avidin-coated beads. The strong affinity between biotin and avidin causes the
biotin-linked target cells to adhere to the avidin-coated beads. This technique
can be utilized to either positively select cells of interest or negatively
deplete unwanted cells. In a positive selection application, unmarked cells are
washed through the column, then captured cells are removed by gentle agitation
and collected for use. In a negative selection application,
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the cells which do not adhere to the column are returned to the patient, and the
harmful cells that have been captured by the avidin-coated beads are retained
and discarded. The avidin-biotin binding process makes possible a
continuous-flow system that allows high throughput of cells in a short period of
time with limited opportunity for non-target cells to bind nonspecifically to
the beads.
During a bone marrow transplant, one to two liters of bone marrow
containing several billion cells are obtained from the patient or donor. This
material is then typically processed on a centrifuge, reducing the volume of
material to 250 to 500 cc which is called a buffy coat. When stem cells are
obtained from peripheral blood, a white blood cell fraction containing 150 to
300 cc is obtained from the patient in a leukapheresis procedure Using the
CEPRATE(R) SC System, these mixtures are then processed further to obtain a
highly purified population of stem cells of approximately 4.5ml, sufficient for
transplantation, in less than 90 minutes.
PRODUCT DEVELOPMENT PROGRAMS
The CellPro cell-selection technology can be adapted according to the
number of cells to be processed or the target cells to be selected. All CellPro
systems use a similar avidin-biotin process with the size of the selection
columns varying depending on the specific output required. For example, the
CEPRATE(R) SC System (which can be used to process up to 50 billion cells) has a
selection column containing 120cc of beads, whereas the CEPRATE(R) LC Laboratory
Cell Separation System (the "CEPRATE(R) LC System") (which can be used to
process approximately 100 million to 500 million cells) has a much smaller
column containing only 1.5cc of beads. Target-cell selection is determined by
the choice of monoclonal antibody used.
CellPro's current development programs are focused on adapting its
proprietary cell-selection technology for use in a broad range of clinical cell
therapy indications. Many of these indications have already advanced into human
clinical trials as evidenced by the following program summary:
<TABLE>
<CAPTION>
PRODUCT TYPE APPLICATION DEVELOPMENT STAGE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stem Cell Selection Autologous BMT, stem cell therapy for cancer Commercially available
treatment
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Autologous peripheral blood stem cell therapy Phase III in multiple
and tumor cell purging for cancer treatment myeloma - PMA filing
expected FY1998
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Autologous stem cell therapy for HIV and Phase I/II - several ongoing
autoimmune diseases, including MS, lupus,
rheumatoid arthritis
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Autologous peripheral blood stem cell therapy Phase I/II - several ongoing
for cancer
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Ex vivo stem cell gene therapy for inherited Phase I/II - several ongoing
disorders
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Ex vivo stem cell gene therapy for cancer Phase I/II - several ongoing
treatment
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Dose-intensified, multicycle, multidrug stem Pilot study
cell therapy with MDR-1 gene therapy for high-
risk breast cancer
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT TYPE APPLICATION DEVELOPMENT STAGE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stem Cell Selection In utero allogeneic stem cell therapy to treat Pilot studies
inherited disorders
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Ex vivo generation of autologous dendritic Pilot studies
cells for immunization against cancer
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Ex vivo stem cell gene therapy for treatment of Phase I/II - ongoing
HIV (AIDS)
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Allogeneic stem cell therapy and T-lymphocyte Phase I/II - begun October
and T-Lymphocyte depletion to reduce graft vs host disease in 1996, Phase III planned for
Depletion hematological malignancies FY 1998
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Allogeneic stem cell therapy and T-lymphocyte Phase I/ll - ongoing
and T-Lymphocyte depletion to reduce solid organ rejection
Depletion following transplantation
- ----------------------------------------------------------------------------------------------------------------
Stem Cell Selection Allogeneic stem cell therapy and T-lymphocyte Preclinical
and T-Lymphocyte depletion to induce tolerance in pancreatic
Depletion islet cell transplantation to treat diabetes
- ----------------------------------------------------------------------------------------------------------------
Tumor Cell Depletion Tumor-specific cell depletion from peripheral Pilot studies - planned for
blood stem cell transplants to treat various FY 1998
cancers
- ----------------------------------------------------------------------------------------------------------------
T Lymphocyte Selection T-lymphocyte subset selection to treat Phase I/II - planned for FY
infectious diseases and cancer 1998
- ----------------------------------------------------------------------------------------------------------------
Dendritic Cell Autologous dendritic-cell selection from Preclinical
Selection peripheral blood for immunization against cancer
- ----------------------------------------------------------------------------------------------------------------
Cancer Cell Selection Cancer-specific cell selection for early Preclinical
diagnosis or relapse monitoring
</TABLE>
The Company spent approximately $16.2 million on research and
development during the fiscal year ended March 31, 1997.
The CEPRATE(R) SC System and the CEPRATE(R) LC System accounted for
100% of the Company's product sales during the fiscal years ended March 31,
1997, 1996 and 1995.
CELL THERAPIES FOR CANCER AND AUTOIMMUNE DISEASE TREATMENT
OVERVIEW
The bone marrow is the principal organ of the blood system and is
responsible for the production of the various cells present in blood. The marrow
itself consists of stem cells, including proliferating and differentiating
cells, and mature blood cells (which include red blood cells, white blood cells
and platelets). The stem cells give rise to all the other cells in the blood.
The red blood cells are responsible for carrying oxygen to body tissues, the
white blood cells are responsible for fighting infection and the platelets are a
critical component of the blood-clotting process. If the marrow is damaged, the
nature or composition of cells in the blood will be altered, resulting in many
complications including anemia, infection and bleeding.
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Higher doses of chemotherapy are associated generally with a higher
probability of eradicating certain diseases, but are also associated with
increased toxicities that may lead to irreversible damage to the marrow and
other tissues. Most patients must therefore be given relatively low, and
consequently less effective, doses of chemotherapy to prevent the adverse and
potentially lethal consequences of marrow destruction. Stem cell transplantation
allows more aggressive treatments, which have a better chance of eradicating
certain cancers. In this procedure, the patient is first given massive
chemotherapy or radiation treatment, which destroys the bone marrow as well as
the cancer, and is then infused with an exogenous source of stem cells.
Patients are now being treated with growth factors to stimulate the
recovery of their blood and immune systems after chemotherapy. The bone marrow,
however, contains significantly reduced quantities of stem cells after
chemotherapy, thereby limiting the effectiveness of such growth factors in
therapy. Consequently, there is growing interest in infusing stem cells
immediately after chemotherapy and then treating patients with growth factors.
This provides a larger pool of stem cells to be stimulated by the growth
factors, potentially enabling a more rapid recovery of the marrow after
chemotherapy. Because this treatment could potentially be performed in an
outpatient setting with minimal complications, it could greatly expand the
number of patients eligible for stem cell therapy.
Bone Marrow Transplantation
When chemotherapy regimens, with or without the administration of
radiation, are sufficiently intense that they destroy the patient's blood and
immune systems and bone marrow, the patient will soon die without the successful
reintroduction of new stem cells to repopulate the marrow. These reintroduced
cells localize to the bone marrow, engraft and start producing new blood cells
in the patient in approximately three-to-four weeks. This infusion of cells is
called bone marrow transplantation.
Bone marrow transplantation was originally used to treat hematological
disorders, such as anemia and leukemia, but is being used increasingly to enable
physicians to give higher doses of chemotherapy to treat patients with other
forms of cancer and to treat other diseases and disorders. Currently, there are
estimated to be between 36,000 to 38,000 bone marrow and peripheral blood stem
cell transplantations performed annually around the world. This number is
increasing rapidly, primarily because of the increasing use of transplantation
procedures in patients with leukemias, lymphomas and, in particular, breast
cancer.
There are two types of stem cell transplants, autologous and
allogeneic. In autologous transplantation, some of the patient's stem cells are
removed prior to treatment, frozen and stored for later use. The previously
stored stem cells are then infused into the patient after intense therapy with a
variety of protocols that generally involve chemotherapy and radiation.
Allogeneic transplantation, using stem cells from a closely matched donor
(usually a close relative), is primarily used for treatment of patients with
certain forms of anemia, leukemia or lymphoma. This procedure is more frequently
associated with serious complications and is generally more expensive to perform
than autologous transplantation. Furthermore, donors who are matched closely
enough to the patient to be suitable can be found only in a limited number of
cases.
Cell selection plays a key role in the successful application of
transplantation because it is important to separate the cells necessary for
engraftment from other cells, which may have potentially adverse effects when
they are infused into the patient. These undesired cells differ depending on the
type of transplantation. In allogeneic transplantation, certain white blood
cells in the donor graft can attack the patient (host) and cause a potentially
lethal condition known as graft-versus-host disease ("GVHD"). In autologous
transplantation, the stem cell harvests taken from the patient may contain
cancer cells. This is not only true of patients whose cancer primarily affects
the marrow, such as leukemia, but also for patients with solid tumors, such as
breast cancer. Therefore, it is believed to be important to deplete cancer cells
from the graft prior to infusion to prevent cancer from being given back to the
patient receiving the
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transplant. Additionally, autologous grafts typically are frozen with
cryoprotectants like dimethlysulfoxide, which can lead to a variety of toxic
side effects upon infusion, including hypertension, cardiac arrhythmias, nausea,
vomiting and occasional respiratory and renal failure.
Several depletion techniques have been developed to remove the cancer
cells in autologous transplantation, or the specific white blood cells
responsible for GVHD in allogeneic transplantation. Many of these depletion
technologies are associated with the administration of cytotoxic agents, which
can have adverse effects on normal stem cells and can affect engraftment of the
transplanted stem cells.
Positive selection of stem cells provides an alternative to these
depletion techniques. Depletion of tumor cells can be more easily achieved as a
consequence of selecting the stem cells. Second, toxicity to normal marrow
elements does not occur because cytotoxic agents are not required to purge tumor
cells. Third, a concentrated fraction of stem cells can be stored in a
relatively small volume compared to whole marrow, and the use of purified stem
cells can potentially reduce the side effects previously associated with marrow
infusion.
Stem Cell Collection from Peripheral Blood
While stem cells comprise approximately one percent of bone marrow,
they can also be found, albeit in significantly lower concentration, in blood.
Collecting stem cells from peripheral blood by a centrifugation process known as
apheresis has become an attractive alternative to collecting marrow for
transplants because the most common risks associated with marrow collection,
including anesthetic and surgical complications, can be avoided. Moreover,
clinical studies have demonstrated that peripheral blood stem cells engraft more
rapidly than marrow, by approximately 1.5 to 2 weeks. In the past, several
apheresis procedures were required over approximately a one week period to
collect sufficient numbers of peripheral blood stem cells to engraft a patient.
Hematopoietic growth factors are now being used to increase the concentration of
stem cells in peripheral blood prior to apheresis. Using this strategy,
sufficient numbers of stem cells can be collected in one to two aphereses,
thereby making this procedure an increasingly attractive alternative to bone
marrow transplantation.
Stem cell collection from peripheral blood avoids the surgical and
anesthetic risks associated with bone marrow collection. There are, however,
major issues associated with this approach. First, because it has been shown
that tumor cells are found in the blood of cancer patients, procedures that
provide tumor-free stem cells are believed to be clinically desirable. In
addition, toxicity is even more prevalent with peripheral blood transplants than
with bone marrow transplants due to the larger volume of peripheral blood which
is required to be collected and infused.
CellPro has completed patient enrollment in a Phase III clinical trial
using peripheral blood stem cells purified with its CEPRATE(R) SC System for
autologous transplantation in patients with multiple myeloma. The trial
demonstrated that the use of concentrated stem cells derived from peripheral
blood significantly reduced the presence of tumor cells in the transplanted
material and was efficacious in engraftment.
Stem Cell Therapy as an Adjunct to Multicycle Dose-Intensified Chemotherapy
In standard chemotherapy, the amount and duration of treatment is
carefully regulated to minimize the risk of infection that results from low
counts of neutrophils (neutropenia), a type of white blood cell. Treatments are
usually administered at intervals or in cycles to allow the patient's bone
marrow a chance to recover from the adverse effects of chemotherapy.
Unfortunately, cancer cells also tend to grow between treatment cycles.
Therefore, strategies to reduce the period of neutropenia should both reduce the
risk of infection and allow physicians to treat cancer patients more
aggressively with chemotherapy. A number of hematopoietic growth factors have
been introduced and are being used to stimulate production of white blood cells
after chemotherapy and thereby reduce the period of neutropenia.
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These growth factors have been of clinical benefit, but are limited in their
overall effectiveness because they act on marrow that has previously been
damaged by chemotherapy.
To overcome this limitation, there has been a growing interest in
infusing the patient with stem cells along with growth factors immediately
following chemotherapy. The growth factors then have a larger pool of stem cells
to stimulate, which results in more rapid regeneration of the patient's blood
cells. Using this approach, physicians have been able to deliver more frequent
and higher doses of chemotherapy. In contrast to conventional transplantation,
stem cell therapy as an adjunct to multicycle dose intensified chemotherapy
could potentially be given on an outpatient basis with minimal complications and
at a reduced cost.
Gene Therapy
Stem cells are critical to the success of many forms of gene therapy.
The goal of gene therapy is to produce a permanent genetic alteration, which can
only be accomplished if the gene is inserted into self-renewing cells like stem
cells. CellPro is collaborating in various pilot clinical trials to first
determine the safety of gene therapy in patients with breast cancer, ovarian
cancer, leukemia, multiple myeloma and other malignancies, and secondly to
determine the therapeutic benefit of inserting corrective genes for the
treatment of these diseases. One of these therapeutic genes, a multiple drug
resistance gene, is inserted into the patient's bone marrow stem cells in an
attempt to confer drug resistance to the patient's marrow. The patient may then
be given greater doses of chemotherapy intended to eliminate the cancer without
damaging the patient's genetically resistant bone marrow.
CellPro is also collaborating with the National Institutes of Health
("NIH") and Childrens Hospital Los Angeles in clinical trials to insert the
adenosine deaminase (ADA) gene into stem cells, purified with the Company's
CEPRATE(R) SC System, of children who are missing this gene. The lack of ADA
causes the genetic disorder severe combined immunodeficiency syndrome (SCIDS).
In 1993, cord blood stem cells from three newborn infants with SCIDS were
purified using the CellPro CEPRATE(R) SC System for subsequent transfection with
normal ADA genes. The procedures were completed successfully and the stem cells
returned to the infants. The children are expressing the ADA gene, and doctors
are reducing conventional therapeutic support. In addition, a stem cell
transplant was used to treat a four-month-old fetus diagnosed with SCIDS.
CellPro's cell selection system was used to purify stem cells from the fetus'
father, which were then administered to the fetus in utero. At 18 months, the
child showed no sign of this life-threatening illness. Other clinical trials
using CellPro's technology to purify cells for gene therapy for the treatment of
Gaucher's Disease, HIV, Sickle Cell Anemia, Thalassemia and other disorders have
also begun.
Allogeneic Transplantation with T-Cell Depletion
Patients with certain diseases, such as leukemia, cannot use their own
cells for transplantation because their stem cells may be affected by their
disease. The treatment of choice for many such patients who have failed standard
therapy is an allogeneic (donor cell) transplant. In the allogeneic transplant
setting, tumor contamination of the graft is not a concern, but T cells in the
graft are. A T cell is a type of immune cell that circulates in the blood that
can attack the recipient patient's own normal cells and cause a potentially
fatal condition known as graft-versus-host disease (GVHD). The use of cells from
a closely matched donor reduces, but does not eliminate, the risk of GVHD.
A matched donor, however, may not be easy to find. Fewer than one-third
of the children who might benefit from an allogeneic transplant have a
genetically matched sibling who can serve as a donor. Non-Caucasians and
children of mixed ethnicities are much less likely to find a suitably matched
donor. In addition, even where a matched donor can be found, the process
involved often takes longer than these children can wait.
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Positive selection of stem cells using the CEPRATE(R) SC System reduces
the number of T cells in the graft and may thus facilitate allogeneic
transplantation where donors and patients are closely matched. In the mismatched
setting, however, additional T cell depletion is required to prevent GVHD in the
patient. To address this need, CellPro has developed a second generation
product, the CEPRATE(R) TCD System for use in conjunction with the CEPRATE(R) SC
System to further deplete T cells from the graft. This product was approved for
sale in Europe in February, 1997.
In October, 1996, CellPro began Phase I/II clinical trials using the
CEPRATE(R) TCD System to treat approximately 25 patients at 6 centers in the
U.S. and Canada. The trial involves children with leukemias who need a stem cell
transplant, but can find no suitably matched donor. These children would
otherwise have few, if any, viable treatment options for their fatal disease.
Children enrolled in the trial will receive stem cell transplants from
a family member (usually a parent) who is only partially matched with the child.
