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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22025
AASTROM BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
Michigan 94-3096597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Frank Lloyd Wright Drive
P.O. Box 376
Ann Arbor, MI 48106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (734) 930-5555
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no 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 [_]
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 amendment to this
Form 10-K. [_]
The approximate aggregate market value of the registrant's Common Stock, no par
value ("Common Stock"), held by non-affiliates of the registrant (based on the
closing sales price of the Common Stock as reported on the Nasdaq National
Market) on September 23, 1998 was $2.00. Excludes shares of Common Stock held
by directors, officers and each person who holds 5% or more of the outstanding
shares of Common Stock, since such persons may be deemed to be affiliates of the
registrant. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of September 18, 1998, 13,694,429 shares of Common Stock, no par value, were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for the Annual Meeting of Shareholders
scheduled for November 11, 1998 Items 10, 11, 12 and 13 of Part III
Annual Report to Shareholders for fiscal year ended 1998 Items 5, 6, 7, 7A, 8, 9 and 14(a) of Part II
</TABLE>
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AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AASTROM BIOSCIENCES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
No.
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PART I...................................................................... 4
Item 1. BUSINESS..................................................... 4
Item 2. PROPERTIES................................................... 23
Item 3. LEGAL PROCEEDINGS............................................ 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 23
PART II..................................................................... 23
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.......................................... 23
Item 6. SELECTED FINANCIAL DATA...................................... 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 23
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 34
PART III.................................................................... 34
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 34
Item 11. EXECUTIVE COMPENSATION....................................... 34
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 34
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 34
PART IV..................................................................... 35
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. 35
SIGNATURES.................................................................. 37
EXHIBIT INDEX............................................................... 38
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Except for the historical information presented, the matters discussed in
this Report include forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed under the caption "Business Risks" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
OVERVIEW
Aastrom Biosciences, Inc. ("Aastrom" or the "Company") is developing automated
cell therapy systems designed to enable therapeutic procedures using living
cells for therapeutic procedures or for the restoration of normal tissues in
patients treated for cancer and other diseases. The AastromReplicell/(TM)/ Cell
Production System (the "AastromReplicell/(TM)/ System"), the Company's lead
product, is currently in multi-site U.S. clinical trials for the production of
either bone marrow or umbilical cord blood cells to mitigate the toxicity of
aggressive chemotherapy used to treat cancer and other diseases. The
AastromReplicell/(TM)/ System is designed to place patient-specific cell
production capability directly in patient treatment centers and to enable
physicians to access cells for therapy just as they do with traditional
pharmaceuticals. Improved, cost effective, access to cells should expand the use
of current cell therapies as well as increase the breadth of new disease
treatments with cells. The AastromReplicell/(TM)/ System is designed as a family
of products