Donor cells are processed first using the CEPRATE(R) SC System to concentrate
the stem cells, and then using the CEPRATE(R) TCD System to reduce the number of
T cells in the graft. The clinical trial is designed to evaluate the proportion
of patients who achieve successful engraftment and the proportion who develop
GVHD. If proven to be safe and effective, use of the CEPRATE(R) TCD System could
revolutionize allogeneic transplantation by providing a viable option for many
patients who would otherwise have little hope. Trials using the CEPRATE(R) TCD
System for adult patients are scheduled to begin in the summer of 1997.
T-Cell Therapy
Disease relapse is the most common cause of treatment failure in cancer
patients, even among those patients who have received myeloablative doses of
chemotherapy or radiotherapy in conjunction with stem cell support. Thus, it is
clear that new approaches are needed to control residual disease if overall
treatment outcomes are to be improved.
A potential new application of cell therapy is the use of donor
lymphocytes to enhance the ability of a patient's immune system to seek out and
destroy residual tumor cells following an allogeneic transplant procedure. Donor
lymphocyte immunotherapy has been reported by various researchers to cure
post-transplant relapse in chronic myelogenous leukemia patients. However, the
application of donor lymphocytes is dose-limited due to the risk of inducing
GVHD in the patient. CellPro believes that the use of selected CD4 T cells
rather than unfractionated donor lymphocytes (buffy coats) will afford the
desired anti-tumor response with less risk of inducing GVHD. Initial clinical
studies will focus on using selected, donor CD4 T cells to treat relapse of
disease. This treatment, however, could potentially be used prophylactically
post-allogeneic transplant to prevent relapse in a wide range of hematologic
cancer patients.
Donor lymphocyte immunotherapy has also been reported to be effective
in treating opportunistic viral infections due to occurrence of Epstein-Barr
Virus (EBV) and Cytomegalovirus (CMV) following allogeneic transplant
procedures. EBV is a significant problem since it can cause a rapidly
progressive and uniformly fatal lymphoproliferative disease if left unchecked.
EBV lymphoproliferative disease occurs in both bone marrow and solid organ
transplant settings, where up to 40% of all cardiac transplant recipients
experience this condition. Once a patient develops significant
lymphoproliferative disease, this condition is not treatable with current drugs.
However, leading investigators have reported eradication of EBV disease using
donor lymphocytes. CellPro believes that the use of selected CD8 T cells rather
than unfractionated donor lymphocytes (buffy coats) will afford the same
anti-viral response with less incidence of GVHD noted in these early studies.
CellPro's cellular immunotherapy program exemplifies what the Company
believes will become a trend toward graft engineering. Namely, a bone marrow or
PBSC graft will be fractionated into multiple cellular components that are
administered to the patient at different time points to restore marrow function
(stem and progenitor cells), eradicate residual malignant disease (CD4
lymphocytes, NK cells), and prevent
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the emergence of viral and fungal diseases common in the immediate
post-transplant setting (CD8 lymphocytes). CellPro believes that its cell
selection technology platform is ideally suited to graft engineering since it
allows multiple cell types to be recovered separately in clinically useful
quantities, enabling the clinician to manipulate the composition of the graft to
suit the patient's needs. Ultimately, the Company envisions that the various
cellular components obtained using the CEPRATE(R) SC System may be activated,
expanded in number, or otherwise manipulated ex vivo, prior to infusion, to
render them even more effective.
Adoptive Immunotherapy
In the autologous transplant setting, new cellular vaccine techniques
are under development to enhance the ability of the patient's immune system to
mount a response against the residual tumor cells which contribute to relapse.
Historically, the use of vaccines has been extremely effective at inducing
immunity against many viral and bacterial pathogens, however, they have
demonstrated only limited benefit against cancer.
CellPro has developed techniques for isolating dendritic cells from the
patient's blood, using monoclonal antibodies specific to dendritic cells or
their precursors. These specialized cells are capable of processing and
presenting tumor antigens to naive, unstimulated T cells. Following selection,
dendritic cells are presented with a specific tumor antigen ex vivo, then
infused into the patient as a cellular vaccine to induce a T-cell response in
vivo. The initial clinical target for dendritic cell vaccines are likely to be
multiple myeloma or melanoma patients.
Another approach which CellPro is currently actively developing with a
research collaborator, Corixa Corporation, is to use its cell selection
technology in a process for ex vivo education and expansion of antigen-specific
T cells. Autologous antigen presenting cells (such as dendritic cells) are first
exposed to tumor specific antigens and then combined with the patient's T cells
for ex vivo education or activation. The T cells are then reinfused into the
patient as a cellular vaccine to mount a tumor specific attack against the
residual tumor cells. CellPro plans to initially focus this therapy on the
treatment of breast cancer.
Adoptive immunotherapy, utilizing autologous, antigen-specific,
effector lymphocytes may prove a safe, effective, and non-cross resistant means
of eradicating minimal residual disease in cancer patients who have undergone
prior surgical removal of tumor or myeloablative chemotherapy treatment.
Tumor Cell Purging
While stem cell selection alone is effective in significantly reducing
the number of tumor cells present in the cell infusion received by a transplant
patient, it frequently does not totally eliminate the presence of tumor cells.
The Company is currently developing new next-generation products for use with
its CEPRATE(R) SC System to enhance the degree to which tumor cells are purged
from autologous stem cell grafts. Using antibodies specific to certain tumor
cells, a second cell selection step is performed following the initial stem cell
concentration to negatively deplete remaining tumor cells. The Company has begun
clinical testing of these next-generation products. Initial focus will be placed
on systems to "purge" breast cancer and lymphoma transplants.
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Autoimmune Diseases
Autoimmune diseases such as multiple sclerosis (MS), lupus and
rheumatoid arthritis are caused by the patient's own immune cells attacking
their normal tissues. A number of cancer patients with co-existing autoimmune
diseases have experienced some improvement of their autoimmune condition
following stem cell transplantation to treat their cancer. This has led to a
strong interest in using high-dose chemotherapy and autologous stem cell
transplantation as therapy for this serious and debilitating group of diseases.
The bone marrow or blood products of autoimmune patients will, however, contain
certain immune cells which could reinitiate the disease. The CEPRATE(R) SC
System is thus being used in these clinical trials to enrich for the stem cells
necessary for rebuilding the blood and immune systems and at the same time
depleting the immune cells that cause disease.
In May, 1996, Northwestern University Medical School in Chicago began
the nation's first clinical trial to use autologous bone marrow transplantation
to treat rapidly progressing MS. The Medical College of Wisconsin in Milwaukee
is also participating in this study. MS is caused by an immunological attack on
the myelin sheath that covers many of the nerve fibers in the central nervous
system. This attack is thought to be caused by T-cell mediated immune
destruction of the myelin sheath surrounding nerves. The CEPRATE(R) SC System is
being used in this study to purify the stem cells and reduce the number of T
cells returned to the patient in the transplant procedure. Northwestern
University and the University of Wisconsin in Madison are also conducting
similar clinical trials to treat lupus and rheumatoid arthritis.
AIDS
Researchers at St. Jude's Children's Research Hospital in Memphis,
Tennessee recently conducted a clinical trial to determine whether stem cells
could be mobilized into the peripheral blood of HIV-1-infected individuals,
collected and used to develop gene-transfer based therapies to combat the
disease. The stem cells were successfully mobilized in these patients and
selected using the CEPRATE(R) SC System. Analysis of the stem cells indicated
they were free from viral infection, making them suitable not only for use in
gene-transfer based therapies, but also for use in stem cell transplantation and
immune system reconstitution.
Another clinical study is being conducted at the City of Hope National
Medical Center in Duarte, California using the CEPRATE(R) SC System to select
stem cells from HIV-positive patients. A ribozyme gene is inserted into the
selected stem cells in the hope that the transduced cells will produce T cells
resistant to HIV infection. If successful, this trial could represent a major
step toward successful gene therapy treatments for HIV and other diseases.
Ribozyme Pharmaceuticals, Inc., is supplying the ribozyme gene used in this
trial.
CEPRATE(R) LC SYSTEM
Biomedical researchers are increasingly performing studies that require
purified cell populations. For example, investigators in immunology are studying
cytokines, receptors and antigens in various subpopulations of lymphocytes.
Other researchers in hematopoiesis are investigating growth factors and the
function of a number of genes in hematopoietic stem cells. To accomplish these
tasks, investigators need to purify sufficient numbers of lymphocytes or stem
cells.
CellPro has developed the CEPRATE(R) LC System, which is easy to use,
versatile and capable of selecting a wide variety of cell types. It consists of
an entire cell selection system, including reagents, antibodies and hardware,
and is used to perform cell selection in the research laboratory. This product
was introduced in October 1991 for isolation of hematopoietic stem cells.
CellPro has since introduced kits that can be used to isolate several lymphocyte
subpopulations. Major customers for these research products include academic
research institutions, biotechnology companies and pharmaceutical firms.
OTHER APPLICATIONS
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To date, CellPro has focused its development efforts on the products
listed above. The Company has also conducted feasibility studies of the
application of its cell-selection technology in the area of cancer diagnostics
and is expanding the application of its technology to the isolation of stem
cells for use in treatment of various autoimmune diseases and support in solid
organ transplantation.
CellPro's cell-separation technology may have application in assisting
physicians in the diagnosis of cancer. By concentrating rare tumor cells that
are present in the early stages of cancer from tissues such as marrow or blood,
CellPro technology could improve the diagnostic accuracy of current tests for
cancer.
Exploratory trials have begun using donor selected stem cells to reduce
the incidence of solid organ rejection in a transplant setting. The use of donor
stem cells conditions the host patient to also express certain characteristics
of the donor's immune system, thus reducing the risk of the patient's own immune
system mounting a defensive attack against the new organ which can lead to
rejection.
Stem cells may also be used to induce tolerance in the setting of
pancreatic islet cell transplantation (ICT). Treatment of diabetes with ICT has
the potential to prevent the development of serious end-stage complications of
the disease, such as renal failure and blindness. If successful, this approach
could significantly improve the quality of life for people with diabetes and
minimize the enormous expense associated with treating patients who are
seriously affected by the disease. Utilizing donor bone marrow infusions in
connection with ICT, researchers at the Diabetes Research Institute in Miami,
Florida have obtained improved survival of transplanted islets in experimental
models. The CEPRATE(R) SC System is now being used to determine if enriched
donor stem cells can enhance islet survival in pre-clinical models.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its technology by, among other
things, filing patent applications for technology that it considers important to
the development of its business. The Company has eight issued patents in the
U.S. and five foreign patents concerning cell selection and related technology
developed or licensed by the Company. Additional U.S. and foreign patent
applications are pending including two U.S. patents which have been allowed, but
not yet issued. The Company intends to file additional patent applications, when
appropriate, relating to improvements in its technology and other specific
procedures that it develops.
See Also, "Investment Considerations - Patents and Proprietary
Technology" on pages 19 through 21.
UNITED STATES GOVERNMENT REGULATION
OVERVIEW
Regulation by governmental authorities is a significant factor in the
manufacture and marketing of the Company's proposed products and in its ongoing
research and product development activities. All of the Company's proposed
products, except the CEPRATE(R) LC System, which is intended for nonclinical
purposes only and is therefore exempt from premarket clearance requirements,
will require regulatory approval prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing as a condition of approval by the FDA and by similar authorities in
foreign countries. The lengthy process of seeking these approvals, and the
ongoing process of compliance with applicable federal statutes and regulations,
require the expenditure of substantial resources. Any failure by the Company or
its collaborators or licensees to obtain, or any delay in obtaining, regulatory
approvals could adversely affect the marketing of any products developed by the
Company.
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The Company and all of its suppliers are subject to various federal,
state and local laws, regulations and recommendations relating to such matters
as safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and biological materials,
used in connection with the Company's research and development work. The Company
does not expect environmental compliance to materially effect its earnings,
capital expenditures or competitive position.
For a discussion of the regulatory process see "Investment
Considerations - Government Regulation" on pages 24 through 27.
COLLABORATIVE, LICENSE AND TECHNOLOGY-RELATED AGREEMENTS
The Company seeks to obtain licenses to technologies that complement
and expand its existing technology base. Where consistent with its business
strategy, the Company intends to enter into collaborations or to license product
and marketing rights to selected strategic partners to capitalize on the
production, development, regulatory and marketing capabilities of these
entities. Several of the Company's collaborative, license and technology-related
agreements are set forth below.
FRED HUTCHINSON CANCER RESEARCH CENTER
In March 1989, the Company entered into two license agreements with the
Fred Hutchinson Cancer Research Center (the Hutchinson Center.) Under one
agreement, the Company was granted an exclusive, worldwide license (with the
right to sublicense) (subject to the rights of certain U.S. governmental
agencies and a grant-back to the Hutchinson Center for non-commercial research
purposes) to certain patent rights relating to avidin-biotin immunoaffinity
chromatography, which constitutes CellPro's core technology for cell separation.
The Company paid an up-front license fee upon execution of this license
agreement and has paid additional amounts upon achieving certain milestones. In
addition, the Company is obligated to pay royalties, subject to a minimum
royalty for a period of ten years after the first commercial shipment of a
product covered by this license agreement and royalties on actual product sales
during the remainder of the term of a licensed patent. CellPro also has the
option of converting its license into a non-exclusive license upon two years'
notice, which would then relieve it of certain of its royalty payment
obligations.
Under the second agreement, CellPro obtained an exclusive, worldwide
license (with the right to sublicense) for ex vivo therapeutic applications and
a non-exclusive license for all other applications under the Hutchinson Center's
rights to a certain hybridoma cell line that produces antibodies selective for
an antigen expressed on human stem cells. The Company paid an up-front license
fee and is obligated to pay royalties until March 1999. In addition, the Company
also paid certain amounts to the Hutchinson Center to fund research.
CORIXA CORPORATION
In December 1995, the Company entered into a multi-year research
collaboration and licensing agreement with Corixa Corporation, a Seattle-based
biotechnology company.
The research collaboration calls for CellPro to provide funding for a
new research program to identify and optimize methods and conditions for growth,
activation, or stimulation of tumor-antigen-specific lymphocytes (white blood
cells) and other antigen-presenting cells outside of the body (ex vivo) for use
in treating cancer. The program objective is to develop commercial products that
combine CellPro's ex vivo cell-separation and cell-culture technology with
Corixa's knowledge and access to proprietary tumor antigens, antigen delivery
systems and adjuvants.
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Under the agreement, as amended in January 1997, CellPro receives
exclusive worldwide rights to all ex vivo therapy applications arising from
Corixa's technology within the field of oncology and co-exclusive rights to
dendritic cell vaccines that incorporate Corixa's technology. CellPro will be
responsible for the clinical development and commercial introduction of any
products resulting from this agreement. CellPro will provide Corixa with
research funding and will make additional milestone and royalty payments based
on the successful development and commercialization of these products. The
amount of research funding will be negotiated annually, subject to certain
minimums.
OTHER AGREEMENTS
The Company has entered into license agreements with other companies
and academic and research institutions pursuant to which the Company receives
access to certain antibodies and cell lines for use in its product development
programs.
COMPETITION
The market for cell separation systems is competitive. Many of the
Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market such systems. In addition, many of
these companies have extensive experience in preclinical testing and human
clinical trials. Certain of these companies may develop and introduce products
and processes competitive with or superior to those of the Company. The Company
faces competition, particularly in the cell-separation field, from several
biotechnology and pharmaceutical companies, including Amgen, Inc., Baxter
Healthcare Corporation, Becton Dickinson and Company, Novartis/Systemix and
Aastrom Biosciences Inc. in collaboration with COBE BCT.
The Company's competitive position will be determined in part by which
cell selection products are ultimately approved for sale by regulatory
authorities and by the outcome of certain legal proceedings pending against the
Company. For a discussion of these legal proceedings, see "Investment
Considerations -- Legal Proceedings," below. The relative speed with which the
Company develops its products, completes the approval processes and is able to
manufacture and market commercial quantities thereof will be an important
competitive factor. Currently, the Company's CEPRATE(R) SC System is approved
for commercial sale in the European Economic Area and Canada, and is the only
cell processing system approved in the U.S. The Company expects that competition
among cell selection products approved for sale will be based, among other
factors, on product efficacy, safety, reliability, availability and price.
EMPLOYEES
The Company currently employs approximately 165 persons, of whom 103
are dedicated to research, development, manufacturing, quality assurance and
quality control, regulatory affairs or preclinical and clinical testing.
Twenty-two of the Company's employees have a Ph.D. or M.D. degree.
MANUFACTURING AND SUPPLY
The Company's manufacturing operations are located in approximately
23,000 square feet in a leased facility in Bothell, Washington. Manufacturing
activities are fully integrated, including antibody production and purification,
avidin affinity matrix, assembly and fill, and distribution operations. The
Company is required to operate this facility in compliance with the FDA's Good
Manufacturing Practices (GMP) requirements and within the requirements of other
regulatory authorities such as ISO 9000 standards for the European Community.
Regulatory compliance requires extensive efforts by the Company, and there can
be no assurance that such requirements will be satisfied in a timely manner. It
is
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estimated that this facility will have the capacity to satisfy product usage
requirements for current and planned clinical trials and to supply products for
early commercial sales.
The Company has formed a subsidiary, CellPro Europe N.V./S.A., with
principal executive offices located in Brussels, Belgium. The purpose of CellPro
Europe N.V./S.A. is to coordinate sales and marketing activities for the Company
throughout Europe. The Company has also established subsidiaries in France,
Germany, Italy and Spain, to conduct sales and customer support activities in
key markets of Europe. In addition, the Company has agreements with companies in
South America and the Asia-Pacific region for the distribution of CellPro's
products.
The Company purchases antibodies, components and supplies for its
products. Certain of the antibodies, components and supplies are obtained from
single source suppliers.
INVESTMENT CONSIDERATIONS
The Company desires to take advantage of certain provisions of the
Private Securities Litigation Reform Act of 1995, enacted in December 1995 (the
"Reform Act") that provided a "safe harbor" for forward-looking statements made
by or on behalf of the Company. The Company hereby cautions stockholders,
prospective investors in the Company and other readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, the Company's stock price or cause the Company's actual results
for the fiscal year ending March 31, 1998, for the fiscal quarter ending June
30, 1997, and for future fiscal years and quarters to differ materially from
those expressed in any forward-looking statements, oral or written, made by or
on behalf of the Company.
LEGAL PROCEEDINGS.
The Company is engaged in litigation with the Johns Hopkins University
("Hopkins"), Becton Dickinson & Company ("BD") and Baxter Healthcare Corporation
("Baxter") concerning certain U.S. patents. There have been two jury trials in
the case. Following the first trial in the Summer of 1995, a unanimous
seven-member jury in the U.S. District Court in Wilmington, Delaware, on August
4, 1995, rendered a verdict wholly favorable to CellPro relating to the four
U.S. patents then in suit: Patent Nos. 4,714,680, 4,965,204, 5,035,994 and
5,130,144 (hereinafter the `680, `204, `994 and `144 patents), which had been
assigned to Hopkins, licensed to BD and sublicensed to Baxter. The `680 patent
purports to cover certain suspensions of stem cells in isolation from a mixed
cell population; the `204 patent purports to cover hybridomas that produce
monoclonal antibodies having certain characteristics relating to stem cells, and
to cover such antibodies themselves; the `994 patent purports to cover a method
of stem cell isolation using such antibodies; and the `144 patent purports to
cover a method of transplanting stem cells in a human patient.
The jury in the first trial determined that the Company did not
literally infringe any of these four patents; that all claims of all four
patents were invalid for obviousness under 35 U.S.C. Section 103; and that, with
the exception of two claims of the `204 patent, all claims of all four patents
were invalid on the additional ground of failure to enable under 35 U.S.C.
Section 112. The two claims of the `204 patent as to which the jury did not
render a verdict of "nonenablement" invalidity under 35 U.S.C. Section 112 are
limited in their literal scope to the My-10 antibody and its accompanying
hybridoma, an antibody and hybridoma which are not employed by the Company.
Following the first jury verdict, plaintiffs filed post-trial motions
and, on July 1, 1996, the Delaware District Court (per Judge Roderick R.
McKelvie) partially granted plaintiffs' motion for judgment as a matter of law
as to the issues of infringement, inducement of infringement and enablement with
respect to the `680 patent, as well as the issue of induced infringement with
respect to the `144 patent. The Court ordered a new trial on remaining liability
and infringement issues.
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In a series of decisions subsequent to the July 1, 1996 order, Judge
McKelvie granted motions by the plaintiffs to dismiss CellPro's remaining
liability and infringement defenses. Plaintiffs moved to withdraw two of the
four patents (the `994 and `144 patents) from suit, which motion was granted
upon plaintiffs' undertaking that they would not accuse any present product of
CellPro of infringing those patents.
A second jury trial was held in March, 1997, at which the jury was
instructed to the effect that the Court had already determined that CellPro
infringed the two patents remaining in the suit, that its defenses had been
dismissed, and that the jury was bound by those determinations. Hence, the jury
at the second trial heard evidence and arguments only as to the amount of
damages to be awarded and as to whether CellPro's conduct had been willful. On
March 11, 1997, the jury reach a verdict finding willfulness and awarding some
$2.3 million in damages to plaintiffs.
No judgment has yet been entered on the second jury's verdict, but the
Company believes it highly likely that a judgment will be entered affirming such
jury's verdict in the near future. Meanwhile the following motions, on
which oral argument was heard on April 30, 1997, are still pending for decision:
(1) Plaintiffs' motion for enhanced damages, whereby they ask the Court to
treble the jury's damage award to some $6.9 million; (2) plaintiffs' motion for
attorney fees, whereby they seek a determination that CellPro is liable to
reimburse them for some $7 million in attorney fees and related litigation
costs; (3) plaintiffs' motion for a permanent injunction, which seeks relief
further discussed below; and (4) the Company's alternative motion for a stay of
injunction pending appeal. Also pending is a motion aimed to determine whether,
and if so when, the Company will be allowed to proceed further on its defense
that the patents are unenforceable for misuse by reason of an attempt by the
plaintiffs to extend the reach of their patents beyond the territory of the U.S.
In the interest of expediting an appeal, the Company has offered to dismiss the
misuse claim without prejudice to its reinstatement should there be a reversal
on appeal.
Plaintiffs' proposed injunction is complex in form, but if granted
would prohibit CellPro (subject to a stay hereinafter described) from making,
using and selling products in the U.S. which utilized the anti-stem-cell
monoclonal antibody that is essential to the Company's principal products as
they are presently constituted. Plaintiffs' proposed injunction would also
require a one-year phase-down of sales of those products in the rest of the
world, followed by a moratorium on international sales of CD34-antibody-based
products thereafter for a period of one year. The partial stay proposed by
Plaintiffs would be effective until such time as another stem-cell
immunoseparation product (such as Baxter's ISOLEX(R) product) gains approval
from the FDA, an event which Plaintiffs have contended is probably six months
away but which may take significantly longer. Under Plaintiffs' proposed
stay, the Company would be allowed to continue selling its principal products to
support FDA approved studies and trials (in the U.S. only) commenced before such
time as an alternative device wins FDA approval. Under plaintiffs' proposed
stay, all other commercial and cost recovery sales of disposable components,
apart from FDA studies and trials, would be subject to the requirement that
CellPro pay over to plaintiffs their "incremental profits" (as defined in the
proposed injunction) on those sales, but not less than $2,000 per commercial
sale of disposable product.
The Company has opposed the entry of any injunction on public-health
grounds and has proposed that if any injunction is entered, it should be stayed
in total pending appeal.
The Company intends to challenge the second jury's verdict on
post-trial motions and, if necessary, on appeal to the U.S. Court of Appeals for
the Federal Circuit. The Company further intends to pursue vigorously an appeal
in that Court from adverse rulings heretofore and hereafter made by the District
Court. The Company plans to urge that reversible errors were made by the Court
in trying this case, that the second jury's verdict is contrary to the evidence
and the law, and that the first jury's invalidity verdicts, wholly favorable to
CellPro, should be reinstated and judgment entered thereon.
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The antitrust and unfair competition claims filed by CellPro against
the plaintiffs have been stayed pending completion of the patent litigation.
Simultaneously with the patent litigation in the Delaware District
Court, an administrative proceeding is pending wherein CellPro has petitioned
the U.S. Department of Health and Human Services ("the Department") to exercise
its "march-in" rights under the Bayh-Dole Act (35 U.S.C. Section 203) by
requiring Hopkins to license to CellPro, on reasonable terms, the technology
covered by the Hopkins patents. However, the Department has never before
exercised its march-in rights under the Bayh-Dole Act. March-in rights may be
exercised if no practical application of the techonology in dispute has been
made in a reasonable time and none is exptected, and such a license is necessary
to protect public health. The Department's decision whether to proceed further
with their evaluation of the march-in process is expected by early August, 1997.
Although Management is optimistic that this patent dispute will
ultimately be resolved favorably to the Company, due either to success on
post-trial motions, success on appeal and/or success in the Bayh-Dole march-in
proceeding, the course of litigation is inherently uncertain and there can be no
assurance of a favorable outcome.
Regardless of the ultimate prospect of a favorable outcome, the Company
expects to continue to make substantial expenditures in connection with this
litigation for the foreseeable future. Future expenses in connection with this
litigation could have a material adverse effect on the Company's results of
operations and financial position in future periods.
If plaintiffs should succeed in their applications for a trebling of
damages and award of attorney fees, and if they should succeed in defending
their position on these items of relief in the Federal Circuit Court on appeal,
then the Company would be required to pay a judgment for damages and fees of
approximately $14 million, which could have a substantial adverse impact on the
Company's business and financial condition. As discussed in Item 3, the Company
has accrued $17 million to cover potential losses from and future expenses for
pursuing this litigation.
If the Company's Bayh-Dole petition should fail and if, in addition,
the plaintiffs were to succeed in obtaining an injunction in the form they
propose, then the Company would be prohibited from selling its principal
products, and from conducting certain related research activities, in the U.S.
during the term of the patents, which would greatly disrupt the Company's
operations. Absent a Bayh-Dole or other reasonable license, and if a suitable
stay of injunction were not granted pending appeal, the Company, according to a
declaration of its chief financial officer filed May 28, 1997, would likely find
it necessary to significantly restrict operations so as to conserve capital
while awaiting the outcome of the appeal. Any such event could result in a
significant decrease in the value of the Company and therefore makes any
investment in the Company inherently highly speculative.
As a possible alternative to a litigated result, the Company could
pursue further attempts to obtain commercially reasonable licenses under the
four Johns Hopkins patents at issue through various means, including through
negotiations with plaintiffs. Such attempts have not been successful to date,
however, and no assurance can be given that plaintiffs would license the patents
to the Company at all or on terms that would permit commercialization of the
Company's stem cell separation technology.
PATENTS AND PROPRIETARY TECHNOLOGY.
The Company's ability to compete effectively will depend substantially
on its ability to develop and maintain proprietary aspects of the technology. To
date, the Company has submitted numerous U.S. patent applications and foreign
counterparts relating to cell selection technology developed by the Company, of
which five patents have issued in the U.S., two have been allowed in the U.S.,
but not yet issued, three have issued in Canada, and one has been granted in
Europe. The Company also has licensed the rights to certain patents related as
continuations to an application originally filed by the Hutchinson
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Center in January 1986; these patents issued in 1993 (U.S. 5,215,927, 6/2/93;
U.S. 5,225,353, 7/6/93; U.S. 5,262,334, 11/16/93). The European counterpart of
these cases was granted in 1992 (EP B 0260 280) and subsequently upheld on
opposition. The Company intends to file additional patent applications, when
appropriate, relating to improvements in its technology and other specific
products that it develops. Although the Company has been granted or has
exclusive rights to various patents, the Company's success will depend in large
part on its ability to obtain U.S. and foreign patent protection for its
products, preserve its trade secrets and operate without infringing on the
proprietary rights of third parties. There can be no assurance that the
Company's issued patents, any future patents that may be issued as a result of
the Company's U.S. or international patent applications, or the patents under
which the Company has license rights, will offer any degree of protection to the
Company's products against competitive products. There can also be no assurance
that any additional patents will issue from any of the patent applications owned
by or licensed to the Company, or that any patents that currently are or may be
issued or licensed to the Company or any of the Company's patent applications
will not be challenged, invalidated or circumvented in the future, or that any
patents issued to or licensed by the Company will not be infringed upon or
designed around by others. In addition, there can be no assurance that
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the U.S. or in international markets.
Moreover, patent law relating to certain of the Company's field of interest,
particularly as to the scope of claims in issued patents, is still developing
and it is unclear how these patent law developments will affect the Company's
patent rights.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the industry have employed intellectual property litigation to gain
a competitive advantage. There can be no assurance that the Company will not in
the future become subject to additional patent infringement claims and
litigation or interference proceedings declared by the U.S. Patent and Trademark
Office ("USPTO") to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time consuming.
Litigation may be necessary to enforce patents issued to or licensed to the
Company, to protect the Company's trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others.
Entry of a judgment against the Company, in a patent infringement case
involving an antibody used by the Company in its CEPRATE(R) SC System, appears
highly likely in the near future. See "Legal Proceedings." Plaintiffs in
this case are seeking a permanent injunction against the Company's principal
products. This injunction would prevent the Company from manufacturing or
selling these products which would have a material adverse effect on the
Company's business, financial condition and results of operations (see "Legal
Proceedings," above). There can be no assurance that additional infringement
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted against the Company in the future or
that such assertions, if proven to be true, will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Any additional litigation or interference proceedings involving the Company
would likely result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. An
adverse determination in litigation or interference proceedings to which the
Company is or may become a party could subject the Company to significant
liabilities to third parties or require the Company to seek licenses from third
parties. Although patent and intellectual property disputes in the medical
device area have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and could include
ongoing royalties. Furthermore, there can be no assurance that necessary
licenses would be available to the Company on satisfactory terms or at all.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
the individual by the Company during the course of the individual's relationship
with the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also
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generally provide that all inventions conceived by the individual in the course
of rendering services to the Company shall be the exclusive property of the
Company. There can be no assurance that proprietary information or
confidentiality agreements with employees, consultants and others will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by competitors.
DEPENDENCE ON CEPRATE(R) SC SYSTEM.
The CEPRATE(R) SC System is the primary product being marketed by the
Company and will remain so for the near term. The Company has received approval
from the FDA for use of the CEPRATE(R) SC System for transplantation of stem
cells obtained from bone marrow. In order to market the CEPRATE(R) SC System in
the U.S. for additional indications, including for the potentially larger market
of transplantation of stem cells obtained from peripheral blood, the Company
will be required to obtain additional regulatory approvals. The Company has
completed a Phase III clinical trial for use of the CEPRATE(R) SC System for
transplantation of stem cells obtained from peripheral blood in patients with
multiple myeloma and plans to file a PMA based on its results in the fall of
1997. There can be no assurance, however, that the FDA will approve the product
for this indication or will not require additional clinical trials.
There can be no assurance that the CEPRATE(R) SC System will achieve
market acceptance and be commercially successful. Because the CEPRATE(R) SC
System represents the Company's principal near-term focus, and because many of
the Company's future products under development are designed to be used in
conjunction with the CEPRATE(R) SC System, failure of the CEPRATE(R) SC System
to gain market acceptance would have a material adverse effect of the Company's
business, financial condition and results of operations. Additionally, there can
be no assurance that a permanent injunction against the sale of the CEPRATE(R)
SC System in the U.S. will not be granted as a consequence of the current patent
litigation involving the Company. Any such injunction would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Legal Proceedings," above.
UNCERTAINTY OF PRODUCT ACCEPTANCE.
Sales of the Company's products have generated growing but modest
revenues to date. The CEPRATE(R) SC System has been approved for marketing and
sale in the U.S., in the European Economic Community (the "EEC") and in Canada.
The CEPRATE(R) TCD System has also been approved for use in the EEC. These are
the only Company products that have received such approvals. The CEPRATE(R) SC
System is approved for use in autologous bone marrow transplantation in the U.S.
Commercial sales of the product for other uses will require specific FDA
approval, as will the CEPRATE(R) TCD System. There can be no assurance that the
CEPRATE(R) SC System or any of the Company's future products will gain any
significant degree of market acceptance in the U.S. or internationally among
physicians, hospital personnel, other health care providers and third-party
payors, even if reimbursement and necessary regulatory approvals are obtained.
The Company believes that the commercial success of its products will depend on
such acceptance. Acceptance will also depend upon the Company's ability to train
physicians, hospital personnel and other health care providers to use the
CEPRATE(R) SC System and the Company's other products, and the willingness of
such individuals to learn to use these products. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE.
The securities markets have, from time to time, experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. These fluctuations often substantially affect the
market price of a company's common stock. In particular, the market prices for
securities of medical device companies and biotechnology companies have in the
past been, and can in the future be expected to be, especially volatile. The
market price of the Company's
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Common Stock has in the past and in the future may be subject to volatility in
general and from quarter to quarter depending upon announcements regarding
developments concerning proprietary rights or litigation or disputes related
thereto, the results of regulatory approval filings, clinical studies or other
testing, technological innovations or new commercial products by the Company or
its competitors, government regulations, changes in reimbursement levels, public
concern as to the safety of products developed by the Company or others, changes
in health care policy in the U.S. and internationally, the issuance of new or
changed stock market analyst reports and recommendations, and economic and other
external factors, as well as continued operating losses by the Company and
fluctuations in the Company's financial results. These factors could have a
material adverse effect on the Company's business, financial condition and
results of operations and may not be indicative of the prices that may prevail
in the public market.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE.
The Company has limited experience in sales, marketing and distribution
of its products, particularly outside of the EEC. The Company has established a
direct sales force in Europe to sell its products, primarily in the EEC, and is
selling the product through distributors in Latin America and the Asia-Pacific
Region. The Company is currently recruiting to establish its sales and technical
support team to support the U.S. product launch of the CEPRATE(R) SC System. In
addition, the Company is currently working with a consultant to explore options
for entering the Japanese market. There can be no assurance that the Company
will be able to attract and retain qualified sales and marketing personnel and
distributors, or that the Company's sales and marketing efforts will be
successful. Failure to develop an effective sales and marketing organization or
establish effective distribution relationships with respect to the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT.
In the U.S., physicians, hospitals and other health care providers that
perform medical services generally rely on third-party payors, such as private
health insurance plans, to reimburse all or part of the cost associated with the
treatment of patients. There can be no assurance that third party reimbursement
at acceptable levels will be available for such procedures. At present,
third-party payors are inconsistent in their approach to reimbursement for stem
cell transplantation. There can be no assurance that even if reimbursement is
provided for such transplantation procedures, the cost of the CEPRATE(R) SC
System or the Company's future products would be covered.
Reimbursement and health care payment systems in international markets
vary significantly by country, and can include both government sponsored and
private health care insurance. Failure by physicians, hospitals and other health
care providers, both in the U.S. and internationally, to obtain sufficient
reimbursement from third-party payors for use of the Company's products, or
adverse changes in government and private third-party payors' policies toward
reimbursement for such procedures, could have a material adverse effect on the
Company's business, financial condition and results of operations.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT.
The Company's ability to successfully develop any additional products
is uncertain. The Company's research and development programs with respect to
certain of its potential products are at an early stage. The Company's goal is
to develop, manufacture and market products for use in cell therapy and
diagnostics based upon the Company's proprietary cell selection technology.
Potential new products will require significant additional research,
development, preclinical and clinical testing, regulatory approval and
additional investment prior to their commercialization, which may not be
successful. Development of new products may also require access to technologies
which are owned or controlled by third parties and which may not be available to
the Company at a cost-effective price or commercially-acceptable terms, if at
all. There can be no assurance that the Company's approach will result in the
development of commercially successful products on a timely basis, or at all.
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COMPETITION AND TECHNOLOGICAL CHANGE.
Biotechnology in general and cell therapy in particular are rapidly
evolving fields in which developments are likely to continue at a rapid pace.
Technological competition from existing biotechnology companies and others
diversifying into this field is intense and expected to increase. Currently, the
CEPRATE(R) SC System is the only stem cell selection system approved for
commercial sale in the U.S. Although this potentially gives the Company a lead
over its competitors in the U.S. marketplace, there can be no assurance that
other, more effective cell selection systems which compete with the CEPRATE(R)
SC System will not receive FDA approval in the near future. Other companies and
institutions with substantially greater financial, manufacturing, marketing,
distribution and technical resources than the Company are engaged in the
research and development of products similar to those currently being developed
or commercialized by the Company, and others may choose to enter this market at
a later date. The Company is aware of at least one other company, Baxter
International Inc., which has filed a PMA requesting approval for a competing
product from the FDA. The Company currently faces competition from several
companies in the development and utilization of cell selection devices, as
discussed under the section titled "Competition" above. There can be no
assurance that these or other companies or institutions will not succeed in
developing products or procedures that are more effective than the Company's or
that would render the Company's technology or products obsolete or
uncompetitive. The Company believes that important competitive factors with
respect to the development and commercialization of its products include the
relative speed with which it can develop products, establish clinical utility,
complete the clinical testing and regulatory approval process, obtain
reimbursement and supply commercial quantities of the product to the market. The
Company's inability to compete favorably with respect to any of these factors
could have a material adverse effect on its business, financial condition and
results of operations. The Company also competes with other companies for
clinical sites to conduct trials. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SUPPLIERS; MANAGEMENT OF EXPANDED
OPERATIONS; GMP.
The Company currently purchases antibodies and many components used in
its products from third party sources. In addition, the Company currently
subcontracts parts of its manufacturing process for certain products and their
components and expects to continue to do so. Certain antibodies and components
are obtained from single source suppliers. There can be no assurance that the
supply of such antibodies, components or supplies will not become limited or be
interrupted or that the Company's manufacturing process will not be interrupted
in the future. There also can be no assurance that the Company will be able to
continue its present arrangements with its suppliers, supplement existing
relationships, find alternative suppliers or that the Company will be able to
identify or obtain the antibodies or other components necessary to develop
products in the future.
There can be no assurance that the Company will be able to develop the
necessary manufacturing capability, build and train the necessary manufacturing,
quality control and assurance teams, attract, retain and integrate the required
key personnel, or implement the financial and management systems necessary to
meet any increased demand for its products. Failure of the Company to
successfully expand its operations in response to any increased demand for its
current and future products, if any, could have a material adverse effect on the
Company's business, financial condition and results of operations.
To be successful, the Company's products must be manufactured in
compliance with regulatory requirements and at acceptable costs. The Company's
manufacturing facilities are subject to GMP regulations, international quality
standards and other regulatory requirements. Failure by the Company to maintain
its facilities in accordance with GMP regulations, international quality
standards or other regulatory requirements may entail a delay or termination of
production, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
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GOVERNMENT REGULATION
FDA AUTHORITY. The testing, manufacture and sale of the Company's
products are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign regulatory agencies. The
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution, and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the FDA to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
DEVICE CLASSIFICATION. In the U.S., medical devices are classified into
one of three classes (i.e., Class I, II, or III) on the basis of the controls
deemed necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls (e.g., labeling, premarket
notification and adherence to GMPs) and Class II devices are subject to general
and special controls (e.g., performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Generally, Class III devices (e.g.,
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices)
are those which must receive premarket approval by the FDA to ensure their
safety and effectiveness
Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance or approval through either clearance of a
510(k) notification or approval of a PMA.
510(K) CLEARANCE. A 510(k) clearance will be granted if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed Class I or Class II medical device or a Class III medical
device for which the FDA has not called for PMAs. The FDA recently has been
requiring more rigorous demonstration of substantial equivalence than in the
past, including in some cases requiring submission of clinical data. The FDA may
determine that the proposed device is not substantially equivalent to a
predicate device, or that additional information is needed before a substantial
equivalence determination can be made. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, but may take longer. A
"not substantially equivalent" determination, or a request for additional
information, could prevent or delay the market introduction of new products that
fall into this category. For any devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions.
PMA APPROVAL. A PMA application must be filed if a proposed device is
not substantially equivalent to a legally marketed Class I or Class II device,
or if it is a Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, laboratory and animal studies. The PMA must also
contain a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application and begin an in-depth review of the PMA. The FDA review of a PMA
application generally takes one to three years from the date the PMA is accepted
for filing, but may take significantly longer. The review time is often
significantly extended by the FDA asking for more information or clarification
of information already provided in the submission. During the review period, an
advisory committee, typically a panel of
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clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
The FDA is not bound by the recommendation of the advisory panel.
Toward the end of the PMA review process, the FDA generally will
conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with applicable GMP requirements. If FDA
evaluations of both the PMA application and the manufacturing facilities are
favorable, the FDA may issue either an approval letter or an approvable letter,
which usually contains a number of conditions that must be met in order to
secure final approval of the PMA. When and if those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval
letter, authorizing commercial marketing of the device for certain indications.
If the FDA's evaluation of the PMA application or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
PMA SUBMITTED. The CEPRATE(R) SC System is being regulated as a Class
III device requiring submission of a PMA. The Company filed a PMA for use of the
CEPRATE(R) SC System for use in autologous stem cell transplantation using bone
marrow. The Company received notice from the FDA that its initial PMA was
approved on December 6, 1996. The Company anticipates that a number of its
future products currently under development will also be classified as Class III
devices requiring a PMA.
CLINICAL TRIALS. If human clinical trials of a device are required,
whether for a 510(k) or a PMA, and the device presents a "significant risk," the
sponsor of the trial (usually the manufacturer or the distributor of the device)
will have to file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from
these studies support the safety and efficacy of the device or warrant the
continuation of clinical studies. Clinical trials using the CEPRATE(R) SC System
are "significant risk" trials which require IDEs. The Company is currently
conducting several clinical trials under its own IDEs and is involved in an
extensive investigator sponsored IDE program where the investigator holds the
IDE and is responsible for conducting the clinical trial. The Company intends to
use data from certain of these trials to support FDA approval of additional
indications for the CEPRATE(R) SC System. There is no assurance that any of
these trials will be successful or that the FDA will accept data from the trials
as adequate for approval of the CEPRATE(R) SC System for additional indications.
Manufacturers are permitted to sell investigational devices distributed in the
course of clinical studies provided such compensation does not exceed recovery
of the costs of manufacture, research, development and handling. The Company has
instituted a cost recovery program for certain of the investigator sponsored
clinical trials which use the CEPRATE(R) SC System.
NO ASSURANCE OF APPROVALS OR CLEARANCES. There can be no assurance that
the Company will be able to obtain necessary regulatory approvals or clearances
on a timely basis or at all, and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended use imposed as a condition of such approvals
or
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clearances, or failure to comply with existing or future regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
PERVASIVE REGULATION. Any devices manufactured or distributed by the
Company pursuant to FDA clearance or approvals are subject to pervasive and
continuing regulation by FDA and certain state agencies. Manufacturers of
medical devices for marketing in the U.S. are required to adhere to applicable
regulations governing design and manufacture which are described in GMP
requirements, which include testing, control and documentation requirements.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product may
have caused or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to cause
or contribute to a death or serious injury. Labeling and promotional activities
are subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Although current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses, physicians are not
prohibited by the FDA from using products for indications other than those
approved by the FDA. There can be no assurance that the CEPRATE(R) SC System or
the Company's future products, if any, will not be used by physicians for
indications other than those approved by the FDA and that the Company will not
be subject to FDA action resulting from such use.
The Company is subject to routine inspection by FDA and certain state
agencies for compliance with GMP requirements, MDR requirements, and other
applicable regulations. The FDA has recently changed GMP regulations which will
likely increase the cost of compliance with GMP requirements. Future changes in
existing requirements or adoption of new requirements could have a material
adverse effect on the Company's business, financial condition, and results of
operation. There can be no assurance that the Company will not incur significant
costs to comply with laws and regulations in the future or that laws and
regulations will not have a material adverse effect upon the Company's business,
financial condition or results of operation.
INTERNATIONAL CONSIDERATIONS. Sales of medical devices outside of the
U.S. are subject to international regulatory requirements that vary widely from
country to country. The time required to obtain approval for sale
internationally may be longer or shorter than that required for FDA approval,
and the requirements may differ. The Company has obtained the certifications
necessary to enable the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European Union Medical Device
Directives, to be affixed to the CEPRATE(R) SC System and the CEPRATE(R) TCD
System. The CE mark designates full marketing approval throughout the 18-nation
European Economic Area. In order to maintain this certification, the Company
will be subject to periodic inspections. The CEPRATE(R) SC System has also been
approved for commercial sale in Canada. The Company has contracted with
distributors for sale of the CEPRATE(R) SC System in certain countries in Latin
America and the Asia-Pacific region pursuant to distribution agreements which
obligate the distributor to obtain regulatory approval for sale of the product
in those counties which require them. Many countries in which the Company
currently operates or intends to operate either do not currently regulate
medical devices or have minimal registration requirements; however, these
countries may develop more extensive regulations in the future that could
adversely affect the Company's ability to market its products. In addition,
significant costs and requests by regulators for additional information may be
encountered by the Company in its efforts to obtain regulatory approvals. Any
such events could substantially delay or preclude the Company from marketing its
products in the U.S. or internationally. Failure to comply with applicable
regulatory requirements can result in loss of previously received approvals and
other sanctions and could have a material adverse effect on the Company's
business, financial condition and results of operations.
ADDITIONAL REGULATION. The Company also is subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws
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or regulations will not have a material adverse effect upon the Company's
ability to do business.
DEPENDENCE ON LICENSES; POTENTIAL NEED FOR STRATEGIC PARTNERS.
The Company has obtained, and may need to obtain in the future,
licensed rights to certain proprietary technologies from other entities,
individuals and research institutions to which it is, or will be, obligated to
pay royalties and milestone payments if it develops products based upon the
licensed technology. The Company has a worldwide, sublicensable, exclusive
license from the Hutchinson Center to certain patent rights related to its cell
selection technology, which constitutes the Company's core technology for its
current products and certain future products currently under development. There
can be no assurance that the Company will be able to enter into additional
collaborative, license or other arrangements that the Company deems necessary or
appropriate to develop, commercialize and market its products, or that any or
all of the contemplated benefits from such collaborative, license or other
arrangements will be realized. Certain of the collaborative, license or other
arrangements that the Company may enter into in the future may place
responsibility on the Company's partners or collaborators for preclinical
testing and human clinical trials and for the preparation and submission of
applications for regulatory approval for potential diagnostic or therapeutic
products. Should any strategic partner fail to develop, commercialize or market
successfully any product to which it has rights, the Company's business,
financial condition and results of operations could be materially adversely
affected. There can be no assurance that partners or collaborators will timely
perform their obligations under any such arrangements or will not pursue
alternative technologies or products either on their own or in collaboration
with others, including the Company's competitors, as a means for developing
products that compete with the Company's products.
OPERATING LOSSES.
The Company has generated modest revenues from product sales, but
these revenues have not been sufficient to cover its operating expenses. The
Company is substantially dependent upon external financing and interest income
to pursue its present and intended business activities. The Company has not been
profitable since inception and has incurred a cumulative net loss of
approximately $116.5 million through March 31, 1997. Losses have resulted
principally from costs incurred in research and development activities, clinical
trials, marketing and product introduction expenses and from general and
administrative costs. The Company expects to continue to incur substantial
expenses in the future to support its operations. The Company's results of
operations may vary significantly from quarter to quarter during this period of
development and the Company expects to continue to incur net operating losses
during this period.
The Company's ability to achieve profitability is dependent on its
ability to successfully market and sell its products, to develop and obtain
patent protection and regulatory approval for its products and to manufacture
its products in a cost-effective manner. There can be no assurance that the
Company will successfully develop, commercialize, patent, manufacture or market
its products, obtain required regulatory approvals, or achieve profitability.
FUTURE CAPITAL NEEDS; POTENTIAL INABILITY TO ACCESS CAPITAL MARKETS.
The Company will continue to expend substantial funds on research and
development and commercialization efforts, including capital expenditures, for
its products. The Company may require additional funds for these purposes and
may seek such funds through additional equity financings, debt financings,
collaborative arrangements with corporate partners or from other sources. No
assurance can be given that such additional funds will be available to the
Company on acceptable terms or on a timely basis, if at all. Lack of adequate
funds from operations or additional sources of financing may have a material
adverse impact on the Company.
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RELIANCE ON KEY PERSONNEL.
The Company is highly dependent upon the efforts of its senior
management and scientific team. The loss of the services of one or more of these
individuals could impede the achievement of its business and development
objectives. Because of the specialized scientific nature of the Company's
business, the Company is also highly dependent upon its ability to continue to
attract and retain qualified scientific and technical personnel. There is
intense competition for qualified personnel in the areas of the Company's
activities, and there can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. Loss of the services of, or failure to recruit, key
management, scientific and technical personnel could adversely affect the
Company's business.
RISKS ASSOCIATED WITH INTERNATIONAL SALES.
Due to regulatory constraints in the U.S., the Company's sales efforts
for the CEPRATE(R) SC System were limited to international markets prior to
December 6, 1996. The Company anticipates that, even though it obtained FDA
approval to sell the CEPRATE(R) SC System in the U.S. in December 1996,
international sales will continue to constitute a significant part of its
business. A number of risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs and difficulties in
staffing, coordinating and managing international operations. Additionally, the
Company's business, financial condition and results of operations may be
adversely affected by fluctuations in international currency exchange rates as
well as constraints on the Company's ability to maintain or increase prices. The
international nature of the Company's business subjects it and its
representatives, agents and distributors to laws and regulations of the foreign
jurisdictions in which they operate or the Company's products are sold. The
regulation of medical devices in a number of such jurisdictions, particularly in
the European Union, continues to develop and there can be no assurance that new
laws or regulations, or new interpretations of existing laws and regulations,
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the U.S. There can be no assurance that the Company
will be able to successfully further commercialize its current products or
successfully commercialize any future products in any international market.
RISK OF LIABILITY; ADEQUACY OF INSURANCE COVERAGE.
Inherent in the manufacturing and distribution of the Company's
products is the risk of financial exposure to product liability claims in the
event that the use of its products results in personal injury. Although the
Company has not experienced any claims to date, there can be no assurance that
the Company will not experience losses due to product liability claims in the
future. Although the Company is presently covered by general liability insurance
(which includes coverage for product and clinical trial liability) in the amount
of $5,000,000 per occurrence and $5,000,000 in the aggregate, there can be no
assurance that such insurance coverage will provide sufficient funds to satisfy
judgments which, in the future, may be entered against the Company or that such
insurance will continue to be available or sufficient in the future. In
addition, there can be no assurance that all of the activities encompassed
within the Company's business are covered under the Company's policies. The
Company may require increased product liability coverage as it increases its
commercial activities in the U.S. and internationally. Furthermore, there can be
no assurance that the Company will have sufficient resources to satisfy any
liability or litigation expenses that may result from any uninsured or
underinsured claims. Any claims or series of claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect on the Company's business, financial condition and results of operations.
28
<PAGE> 29
ITEM 2. PROPERTIES
The Company currently leases a total of approximately 148,000 square
feet in three facilities in Bothell, Washington. The Company's headquarters are
located in a 90,000 square foot leased facility. This facility houses research
and development, sales and marketing, and administrative activities. The lease
is for a 10-year term and expires in August 2003 with options to renew for up to
three additional consecutive five-year terms. Manufacturing activities are
located in a leased facility featuring a clean room and biologics manufacturing
capabilities. This facility includes approximately 23,000 square feet. The lease
expires October 1997, with options to extend for five additional years. This
option has been exercised. The Company's original headquarters and research
facility includes approximately 35,000 square feet. The Company has subleased
this facility. This lease will expire in October 1997. Also, the Company has
leased office space in Brussels, Belgium for its European headquarters. The
lease expires in February 2002, with an option to terminate in February 1999.
ITEM 3. LEGAL PROCEEDINGS
(a) At March 31, 1997, the Company established a liability of $17 million to
cover potential losses from, and future expenses for pursuing, ongoing patent
litigation in which the Company is accused of infringing two patents owned by
the Johns Hopkins University and licensed to Baxter Healthcare Corporation and
Becton Dickinson & Company (Hopkins, Baxter and Becton hereinafter being
collectively referred to as "plaintiffs"). While management is optimistic that
the Company will ultimately prevail in this dispute, the course of litigation is
inherently uncertain and there can be no assurance of a favorable outcome. The
liability has been recorded in recognition of the fact that adverse Court
rulings on liability, and an adverse jury verdict, have been rendered at the
District Court level and that the entry of a District Court judgment against the
Company, in the near term, appears highly likely. The ultimate amount of loss,
if any, and the ultimate amount of future expenses incurred in pursuing this
litigation, may vary significantly from the amount accrued.
There have been two jury trials in the case. In the first trial, a jury
on August 4, 1995, found in favor of CellPro on all counts. The verdict stated
that the four patents then in suit were not infringed by CellPro's manufacture,
use and sale of the CEPRATE(R) SC System or the CEPRATE(R) LC System.
Additionally, the jury found that the claims of the patents asserted against
CellPro were invalid.
Post-trial motions were filed and, on July 1, 1996, the U.S. District
Court for the District of Delaware (per Judge Roderick R. McKelvie) partially
granted plaintiffs' motion for judgment as a matter of law as to the issues of
infringement, inducement of infringement and enablement with respect to U.S.
Patent No. 4,965,680, as well as the issue of induced infringement with respect
to U.S. Patent No. 5,130,144. The Court ordered a new trial on remaining
liability and infringement issues.
In a series of decisions preceding the new trial, Judge McKelvie
granted motions by the plaintiffs to dismiss CellPro's remaining liability and
infringement defenses. Plaintiffs moved to withdraw two of the four patents from
suit, which motion was granted upon plaintiffs' undertaking that they would not
accuse any present product of CellPro of infringing those patents.
A second jury trial was held in March, 1997, at which the jury was
instructed to the effect that the Court had already determined that CellPro
infringed the two patents remaining in suit, that its defenses had been
dismissed, and that the jury was bound by those determinations. Hence, the jury
at the second trial heard evidence and arguments only as to the amount of
damages to be awarded and as to whether CellPro's conduct had been willful. On
March 11, 1997, the jury reached a verdict finding willfulness and awarding some
$2.3 million in damages to plaintiffs.
A final judgment has not yet been rendered at the District Court level.
Still pending are decisions as to whether enhanced damages will be awarded, as
to whether and on what terms an injunction will be
29
<PAGE> 30
granted against CellPro's principal products, as to whether an award reimbursing
plaintiffs for attorney fees will be granted, and as to whether CellPro will be
allowed to proceed further on its defense that the patents are unenforceable for
misuse by reason of an attempt by the plaintiffs to extend the reach of their
patents beyond the territory of the U.S. Also pending for decision is CellPro's
alternative motion for a stay, pending appeal, of any permanent injunctions the
Court may enter against CellPro.
The Company intends to challenge the second jury's verdict on
post-trial motions and, if necessary, on appeal to the U.S. Court of Appeals for
the Federal Circuit. The Company further intends to pursue vigorously an appeal
in the Court from all adverse rulings heretofore and hereafter made by the
District Court. The Company plans to urge that reversible errors were made by
the Court in trying this case, that the second jury's verdict is contrary to the
evidence and law, and that the first jury's verdict should be reinstated and
judgment entered thereon. Additionally, the Company has requested that the
Department of Health and Human Services exercise its "march-in" rights under the
Bayh-Dole Act 35 U.S.C. 200 et. seq. and grant the Company a license to the
technology in dispute.
The antitrust and unfair competition claims filed by CellPro against
the plaintiffs have been stayed pending completion of the patent litigation.
The Company may incur substantial expenses in excess of the amount
accrued at March 31, 1997 in connection with this litigation. These expenses
could have a material effect on the Company's results of operations and
financial position in future periods. Additionally, as a result of this
litigation, an injunction could be granted and, if granted, the Company could be
prohibited from selling its principal products. The granting of an injunction
would materially disrupt the Company's business. See also "Investment
Considerations--Legal Proceedings," above.
(b) No material legal proceedings were terminated in the fourth quarter of
fiscal 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended March 31, 1997.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CellPro common stock trades on the Nasdaq Stock Market under the symbol
CPRO. As of March 31, 1997, there were approximately 285 holders of record of
the Company's common stock. The Company has never paid any cash dividends and
does not anticipate paying any cash dividends in the foreseeable future. The
Company intends to retain future earnings and capital for use in its business.
The following table sets forth the range of high and low sales prices
of the Common Stock as quoted on the Nasdaq Stock Market for the fiscal years
ended March 31,1997 and 1996.
<TABLE>
<CAPTION>
1997 High Low
<S> <C> <C>
4th Quarter 13.000 6.125
3rd Quarter 15.500 10.000
2nd Quarter 17.250 10.750
1st Quarter 20.000 15.000
1996 High Low
4th Quarter 20.375 13.000
3rd Quarter 16.750 10.000
2nd Quarter 16.750 11.500
1st Quarter 13.750 8.625
</TABLE>
31
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Product sales $ 9,515,984 $ 6,801,985 $ 4,215,910 $ 1,365,374 $ 301,173
Related party revenue - 6,000,000 - - -
Contract revenue 146,390 41,600 - 2,933,000 -
------------- ------------- ------------- ------------- -------------
Total revenues 9,662,374 12,843,585 4,215,910 4,298,374 301,173
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of product sales 5,161,389 3,723,421 2,429,573 1,266,840 286,114
Research and development 16,243,501 16,474,133 15,417,405 9,944,617 9,215,430
Selling, general & admin. 15,379,650 12,515,870 9,177,505 6,224,706 3,439,921
Litigation provision 17,000,000 - - 3,926,530 -
------------- ------------- ------------- ------------- -------------
Total costs and expenses 53,784,540 32,713,424 27,024,483 21,362,693 12,941,465
------------- ------------- ------------- ------------- -------------
Loss from operations (44,122,166) (19,869,839) (22,808,573) (17,064,319) (12,640,292)
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest income 3,590,157 4,164,218 3,766,173 2,178,817 1,431,929
Interest expense (46,053) (86,718) (157,034) (205,838) (210,787)
Other, net (337,322) 139,679 213,479 (30,052) -
------------- ------------- ------------- ------------- -------------
Total other income 3,206,782 4,217,179 3,822,618 1,942,927 1,221,142
------------- ------------- ------------- ------------- -------------
Net loss $ (40,915,384) $ (15,652,660) $ (18,985,955) $ (15,121,392) $ (11,419,150)
============= ============= ============= ============= =============
Net loss per share $ (2.84) $ (1.13)) $ (1.45) $ (1.27) $ (1.23)
============= ============= ============= ============= =============
Weighted average number of
shares outstanding
during the period 14,421,908 13,847,929 13,059,985 11,936,094 9,252,139
============= ============= ============= ============= =============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents $ 54,043,175 $ 74,143,851 $ 64,649,630 $ 95,505,030 $ 55,898,994
and marketable
securities
Total assets 76,123,697 97,941,349 89,512,935 110,616,321 62,163,416
Long-term debt, net of
current portion 152,943 208,001 486,428 754,719 870,957
Total stockholders' equity 52,780,648 92,213,233 80,760,680 99,376,207 57,367,564
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for disclosures that report the Company's historical results,
the statements set forth in this section are forward-looking statements. Actual
results may differ materially from those projected in the forward-looking
statements. Additional information concerning factors that may cause actual
results to differ materially from those in the forward-looking statements is
contained herein under the caption "Investment Considerations" for the fiscal
year ended March 31, 1997 and in the Company's other filings with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.
Since the commencement of operations in 1989, the Company has primarily
engaged in developing, manufacturing and marketing proprietary continuous-flow,
cell-selection systems. These systems may be used for a variety of therapeutic,
diagnostic and research applications. On December 6,
32
<PAGE> 33
1996, the U.S. FDA granted marketing approval for CellPro's CEPRATE(R) SC System
for purification of stem cells for bone marrow transplantation. The CEPRATE(R)
SC System has also received marketing approval throughout the 18-nation European
Economic Area and Canada.
The Company's activities have been funded primarily by raising
approximately $153 million through the sale of Common Stock, including two
public offerings and two private offerings to Corange International Limited
("Corange"), and $9.7 million through private sales of Preferred Stock prior to
the Company's initial public offering. The Company has been unprofitable since
inception and expects to incur additional operating losses for at least the next
few years. For the period from inception to March 31, 1997, the Company incurred
a cumulative net loss of approximately $116.5 million.
The Company's first commercial product, the CEPRATE(R) LC System, was
introduced in October 1991 and is being sold on a world-wide basis for various
research applications. Additionally, the Company commenced sales of its
CEPRATE(R) SC System for certain therapeutic purposes in Europe in August 1993
and in the U.S. in January 1997. The CEPRATE(R) SC System is also being sold in
Canada, South America and Asia-Pacific. The Company expects to continue to incur
substantial expenses to support its operations, including the costs of
preclinical and clinical studies, manufacturing scale-up costs and the expansion
of its sales and marketing organization. The Company's results of operations may
vary significantly from quarter to quarter during this period of development and
the Company expects to continue to incur net operating losses during this
period.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
PRODUCT SALES
Product sales increased to $9.5 million in the fiscal year ended March
31, 1997 ("fiscal 1997"), from $6.8 million in the fiscal year ended March 31,
1996 ("fiscal 1996"), and $4.2 million in the fiscal year ended March 31, 1995
("fiscal 1995"). Additional sales of the CEPRATE(R) SC System were primarily
responsible for the increase.
In July 1995, the CEPRATE(R) SC System was approved for commercial sale
in the European Economic Area. This opened up several new markets and expanded
access to those which were already being served in Europe. European sales
increased 26%, to $6.8 million, in fiscal 1997, from $5.3 million in fiscal
1996. This was fueled by a 41% increase in CEPRATE(R) SC System unit sales. The
fiscal 1996 European sales represented a 46% increase from fiscal 1995 sales of
$3.7 million with a 40% increase in CEPRATE(R) SC System units sold. These sales
are denominated in various European currencies. As a result, product sales have
been and will continue to be affected by changing currency exchange rates.
During January 1997, the Company commenced commercial shipments of the
CEPRATE(R) SC System in the U.S. Beginning in fiscal 1996, the product had been
offered for sale, on a limited basis, for investigational use in the U.S. under
a cost recovery program. The CEPRATE(R) SC System is also available for sale in
Canada and key Latin American and Asia-Pacific countries. During fiscal 1997,
1996 and 1995, combined U.S. and export sales to Asia-Pacific, Canada and South
America totaled $2.7 million, $1.5 million, and $560,000, respectively. The
increase between 1997 and 1996 resulted from increased cost recovery and export
sales of CEPRATE(R) SC Systems, and initial commercial sales in the U.S. The
increase from fiscal 1995 to fiscal 1996 resulted from initiation of both cost
recovery sales in the U.S. and export sales in Asia-Pacific, Canada, and South
America.
33
<PAGE> 34
RELATED PARTY REVENUES
Related party revenue for fiscal 1996 consisted of $6 million for prior
research and development services received from Corange as part of a
modification of business arrangements between CellPro and Corange previously
established in December 1993.
COST OF PRODUCT SALES
Cost of product sales was $5.2 million, $3.7 million, and $2.4 million
for fiscal 1997, 1996, and 1995, respectively. As noted above, these increases
are related to higher sales volumes. The Company's gross margin percentage
improved slightly from fiscal 1996 to fiscal 1997. The strength in the U.S.
dollar reduced the average European selling price for the Company's products,
which was offset by lower European distribution costs. During the quarter ended
December 31, 1996, the Company discontinued a contract distribution arrangement
in Europe and began distributing its products directly. The Company's gross
profit was higher in fiscal 1996 than in fiscal 1995 due to the favorable mix of
CEPRATE(R) SC System sales and higher average European selling prices in fiscal
1996 than in fiscal 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses totaled $16.2 million in fiscal 1997,
consistent with the $16.5 million level in fiscal 1996. In fiscal 1995, these
expenses totaled $15.4 million. The increase from fiscal 1995 to fiscal 1996
resulted from the commencement of the Company's second Phase III clinical trial,
which began in fiscal 1995, and from a newly created collaboration with Corixa
Corporation to develop T-lymphocyte therapies to treat cancer. Patient accrual
was completed in the Phase III trial during fiscal 1997. The Corixa
collaboration is on-going.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses totaled $15.4 million,
$12.5 million and $9.2 million in fiscal 1997, 1996 and 1995, respectively. The
increase from fiscal 1996 to fiscal 1997 as well as the increase from fiscal
1995 to fiscal 1996 resulted from higher legal fees and increased sales and
marketing expenses. Higher legal fees were incurred to defend the Company in
patent litigation asserted by Baxter Healthcare Corporation, Becton Dickenson &
Co. and Johns Hopkins University against the Company, as described below.
Increased sales and marketing expenses resulted from expanded commercialization
activities for the CEPRATE(R) SC System in the U.S., Europe, the Middle East,
Canada, Asia/ Pacific and Latin America.
INTEREST INCOME
The Company generated $3.6 million, $4.2 million and $3.8 million of
interest income during the fiscal years ended March 31, 1997, 1996 and 1995,
respectively. The decrease from fiscal 1996 to fiscal 1997 was due to lower
average cash balances available for investment in fiscal 1997 than in fiscal
1996. The increase in fiscal 1996 over fiscal 1995 was due to higher interest
rates received on such cash balances in fiscal 1996. Average cash reserves were
higher in fiscal 1996 due to the July 31, 1995 modification of the Corange
collaboration, which resulted in an infusion of $30 million of cash from the
sale of Common Stock and revenue for past research and development. Average cash
reserves were augmented in fiscal 1995 with the $60 million in proceeds from the
Company's sale of Common Stock to Corange and a commitment payment received from
Corange late in fiscal 1994.
LITIGATION PROVISION
At March 31, 1997, the Company established a liability of $17 million
to cover potential losses from, and future expenses for pursuing, ongoing patent
litigation in which the Company is accused of infringing two patents owned by
the Johns Hopkins University and licensed to Baxter Healthcare
34
<PAGE> 35
Corporation and Becton Dickinson & Company (Hopkins, Baxter and Becton
hereinafter being collectively referred to as "plaintiffs"). While management is
optimistic that the Company will ultimately prevail in this dispute, the course
of litigation is inherently uncertain and there can be no assurance of a
favorable outcome. The liability has been recorded in recognition of the fact
that adverse Court rulings on liability, and an adverse jury verdict, have been
rendered at the District Court level and that the entry of a District Court
judgment against the Company, in the near term, appears highly likely. The
ultimate amount of loss, if any, and the ultimate amount of future expenses
incurred in pursuing this litigation, may vary significantly from the amount
accrued.
There have been two jury trials in the case. In the first trial, a jury
on August 4, 1995, found in favor of CellPro on all counts. The verdict stated
that the four patents then in suit were not infringed by CellPro's manufacture,
use and sale of the CEPRATE(R) SC System or the CEPRATE(R) LC System.
Additionally, the jury found that the claims of the patents asserted against
CellPro were invalid.
Post-trial motions were filed and, on July 1, 1996, the U.S. District
Court for the District of Delaware (per Judge Roderick R. McKelvie) partially
granted plaintiffs' motion for judgment as a matter of law as to the issues of
infringement, inducement of infringement and enablement with respect to U.S.
Patent No. 4,965,680, as well as the issue of induced infringement with respect
to U.S. Patent No. 5,130,144. The Court ordered a new trial on remaining
liability and infringement issues.
In a series of decisions preceding the new trial, Judge McKelvie
granted motions by the plaintiffs to dismiss CellPro's remaining liability and
infringement defenses. Plaintiffs moved to withdraw two of the four patents from
suit, which motion was granted upon plaintiffs' undertaking that they would not
accuse any present product of CellPro of infringing those patents.
A second jury trial was held in March, 1997, at which the jury was
instructed to the effect that the Court had already determined that CellPro
infringed the two patents remaining in suit, that its defenses had been
dismissed, and that the jury was bound by those determinations. Hence, the jury
at the second trial heard evidence and arguments only as to the amount of
damages to be awarded and as to whether CellPro's conduct had been willful. On
March 11, 1997, the jury reached a verdict finding willfulness and awarding some
$2.3 million in damages to plaintiffs.
A final judgment has not yet been rendered at the District Court level.
Still pending are decisions as to whether enhanced damages will be awarded, as
to whether and on what terms an injunction will be granted against CellPro's
principal products, as to whether an award reimbursing plaintiffs for attorney
fees will be granted, and as to whether CellPro will be allowed to proceed
further on its defense that the patents are unenforceable for misuse by reason
of an attempt by the plaintiffs to extend the reach of their patents beyond the
territory of the U.S. Also pending for decision is CellPro's alternative motion
for a stay, pending appeal, of any permanent injunctions the Court may enter
against CellPro.
The Company intends to challenge the second jury's verdict on
post-trial motions and, if necessary, on appeal to the U.S. Court of Appeals for
the Federal Circuit. The Company further intends to pursue vigorously an appeal
in the Court from all adverse rulings heretofore and hereafter made by the
District Court. The Company plans to urge that reversible errors were made by
the Court in trying this case, that the second jury's verdict is contrary to the
evidence and law, and that the first jury's verdict should be reinstated and
judgment entered thereon. Additionally, the Company has requested that the
Department of Health and Human Services exercise its "march-in" rights under the
Bayh-Dole Act 35 U.S.C. 200 et. seq. and grant the Company a license to the
technology in dispute.
The antitrust and unfair competition claims filed by CellPro against
the plaintiffs have been stayed pending completion of the patent litigation.
The Company may incur substantial expenses in excess of the amount
accrued at March 31, 1997 in connection with this litigation. These expenses
could have a material effect on the Company's results of operations and
financial position in future periods. Additionally, as a result of this
litigation, an injunction
35
<PAGE> 36
could be granted and, if granted, the Company could be prohibited from selling
its principal products. The granting of an injunction would materially disrupt
the Company's business.
Selling, general and administrative expense includes $3.9 million and
$2.3 million related to this litigation for the years ended March 31, 1997 and
1996, respectively.
The above factors resulted in net operating losses of $40.9 million,
$15.7 million and $19.0 million in fiscal 1997, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through the sale of Common Stock and Preferred Stock, generation of interest
income and arrangements for equipment financing. Through March 31, 1997, the
Company has raised $73.3 million through two public offerings, $79.7 million
through two private offerings of Common Stock, and $9.7 million from the sale of
Preferred Stock. The Company has also generated $16.7 million in interest
income, $22.3 million in product sales and $9.0 million in contract and related
party revenues.
Since inception, the Company has used $87.3 million of cash in
operating activities and has invested $27.5 million in equipment and leasehold
improvements. The Company has financed $3.7 million of these investments with
secured lending arrangements.
The Company expects to incur substantial expenses in support of
additional research and development activities, including the costs of
preclinical and clinical studies, expansion of manufacturing activities and new
product development. Selling, general and administrative expenses will also
increase as the Company builds its sales and marketing organization and expands
administrative activities in support of the Company's anticipated expansion of
commercial sales.
At March 31, 1997, the Company had $54 million in cash and marketable
securities available to meet its future working capital needs. The Company
anticipates that its capital resources should be sufficient to fund its cash
requirements through approximately the fiscal year ending March 31, 1999. The
preceding forward-looking statement, and those presented below, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. In particular, any requirement to segregate
significant damages in connection with ongoing patent litigation would have a
material impact on this projection. In addition, the amount and timing of net
expenditures of capital resources will depend on the Company's ability to
increase product sales, the timing and extent of sales and marketing
expenditures, including those incurred in support of product launches, the
results of continuing patent litigation as described above, the progress of
ongoing research and development, the results of preclinical testing and
clinical trials, the rate at which operating losses are incurred, the execution
of any collaborative research and development agreements, product marketing or
licensing agreements, or other corporate partner arrangements, the FDA
regulatory process and other factors, many of which are beyond the Company's
control.
FORWARD LOOKING INFORMATION
Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the Reform Act), the Company provides the following
"forward-looking statements," as such term is defined in the Reform Act. Readers
are cautioned that such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
from those contained in such forward-looking statements.
During the year ending March 31, 1998 ("fiscal 1998"), the Company
expects to continue its sales and marketing efforts to launch the CEPRATE(R) SC
System in the U.S. and expand its use in Europe. In addition, the Company will
launch its newest product, the CEPRATE(R) TCD System, in the European
36
<PAGE> 37
market and continue clinical trials of this product in the U.S. in preparation
for filing a PMA with the U.S. FDA late in 1999. The CEPRATE(R) TCD System is
used to deplete additional T cells from transplant products initially
concentrated using the CEPRATE(R) SC System. This additional T-cell depletion is
believed to be important in allogeneic (donor-derived) stem cell transplants,
such as those used in treating leukemia, particularly where mis-matched donors
are used.
These sales and marketing efforts, together with the anticipated
availability of new products, may result in double-digit sales growth for fiscal
1998. However, the Company's ability to sell its products, and conduct clinical
trials, may be severely and permanently curtailed if an injunction is granted
against the Company's products pursuant to the on-going patent litigation as
described previously, under the heading "Litigation Provision."
Research and development directed at discovering and developing new
cellular therapy products is expected to continue in fiscal 1998. These products
include tumor cell purging products targeted for breast cancer and lymphoma
patients, T-cell selection products to positively select CD4 and CD8 cells to
treat cancer and infectious diseases, and dendritic cell selection for
immunization against cancer. In the diagnostic market, the Company is developing
a tumor cell enrichment product for use in detecting minimal residual disease in
cancer patients. These products are expected to enter early-stage clinical
trials within a year. Additional information on research and development may be
found in the section entitled "Product Development Programs" of the Company's
annual report on Form 10-K. These research and development initiatives are
subject to the availability of funding which could be negatively impacted by a
number of factors, some of which have been discussed above under "Liquidity and
Capital Resources."
NEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 128, "Earnings Per Share." This statement will
change the computation, presentation and disclosure requirements for earnings
per share ("EPS"). The statement will be effective for interim and annual
reporting periods ending after December 15, 1997. This statement will replace
"primary" EPS with "basic" EPS, the principal difference being the exclusion of
common stock equivalents in the computation of basic EPS. In addition, this
statement will require the dual presentation of basic and diluted EPS on the
face of the consolidated statement of operations. EPS computed pursuant to this
statement is not expected to be materially different from the historical net
loss per share previously presented.
37
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE IN FORM 10-K
<S> <C>
Report of Independent Accountants 39
Consolidated Balance Sheets at March 31, 1997 and 1996 40
Consolidated Statements of Operations for the years ended March 31, 41
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended 42
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31, 43
1997, 1996 and 1995
Notes to Consolidated Financial Statements 44-54
All financial statement schedules have been omitted since this
information is not required or because the information required is
included in the financial statements or notes thereto.
</TABLE>
38
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
CellPro, Incorporated
We have audited the accompanying consolidated balance sheets of
CellPro, Incorporated as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits 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
CellPro, Incorporated as of March 31, 1997 and 1996 and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
Coopers & Lybrand, L.L.P.
Seattle, Washington
May 13, 1997
39
<PAGE> 40
CELLPRO, INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,052,804 $ 17,076,098
Securities available for sale 38,990,371 57,067,753
Trade receivables 3,158,729 2,283,624
Inventories 5,078,257 4,384,452
Other current assets 548,558 555,904
---------------- ---------------
Total current assets 62,828,719 81,367,831
Property and equipment, net 13,183,854 16,504,305
Other assets 111,124 69,213
---------------- ---------------
Total assets $ 76,123,697 $ 97,941,349
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 149,750 $ 269,275
Accounts payable 991,297 1,104,467
Accrued liabilities 3,852,349 4,146,373
Accrual for litigation claim and costs 17,000,000 -
---------------- ---------------
Total current liabilities 21,993,396 5,520,115
Long-term debt, net of current portion 152,943 208,001
Other liabilities 1,196,710 -
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 25,000,000 shares
authorized; 14,487,313 shares and 14,348,933 shares
issued and outstanding respectively 14,487 14,349
Additional paid-in capital 169,556,157 167,971,991
Foreign currency translation (173,315) (50,014)
Net unrealized loss on securities available for sale (80,331) (102,127)
Accumulated deficit (116,536,350) (75,620,966)
---------------- ---------------
Total stockholders' equity 52,780,648 92,213,233
---------------- ---------------
Total liabilities and stockholders' equity $ 76,123,697 $ 97,941,349
================ ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
40
<PAGE> 41
CELLPRO, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Product sales $ 9,515,984 $ 6,801,985 $ 4,215,910
Related party revenue - 6,000,000 -
Contract revenue 146,390 41,600 -
--------------- --------------- ----------------
Total revenues 9,662,374 12,843,585 4,215,910
--------------- --------------- ----------------
Costs and expenses:
Cost of product sales 5,161,389 3,723,421 2,429,573
Research and development 16,243,501 16,474,133 15,417,405
Selling, general and administrative 15,379,650 12,515,870 9,177,505
Litigation provision 17,000,000 - -
--------------- --------------- ----------------
Total costs and expenses 53,784,540 32,713,424 27,024,483
--------------- --------------- ----------------
Loss from operations (44,122,166) (19,869,839) (22,808,573)
--------------- --------------- ----------------
Other income (expense):
Interest income 3,590,157 4,164,218 3,766,173
Interest expense (46,053) (86,718) (157,034)
Other, net (337,322) 139,679 213,479
--------------- --------------- ----------------
Total other income 3,206,782 4,217,179 3,822,618
--------------- --------------- ----------------
Net loss $ (40,915,384) $ (15,652,660) $ (18,985,955)
=============== =============== ================
Net loss per share $ (2.84) $ (1.13) $ (1.45)
=============== =============== ================
Weighted average number of shares
outstanding during the period 14,421,908 13,847,929 13,059,985
=============== =============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
41
<PAGE> 42
CELLPRO, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Common Stock Additional Foreign Securities
Paid-in Currency Available Accumulated
Shares Par Value Capital Translation for Sale Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1994 13,023,846 $ 13,024 $140,349,232 $ (3,698) $ -- $ (40,982,351) $ 99,376,207
Exercise of stock options 48,368 48 346,720 -- -- -- 346,768
Employee stock purchase plan 12,438 13 204,612 -- -- -- 204,625
Amortization of stock option expense -- -- 90,000 -- -- -- 90,000
Foreign currency translation -- -- -- 12,458 -- -- 12,458
Net unrealized loss on securities
available for sale -- -- -- -- (283,423) -- (283,423)
Net loss -- -- -- -- -- (18,985,955) (18,985,955)
----------- --------- ----------------------- --------- ------------- ------------
Balance at March 31, 1995 13,084,652 13,085 140,990,564 8,760 (283,423) (59,968,306) 80,760,680
Sale of common stock for cash, net 1,000,000 1,000 24,551,861 -- -- -- 24,552,861
Amortization of stock option expense -- -- 37,500 -- -- -- 37,500
Exercise of stock options 243,185 243 2,201,590 -- -- -- 2,201,833
Foreign currency translation -- -- -- (58,774) -- -- (58,774)
Employee stock purchase plan 21,096 21 190,476 -- -- -- 190,497
Net unrealized gain on securities
available for sale -- -- -- -- 181,296 -- 181,296
Net loss -- -- -- -- -- (15,652,660) (15,652,660)
----------- --------- ----------------------- --------- ------------- ------------
Balance at March 31, 1996 14,348,933 14,349 167,971,991 (50,014) (102,127) (75,620,966) 92,213,233
Compensation related to options granted -- -- 253,332 -- -- -- 253,332
Exercise of stock options 124,125 124 1,169,482 -- -- -- 1,169,606
Foreign currency translation -- -- -- (123,301) -- -- (123,301)
Employee stock purchase plan 14,255 14 161,352 -- -- -- 161,366
Net unrealized gain on securities
available for sale -- -- -- -- 21,796 -- 21,796
Net loss -- -- -- -- -- (40,915,384) (40,915,384)
----------- --------- ----------------------- --------- ------------- ------------
Balance at March 31, 1997 14,487,313 $ 14,487 $169,556,157 $(173,315) $ (80,331) $(116,536,350) $ 52,780,648
=========== ========= ======================= ========= ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE> 43
CELLPRO, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net loss $ (40,915,384) $ (15,652,660) $ (18,985,955)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 3,976,696 3,897,400 3,078,323
Compensation related to stock options
granted 253,332 37,500 90,000
Changes in:
Trade receivables (875,105) (1,149,451) (476,879)
Inventories (693,805) (1,196,516) (1,583,149)
Other current assets 7,346 (596) 74,813
Accounts payable (113,170) (1,646,414) (508,036)
Accrued liabilities 902,686 847,064 1,965,425
Accrual for litigation claim and costs 17,000,000 (1,875,322) (3,124,678)
--------------- --------------- ---------------
Net cash used in operating activities (20,457,404) (16,738,995) (19,470,136)
--------------- --------------- ---------------
Investing activities:
Purchase of property and equipment (656,245) (742,480) (11,107,900)
Proceeds from sales and maturities of securities
available for sale 26,574,876 39,954,694 46,307,740
Purchase of securities available for sale (8,475,698) (49,375,547) (38,473,706)
Change in other assets (41,911) 257,450 262,778
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 17,401,022 (9,905,883) (3,011,088)
--------------- --------------- ---------------
Financing activities:
Proceeds from long-term debt 104,490 69,700 102,300
Principal payments on long-term debt (279,073) (419,167) (922,870)
Net proceeds from issuance of common stock 1,330,972 26,945,191 551,393
Other (123,301) (58,774) 12,458
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities 1,033,088 26,536,950 (256,719)
--------------- --------------- ---------------
Net decrease in cash and cash equivalents (2,023,294) (107,928) (22,737,943)
Cash and cash equivalents:
Beginning of period 17,076,098 17,184,026 39,921,969
--------------- --------------- ---------------
End of period $ 15,052,804 $ 17,076,098 $ 17,184,026
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE> 44
CELLPRO, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
CellPro, Incorporated and Subsidiaries (the "Company" or "CellPro"),
whose operations began in April 1989, is a biotechnology company, specializing
in developing, manufacturing, and marketing proprietary continuous-flow,
cell-selection systems for use in a variety of therapeutic, diagnostic, and
research applications. The Company has formed several European subsidiaries to
coordinate European marketing and clinical trials and one Australian subsidiary
to facilitate regulatory approval in that country. On December 6, 1996, the U.S.
Food and Drug Administration ("FDA") granted marketing approval for the
Company's principal product, the CEPRATE(R) SC Stem Cell Concentration System.
This product is also approved for use in Canada and has been granted use of the
CE (Communaute' Europe'enne) marking, designating full marketing approval
throughout the 18-nation European Economic Area. In fiscal years prior to 1997,
the Company was in the development stage.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation. Foreign subsidiaries are
consolidated on a one-month delay.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 may differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents represent highly liquid short-term investments. The
Company considers all short-term investments purchased with a maturity of three
months or less to be cash equivalents. Cash and cash equivalents are recorded at
market value. The Company maintains a portion of its cash in bank deposit
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents.
SECURITIES AVAILABLE FOR SALE
The Company's investment securities are classified as available for
sale and carried at fair value. Unrealized gains and losses are excluded from
the statement of operations and reported as a separate component of
stockholders' equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and are included
in interest income. The Company's policy limits the amount of credit exposure to
any one issuer.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined in a manner which approximates the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
by the straight-line method over the estimated useful lives of the assets (two
to five years). Leasehold improvements are amortized on a straight-line
44
<PAGE> 45
basis over the remaining term of the related lease (one to nine years).
Expenditures for maintenance and repairs are charged to expense as incurred.
FOREIGN CURRENCY TRANSLATION
Revenues, costs and expenses of the Company's international operations
denominated in foreign currencies are translated to U.S. dollars at average
rates of exchange prevailing during the year. Assets and liabilities are
translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are accumulated and reported in
stockholders' equity.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are charged to operations as
incurred.
NET LOSS PER SHARE
In accordance with the applicable rules of the Securities and Exchange
Commission, net loss per share is based upon the weighted average number of
shares of Common Stock outstanding. Common stock equivalents have not been
included because the effect would be anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the 1997 presentation.
3. SECURITIES AVAILABLE FOR SALE:
The following table summarizes the Company's securities available for
sale at March 31:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized Amortized Cost
Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 21,078,265 $ 4,665 $ (38,973) $ 21,112,573
Corporate debt securities 14,419,537 6,375 (38,340) 14,451,502
Certificate of deposit 3,492,569 - (14,058) 3,506,627
------------- --------------- ------------ ----------------
Total $ 38,990,371 $ 11,040 $ (91,371) $ 39,070,702
============= =============== ============ ================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized Amortized Cost
Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 26,878,989 $ 85,954 $ (69,531) $ 26,862,566
Corporate debt securities 30,188,764 26,151 (144,701) 30,307,314
------------- --------------- ------------ ----------------
Total $ 57,067,753 $ 112,105 $ (214,232) $ 57,169,880
============= =============== ============ ================
</TABLE>
45
<PAGE> 46
Amortized cost and market value of debt securities at March 31, 1997,
by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Market Value Amortized Cost
Contractual Maturity
<S> <C> <C>
Due within 1 year $ 23,181,678 $ 23,227,947
Due after 1 year but within 5 years $ 15,808,693 $ 15,842,755
</TABLE>
Gross realized losses totaled approximately $6,300, $26,000, and
$29,000 for the years ended March 31, 1997, 1996 and 1995, respectively. Gross
realized gains totaled approximately $12,000 and $43,000 for the years ended
March 31, 1997 and 1996, respectively.
4. INVENTORIES:
Inventories consisted of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $ 1,520,000 $ 1,241,599
Work-in-process 918,632 1,407,472
Finished goods 2,639,625 1,735,381
=============== ===============
$ 5,078,257 $ 4,384,452
=============== ===============
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Laboratory and manufacturing equipment $ 2,935,605 $ 2,983,370
Computers 1,400,577 1,236,172
Office Equipment 1,099,020 1,189,479
Furniture 1,413,115 1,552,584
Leasehold improvements 18,198,380 18,102,166
--------------- ---------------
25,046,697 25,063,771
Less accumulated depreciation (11,862,843) (8,559,466)
--------------- ---------------
$ 13,183,854 $ 16,504,305
=============== ===============
</TABLE>
46
<PAGE> 47
6. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Litigation costs $ 1,200,000 $ -
Deferred sales tax - 1,190,000
Accrued clinical trials costs 972,000 987,000
Accrued employee compensation and benefits 567,000 583,000
Other 1,113,349 1,386,373
--------------- ---------------
$ 3,852,349 $ 4,146,373
=============== ===============
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consisted of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Notes payable, collateralized by furniture and
equipment with an original cost of
approximately $422,000, payable in
monthly installments totaling $11,745
including interest; final payment due
January 1997, interest at 9.47% $ - $ 112,507
Capital lease obligations, payable in 111,168 163,989
monthly installments totaling
approximately $6,000, imputed interest
at 10%
Other 191,525 200,780
--------------- ---------------
Total 302,693 477,276
Less current portion (149,750) (269,275)
--------------- ---------------
Net $ 152,943 $ 208,001
=============== ===============
</TABLE>
At March 31, 1997, aggregate required principal payments for all
long-term debt, including capital lease obligations, for the fiscal years ending
March 31 are as follows:
<TABLE>
<S> <C>
1998 $ 149,750
1999 114,223
2000 36,032
2001 1,505
2002 1,183
-----------
$ 302,693
===========
</TABLE>
Property and equipment includes $264,000 and $446,000, at March 31,
1997 and 1996, respectively, of equipment held under capital leases.
Cash paid for interest for the years ended March 31, 1997, 1996, and
1995 was approximately $46,000, $87,000 and $157,000, respectively.
47
<PAGE> 48
8. OTHER LIABILITIES:
Other liabilities consist of deferred state sales tax. The sales tax
will be paid in five annual installments beginning December 31, 1998.
9. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases one office and one manufacturing facility under
noncancelable leases which expire in October 1997. The Company also leases a
research and office facility under a 120-month noncancelable lease which expires
August 2003. The lease for one facility provides for a rent increase in 1997
based upon changes in the Consumer Price Index.
Under the terms of the leases, the Company is responsible for its share
of taxes, insurance and common area charges. The leases provide the Company with
options to renew with lease payments escalating based on changes in the Consumer
Price Index.
Total rental expense was approximately $1,100,000, $1,530,000 and
$1,400,000 for the years ended March 31, 1997, 1996 and 1995, respectively. Net
of sublease income of $418,000 and $303,000 for the years ended March 31, 1997
and 1996, respectively.
Future minimum payments on operating leases, net of sublease payments,
are summarized as follows:
<TABLE>
<CAPTION>
Years Ending March 31,
<S> <C>
1998 $ 861,000
1999 631,000
2000 536,000
2001 518,000
2002 518,000
Thereafter 690,000
===========
$ 3,754,000
===========
</TABLE>
LITIGATION PROVISION
At March 31, 1997, the Company established a liability of $17 million
to cover potential losses from, and future expenses for pursuing, ongoing patent
litigation in which the Company is accused of infringing two patents owned by
the Johns Hopkins University and licensed to Baxter Healthcare Corporation and
Becton Dickinson & Company (Hopkins, Baxter and Becton hereinafter being
collectively referred to as "plaintiffs"). While management is optimistic that
the Company will ultimately prevail in this dispute, the course of litigation is
inherently uncertain and there can be no assurance of a favorable outcome. The
liability has been made in recognition of the fact that adverse Court rulings on
liability, and an adverse jury verdict, have been rendered at the District Court
level and that the entry of a District Court judgment against the Company, in
the near term, appears highly likely. The ultimate amount of loss, if any, and
the ultimate amount of future expenses incurred in pursuing this litigation, may
vary significantly from the amount accrued.
There have been two jury trials in the case. In the first trial, a jury
on August 4, 1995, found in favor of CellPro on all counts. The verdict stated
that the four patents then in suit were not infringed by CellPro's manufacture,
use and sale of the CEPRATE(R) SC System or the CEPRATE(R) LC System.
Additionally, the jury found that the claims of the patents asserted against
CellPro were invalid.
Post-trial motions were filed and, on July 1, 1996, the U.S. District
Court for the District of Delaware (per Judge Roderick R. McKelvie) partially
granted plaintiffs' motion for judgment as a matter of law as to the issues of
48
<PAGE> 49
infringement, inducement of infringement and enablement with respect to U.S.
Patent No. 4,965,680, as well as the issue of induced infringement with respect
to U.S. Patent No. 5,130,144. The Court ordered a new trial on remaining
liability and infringement issues.
In a series of decisions preceding the new trial, Judge McKelvie
granted motions by the plaintiffs to dismiss CellPro's remaining liability and
infringement defenses. Plaintiffs moved to withdraw two of the four patents from
suit, which motion was granted upon plaintiffs' undertaking that they would not
accuse any present product of CellPro of infringing those patents.
A second jury trial was held in March, 1997, at which the jury was
instructed to the effect that the Court had already determined that CellPro
infringed the two patents remaining in suit, that its defenses had been
dismissed, and that the jury was bound by those determinations. Hence, the jury
at the second trial heard evidence and arguments only as to the amount of
damages to be awarded and as to whether CellPro's conduct had been willful. On
March 11, 1997, the jury reached a verdict finding willfulness and awarding some
$2.3 million in damages to plaintiffs.
A final judgment has not yet been rendered at the District Court level.
Still pending are decisions as to whether enhanced damages will be awarded, as
to whether and on what terms an injunction will be granted against CellPro's
principal products, as to whether an award reimbursing plaintiffs for attorney
fees will be granted, and as to whether CellPro will be allowed to proceed
further on its defense that the patents are unenforceable for misuse by reason
of an attempt by the plaintiffs to extend the reach of their patents beyond the
territory of the United States. Also pending for decision is CellPro's
alternative motion for a stay, pending appeal, of any permanent injunction the
Court may enter against CellPro.
The Company intends to challenge the second jury's verdict on
post-trial motions and, if necessary, on appeal to the U.S. Court of Appeals for
the Federal Circuit. The Company further intends to pursue vigorously an appeal
in that Court from all adverse rulings heretofore and hereafter made by the
District Court. The Company plans to urge that reversible errors were made by
the Court in trying this case, that the second jury's verdict is contrary to the
evidence and the law, and that the first jury's verdict should be reinstated and
judgment entered thereon.
The antitrust and unfair competition claims filed by CellPro against
the plaintiffs have been stayed pending completion of the patent litigation.
The Company may incur substantial expenses in excess of the amount
accrued at March 31, 1997 in connection with this litigation. These expenses
could have a material effect on the Company's results of operations and
financial position in future periods. Additionally, as a result of this
litigation, an injunction could be granted and, if granted, the Company could be
prohibited from selling its principal products. The granting of an injunction
would materially disrupt the Company's business.
Selling, general and administrative expense includes $3.9 million and
$2.3 million related to this litigation for the years ended March 31, 1997 and
1996, respectively.
10. CAPITAL STOCK:
STOCK OPTION PLAN
In 1989, the Company adopted a stock option plan (the "Option Plan")
administered by a Plan Administrator designated by the Board of Directors. A
total of 3,155,000 shares are available for issuance under the Plan. Options
issued under the Option Plan are designated as either incentive stock options
("ISOs") or nonqualified stock options. ISOs must be granted to employees at
minimum exercise prices equal to the fair market value of common shares at the
date of grant. Nonqualified options must be granted at minimum exercise prices
at least equal to 50% of fair market value of common shares at the date of
grant. Options generally vest over a four year period and have a term of ten
years from the date of grant.
49
<PAGE> 50
Stock option information with respect to all of the Company's stock
option plans follows:
<TABLE>
<CAPTION>
Exercise Price
-------------------------------------------------------------
Shares Low High Weighted-Average
<S> <C> <C> <C>
Balance April 1, 1994, unexercised 1,490,732 $ 0.10 $ 33.75 $ 12.81
Granted 200,288 9.63 27.25 17.84
Exercised (48,368) 0.10 21.25 6.91
Forfeited (40,302) 8.00 29.75 19.21
---------------- ---------------- ---------------- ----------------
Balance March 31, 1995, unexercised 1,602,350 0.10 33.75 13.53
---------------- ---------------- ---------------- ----------------
Granted 989,733 10.00 18.00 11.50
Exercised (243,185) 0.10 13.50 9.08
Forfeited (774,495) 8.00 33.75 17.99
---------------- ---------------- ---------------- ----------------
Balance March 31, 1996, unexercised 1,574,403 0.10 33.00 10.78
---------------- ---------------- ---------------- ----------------
Granted 513,750 6.48 18.75 12.08
Exercised (124,125) 0.30 15.75 9.37
Forfeited (274,132) 6.81 33.00 13.32
================ ================ ================ ================
Balance March 31, 1997, unexercised 1,689,896 $ 0.10 $ 29.75 $ 10.86
================ ================ ================ ================
</TABLE>
Pursuant to APB Opinion No. 25, the Company records for financial
statement reporting purposes only, compensation expense equal to the difference,
on the date of grant, between the grant price and the quoted market price of the
Common Stock underlying options granted. Such compensation is amortized to
expense over the vesting period of the related options.
At March 31, 1997, 1996 and 1995, options for a total of 991,000,
736,000 and 900,000 shares were exercisable at weighted average prices of $9.88,
$9.64 and $11.17 per share, respectively.
FAIR VALUE DISCLOSURES
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," requires the use of option valuation models to
provide supplemental information regarding options granted after March 31, 1995.
Pro forma information regarding net loss and net loss per share shown below was
determined as if the Company had accounted for its employee stock options and
shares sold under its stock purchase plan under the fair value method of that
statement.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have characteristics significantly different from those of traded
options such as vesting restrictions and extremely limited transferability. In
addition, the assumptions used in option valuation models (see below) are highly
subjective, particularly the expected stock price volatility of the underlying
stock. Because changes in these subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for 1997 and 1996 is not representative of the pro forma effect on
operations in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to April 1, 1995. Pro forma
information in future years will reflect the amortization of
50
<PAGE> 51
a larger number of stock options granted in several succeeding years. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Years Ended March 31, (in millions) 1997 1996
<S> <C> <C>
Net loss
As reported $ (40.9) $ (15.7)
Pro forma (42.8) (17.4)
Net loss per share
As reported $ (2.84) $ (1.13)
Pro forma (2.97) (1.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 63.3%; an expected life of 4.33 years;
risk-free interest rate of 6.31% in 1997 and 5.96% in 1996; and no expected
dividends.
These assumptions resulted in weighted-average fair values of $6.34 and
$5.62 per share for stock options granted in 1997 and 1996, respectively.
The following table summarizes information about options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------------
Weighted-Average
Weighted- Remaining
Average Contractual Weighted-Average
Price Range Shares Exercise Price Life Shares Exercise Price
<S> <C> <C> <C> <C> <C>
$0.10 - $10.00 325,120 $5.10 5.38 275,534 $4.68
$10.50 - $10.50 546,421 $10.50 8.46 334,755 $10.50
$10.75 - $13.00 464,767 $11.75 7.45 266,483 $11.37
$13.06 - $29.75 353,588 $15.57 8.58 114,006 $17.09
---------------- ----------------- ----------------- ---------------- -----------------
$0.10 - $29.75 1,689,896 $10.86 7.61 990,778 $9.88
</TABLE>
STOCK PURCHASE PLAN
The Company established a stock purchase plan (the "Purchase Plan")
under which employees, other than officers, may purchase shares of the Company's
Common Stock. The purchase price per share is 85% of the lower of the market
value per share of Common Stock determined as of the beginning or end of the
six-month purchase period specified in the Purchase Plan. The initial purchase
period began April 16, 1992. Through April 15, 1997, the end of the tenth
purchase period, a total of 74,769 shares have been acquired by employees
through the Purchase Plan. At March 31, 1997, the Company had 75,231 shares
available for future issuance under the Purchase Plan.
PREFERRED STOCK
The Company has 1,000,000 shares of authorized preferred stock. None of
the preferred stock has been issued. As discussed below, 200,000 shares are
reserved for use in the Company's shareholder rights plan.
SHAREHOLDER RIGHTS PLAN
In April 1995, the Board of Directors adopted a shareholder rights plan
pursuant to which holders of Common Stock outstanding on May 8, 1995 have been
granted one Preferred Share Purchase Right (a "Right") on each outstanding share
of Common Stock. Each Right entitles the registered holder to purchase one
one-hundredth of a share of a new series of Junior Participating Preferred Stock
(200,000 shares authorized) at an exercise price of
51
<PAGE> 52
$70.00, subject to certain adjustments, upon the occurrence of certain events.
The Rights will be exercisable only if a person, or group, acquires 15%, or
more, of the Common Stock, or announces a tender offer for the Company, the
consummation of which would result in ownership by a person, or group, of 15%,
or more, of the Company's Common Stock. The Rights may be redeemed, at a
redemption price of one cent per right, by the Board of Directors of the Company
at any time within ten days after a person, or group, has acquired beneficial
ownership of 15%, or more, of the Company's Common Stock. The Rights will expire
on May 7, 2005.
If, after the rights become exercisable, the Company is acquired in a
merger, or other such transaction, or sells 50%, or more, of its assets or
earnings power, each right will entitle its holder to purchase the acquiring
company's common shares having a value of twice the Right's exercise price. In
addition, if a person, or group, acquires 15%, or more, of the Company's
outstanding Common Stock, each Right will entitle its holder (other than the
acquiror) to purchase a number of the Company's common shares having a value of
twice the Right's exercise price.
11. COLLABORATION AGREEMENTS:
CORIXA
On December 22, 1995, the Company signed a technology-based, multi-year
research collaboration and licensing agreement with Corixa Corporation, a
Seattle-based biotechnology company. The research collaboration calls for
CellPro to provide funding for a new research program to identify and optimize
methods and conditions for the growth of, and activation, or stimulation of
tumor-antigen-specific lymphocytes (white blood cells) and other
antigen-presenting cells outside of the body for use in treating cancer.
Under the agreement, as amended January 1997, CellPro receives
exclusive worldwide rights to all ex vivo therapy applications arising from
Corixa's technology within the field of oncology and co-exclusive rights to
dendritic cell vaccines that incorporate Corixa's technology. CellPro will be
responsible for the clinical development and commercial introduction of any
products resulting from this agreement. Subject to certain conditions, CellPro
will provide Corixa with annual research funding and will make additional
milestone and royalty payments based on the successful development and
commercialization of these products. The amount of research funding will be
negotiated annually, subject to certain minimums.
CORANGE
On July 31, 1995, CellPro and its former corporate partner, Corange,
reached a definitive agreement to conclude their collaboration entered into
during December 1993. Under the new agreement, Corange paid CellPro $24 million
in exchange for one million newly issued shares of CellPro Common Stock and $6
million for prior research and development services. In addition, CellPro agreed
to supply Corange, on a non-exclusive basis, with cell separation systems for
use in the field of gene medicine. All rights to CellPro's technology previously
licensed to Corange have been returned to CellPro, the agreements have been
terminated, and the two companies have exchanged releases in settlement of all
claims relating to the 1993 agreements. Product sales to Corange approximated
$100,000 and $85,000 in 1997 and 1996, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents at March 31, 1996 and
1997 approximates fair value.
The aggregate fair value, based on market quotes, of the Company's
securities available for sale at March 31, 1997 was $39.0 million as compared to
its carrying value of $39.1 million. The aggregate fair value of the Company's
securities available for sale at March 31, 1996 was $57.1 million as compared to
its carrying value of $57.2 million.
The carrying value of the Company's debt approximates fair value at
March 31, 1997.
52
<PAGE> 53
The fair value of the other liabilities has been estimated at $940,000,
compared to its balance sheet carrying value of $1,196,710 at March 31, 1997.
13. FEDERAL INCOME TAXES:
At March 31, 1997, the Company had accumulated net operating loss
carryforwards of approximately $96.4 million which expire through 2012. The
Company also has cumulative research and development tax credit carryforwards of
approximately $3.5 million which expire through 2012. Differences between the
tax bases of assets and liabilities and their financial statement amounts are
reflected as deferred income taxes based on enacted tax rates. The principal
differences in bases result from differing depreciation methods and the changes
in various accrued liabilities. The accumulated net operating loss and research
and development credit carryforwards and the differences between tax and
financial reporting bases result in deferred income tax assets of approximately
$45.4 million which have been reduced by a valuation allowance of an equal
amount.
The Company's ability to use its net operating losses to offset future
taxable income is subject to restrictions enacted in the U.S. Internal Revenue
Code of 1986, as amended (the "Code"). These restrictions could limit the
Company's future use of its net operating losses if certain stock ownership
changes described in the Code occur.
14. TECHNOLOGY AGREEMENTS:
The Company has entered into several licensing agreements granting it
rights to utilize core technology for cell separation and certain antibodies.
These agreements require payments of up-front fees upon execution and royalty
payments in varying amounts for sales of licensed products for periods of up to
17 years. Payments relating to technology agreements are expensed as incurred.
15. EMPLOYEE RETIREMENT PLAN:
The Company sponsors an Employee Retirement Plan in accordance with
Section 401(k) of the Internal Revenue Code. Under this Plan, at the discretion
of the Board of Directors, the Company may match a portion of the employees'
contributions. No Company contributions have been made to the Plan as of March
31, 1997.
53
<PAGE> 54
16. GEOGRAPHIC SEGMENT INFORMATION:
The Company markets its products internationally through wholly-owned
subsidiaries located in Europe and through independent distributors in other
export markets. U.S. revenues in the following table include U.S. export sales
to customers in foreign countries of $864,000 in 1997 and $423,000 in 1996. A
summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1 --------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Product sales revenue:
U.S. $ 2,758,487 $ 1,457,534 $ 560,025
Transfers between geographic areas 7,126,090 4,284,645 4,179,705
Contract revenue 146,390 41,600 -
Related party revenue - 6,000,000 -
-------------- --------------- ----------------
Total U.S. 10,030,967 11,783,779 4,739,730
Europe 6,757,497 5,344,451 3,655,885
Eliminations (7,126,090) (4,284,645) (4,179,705)
-------------- --------------- ----------------
Consolidated revenues $ 9,662,374 $ 12,843,585 $ 4,215,910
============== =============== ================
Geographic Assets:
U.S. $ 18,352,150 $ 20,188,482 $ 22,102,915
Europe 3,430,520 3,620,535 3,230,607
Eliminations 297,852 (11,518) 98,958
-------------- --------------- ----------------
22,080,522 23,797,499 25,432,480
General corporate assets (principally
cash and investments) 54,043,175 74,143,850 64,080,455
============== =============== ================
Consolidated assets $ 76,123,697 $ 97,941,349 $ 89,512,935
============== =============== ================
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
54
<PAGE> 55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors and executive officers is included under the caption "Proposal One
Election of Directors-Nominees" of the Company's 1997 Notice of Annual Meeting
of Stockholders and Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Proposal One - Election of Directors - Executive Compensation and Other
Information" of the Company's 1997 Notice of Annual Meeting of Stockholders and
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"Record Date, Voting and Share Ownership" of the Company's 1997 Notice of Annual
Meeting of Stockholders and Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Proposal One - Election of Directors - Executive Compensation and Other
Information" of the Company's 1997 Notice of Annual Meeting of Stockholders and
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements under
Item 8 of this Form 10-K.
(A)(2) FINANCIAL STATEMENT SCHEDULES
Not applicable
(B) REPORTS ON FORM 8-K
Not applicable
55
<PAGE> 56
(C) EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
3.1(3) Restated Certificate of Incorporation.
3.2(3) Bylaws, as amended.
3.3(10) Certificate of Designations of Series A Junior Participating Preferred Stock of the
Company filed with the Secretary of State of Delaware on May 4, 1995.
4.1 Reference is made to Exhibit 3.1.
4.2 Reference is made to Exhibit 3.2.
4.3(9) Conformed copy of Rights Agreement dated as of April 21, 1995 between the Company and
American Stock Transfer Company.
10.4(1)** 1989 Stock Option Plan and forms of agreements thereunder.
10.5(1)** 1991 Employee Stock Purchase Plan and form of agreement thereunder.
10.8(1) Industrial Real Estate Lease dated as of June 26, 1989, by and between the Company and
Newplex II, with all amendments thereto.
10.9(4)(5) Exclusive License Agreement dated as of May 11, 1990, by and between the Company and
the University of Washington.
10.10(4)(5) Amended and Restated Antibody License Agreement dated as of
August 16, 1991, by and between the Company and the Fred
Hutchinson Cancer Research Center including First Amendment
to Restated Antibody License Agreement entered into as of
April 7, 1993.
10.11(1)(4) Technology License Agreement dated as of March 23, 1989, by
and between the Company and the Fred Hutchinson Cancer
Research Center including First Amendment to Technology
License Agreement entered into as of April 7, 1993.
10.12(1) Form of Indemnification Agreement.
10.13(2) Lease dated November 7, 1991, by and between the Company and Canyon Park Joint
Venture I.
10.14(6) First Amendment to Lease, dated November 1, 1992, by and between the Company and
NewPlex II.
10.15(6) Lease, dated February 24, 1993, by and between the Company and Canyon Park Joint
Venture II.
10.16(6) Lease, dated February 24, 1993, by and between the Company and Canyon Park Joint
Venture II and WRC Properties, Inc.
10.17(4)(7) Stock Purchase Agreement dated December 3, 1993 between CellPro, Incorporated and
Corange International Limited.
10.18(4)(7) Registration Rights Agreement dated December 3, 1993 between CellPro and Corange.
10.19 (4)(7) Standstill Agreement dated December 3, 1993 between CellPro and Corange.
10.20(8) Equipment lease dated March 15, 1994 between the Company and Lease Partners
Corporation and related Equipment Schedule.
10.21(10) Sublease Agreement between the Company and Prolinx, Inc. dated May 3, 1995.
10.22(4)(10) Agreement between the Company and Corange International Limited dated April 29, 1995.
10.23(4)(11) Amendment to Registration Rights Agreement dated July 31, 1995 between CellPro and
Corange.
10.24(11) Amendments to Standstill Agreement dated July 31, 1995 between CellPro and Corange.
10.25(11) Limited Release by CellPro dated July 31, 1995.
10.26(4)(11) Amended and Restated Stock Purchase Agreement dated July 31, 1995 between CellPro and
Corange.
10.27(11) Termination Agreement dated July 31, 1995 between CellPro and Corange.
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
10.28(4)(11) Supply Agreement dated July 31, 1995 between CellPro and Corange.
10.29(11) Limited Release by Corange dated July 31, 1995.
21* Subsidiaries of the Company.
23 Consent of Independent Accountants. The consent set forth on page 61 is incorporated
herein by reference.
24.1 Power of Attorney. The Power of Attorney set forth on page 60 is incorporated herein
by reference.
27* Financial Data Schedule.
</TABLE>
57
<PAGE> 58
- --------------------------
(1) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-4212) declared effective by the
Securities and Exchange Commission (the "SEC") on September 24, 1991.
(2) Incorporated herein by reference from an exhibit to the Company's
Annual Report on Form 10-K (File No. 0-19472) filed with the SEC on June 26,
1992.
(3) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 33-56960) declared effective by the
SEC on February 12, 1993.
(4) Certain portions of this Exhibit were granted confidential treatment
pursuant to an order from the SEC.
(5) Certain portions of this exhibit are incorporated by reference from an
exhibit filed with the Company's Registration Statement on Form S-1 (File No.
33-4212) declared effective by the SEC on September 24, 1991.
(6) Incorporated herein by reference from an exhibit to the Company's
annual report on Form 10-K (File No. 0-19472) filed with the SEC June 28, 1993
(7) Incorporated by reference from an exhibit to Form 8-K filed with the
SEC on March 17, 1994.
(8) Incorporated herein by reference from an exhibit to the Company's
annual report on Form 10-K (File No. 0-19472) filed with the SEC June 28, 1994
(9) Incorporated by reference from an exhibit to Form 8-A filed with the
SEC on May 4, 1995.
(10) Incorporated by reference from an exhibit to the Company's annual
report on Form 10-K (File No. 0-19472) filed with the SEC on June 28, 1995.
(11) Incorporated by reference from an exhibit to the Company's quarterly
report on Form 10Q (File No. 0-19472) for the quarter ended December 31, 1995
filed with the SEC on February 13, 1996.
* Filed herewith.
** This item is a compensatory plan required to be listed as an exhibit to this
form pursuant to Item 601(a)(10)(iii) of Regulation S-K.
NOTE: THE GRAPHIC PORTION OF THE CELLPRO LOGO, THE CELLPRO NAME AND THE WORD
CEPRATE ARE ALL REGISTERED TRADEMARKS OF CELLPRO.
58
<PAGE> 59
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN BOTHELL, WASHINGTON ON
THIS 26TH DAY OF JUNE, 1997.
CELLPRO, INCORPORATED
BY: /s/ Richard D. Murdock
RICHARD D. MURDOCK
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
59
<PAGE> 60
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard D. Murdock and Larry G. Culver
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his 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 BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Richard D. Murdock President, Chief Executive Officer and Director June 26, 1997
- ---------------------------- (Principal Executive Officer)
(Richard D. Murdock)
/s/ Larry G. Culver Executive Vice President, Chief Operating June 26, 1997
- ---------------------------- Officer, Chief Financial Officer, Assistant
(Larry G. Culver) Secretary and Director (Principal Financial and
Accounting Officer)
/s/ Joseph S. Lacob Chairman of the Board June 26, 1997
- ---------------------------
(Joseph S. Lacob)
/s/ Kenneth W. Anstey Director June 26, 1997
- ---------------------------
(Kenneth W. Anstey)
/s/ Joshua L. Green Director June 26, 1997
- ----------------------------
(Joshua L. Green)
/s/ Charles P. Waite, Jr. Director June 26, 1997
- ----------------------------
(Charles P. Waite, Jr.)
</TABLE>
60
<PAGE> 61
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
CellPro, Incorporated
We consent to the incorporation by reference in the Registration Statement of
CellPro, Incorporated on Form S-8 (filed No. 33-71478) of our report dated May
13, 1997, on our audits of the consolidated financial statements of CellPro,
Incorporated as of March 31, 1997 and 1996 and for the years ended March 31,
1997, 1996 and 1995, which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND, L.L.P.
Seattle, Washington
June 25, 1997
61
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
3.1(3) Restated Certificate of Incorporation.
3.2(3) Bylaws, as amended.
3.3(10) Certificate of Designations of Series A Junior Participating Preferred Stock of the
Company filed with the Secretary of State of Delaware on May 4, 1995.
4.1 Reference is made to Exhibit 3.1.
4.2 Reference is made to Exhibit 3.2.
4.3(9) Conformed copy of Rights Agreement dated as of April 21, 1995 between the Company and
American Stock Transfer Company.
10.4(1)** 1989 Stock Option Plan and forms of agreements thereunder.
10.5(1)** 1991 Employee Stock Purchase Plan and form of agreement thereunder.
10.8(1) Industrial Real Estate Lease dated as of June 26, 1989, by and between the Company and
Newplex II, with all amendments thereto.
10.9(4)(5) Exclusive License Agreement dated as of May 11, 1990, by and between the Company and
the University of Washington.
10.10(4)(5) Amended and Restated Antibody License Agreement dated as of
August 16, 1991, by and between the Company and the Fred
Hutchinson Cancer Research Center including First Amendment
to Restated Antibody License Agreement entered into as of
April 7, 1993.
10.11(1)(4) Technology License Agreement dated as of March 23, 1989, by
and between the Company and the Fred Hutchinson Cancer
Research Center including First Amendment to Technology
License Agreement entered into as of April 7, 1993.
10.12(1) Form of Indemnification Agreement.
10.13(2) Lease dated November 7, 1991, by and between the Company and Canyon Park Joint
Venture I.
10.14(6) First Amendment to Lease, dated November 1, 1992, by and between the Company and
NewPlex II.
10.15(6) Lease, dated February 24, 1993, by and between the Company and Canyon Park Joint
Venture II.
10.16(6) Lease, dated February 24, 1993, by and between the Company and Canyon Park Joint
Venture II and WRC Properties, Inc.
10.17(4)(7) Stock Purchase Agreement dated December 3, 1993 between CellPro, Incorporated and
Corange International Limited.
10.18(4)(7) Registration Rights Agreement dated December 3, 1993 between CellPro and Corange.
10.19 (4)(7) Standstill Agreement dated December 3, 1993 between CellPro and Corange.
10.20(8) Equipment lease dated March 15, 1994 between the Company and Lease Partners
Corporation and related Equipment Schedule.
10.21(10) Sublease Agreement between the Company and Prolinx, Inc. dated May 3, 1995.
10.22(4)(10) Agreement between the Company and Corange International Limited dated April 29, 1995.
10.23(4)(11) Amendment to Registration Rights Agreement dated July 31, 1995 between CellPro and
Corange.
10.24(11) Amendments to Standstill Agreement dated July 31, 1995 between CellPro and Corange.
10.25(11) Limited Release by CellPro dated July 31, 1995.
10.26(4)(11) Amended and Restated Stock Purchase Agreement dated July 31, 1995 between CellPro and
Corange.
10.27(11) Termination Agreement dated July 31, 1995 between CellPro and Corange.
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
10.28(4)(11) Supply Agreement dated July 31, 1995 between CellPro and Corange.
10.29(11) Limited Release by Corange dated July 31, 1995.
21* Subsidiaries of the Company.
23 Consent of Independent Accountants. The consent set forth on page 61 is incorporated
herein by reference.
24.1 Power of Attorney. The Power of Attorney set forth on page 60 is incorporated herein
by reference.
27* Financial Data Schedule.
</TABLE>
<PAGE> 64
- --------------------------
(1) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-4212) declared effective by the
Securities and Exchange Commission (the "SEC") on September 24, 1991.
(2) Incorporated herein by reference from an exhibit to the Company's
Annual Report on Form 10-K (File No. 0-19472) filed with the SEC on June 26,
1992.
(3) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 33-56960) declared effective by the
SEC on February 12, 1993.
(4) Certain portions of this Exhibit were granted confidential treatment
pursuant to an order from the SEC.
(5) Certain portions of this exhibit are incorporated by reference from an
exhibit filed with the Company's Registration Statement on Form S-1 (File No.
33-4212) declared effective by the SEC on September 24, 1991.
(6) Incorporated herein by reference from an exhibit to the Company's
annual report on Form 10-K (File No. 0-19472) filed with the SEC June 28, 1993
(7) Incorporated by reference from an exhibit to Form 8-K filed with the
SEC on March 17, 1994.
(8) Incorporated herein by reference from an exhibit to the Company's
annual report on Form 10-K (File No. 0-19472) filed with the SEC June 28, 1994
(9) Incorporated by reference from an exhibit to Form 8-A filed with the
SEC on May 4, 1995.
(10) Incorporated by reference from an exhibit to the Company's annual
report on Form 10-K (File No. 0-19472) filed with the SEC on June 28, 1995.
(11) Incorporated by reference from an exhibit to the Company's quarterly
report on Form 10Q (File No. 0-19472) for the quarter ended December 31, 1995
filed with the SEC on February 13, 1996.
* Filed herewith.
** This item is a compensatory plan required to be listed as an exhibit to this
form pursuant to Item 601(a)(10)(iii) of Regulation S-K.
NOTE: THE GRAPHIC PORTION OF THE CELLPRO LOGO, THE CELLPRO NAME AND THE WORD
CEPRATE ARE ALL REGISTERED TRADEMARKS OF CELLPRO.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF CELLPRO, INCORPORATED
CellPro Europe N.V./S.A., a Belgian corporation
CellPro France S.A.R.L., a French corporation
CellPro Deutschland GmbH, a German corporation
CellPro II, Inc., a Washington corporation
CellPro Italia s.r.l., an Italian corporation
CellPro Biotech Iberica, S.L., a Spanish corporation
CellPro Asia-Pacific Pty., Ltd., an Australian corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 15,053
<SECURITIES> 38,990
<RECEIVABLES> 3,159
<ALLOWANCES> 0
<INVENTORY> 5,078
<CURRENT-ASSETS> 62,829
<PP&E> 25,047
<DEPRECIATION> 11,863
<TOTAL-ASSETS> 76,124
<CURRENT-LIABILITIES> 21,993
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 52,767
<TOTAL-LIABILITY-AND-EQUITY> 76,124
<SALES> 9,516
<TOTAL-REVENUES> 9,662
<CGS> 5,161
<TOTAL-COSTS> 5,161
<OTHER-EXPENSES> 48,623
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (40,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,915)
<EPS-PRIMARY> (2.84)
<EPS-DILUTED> (2.84)
</TABLE>
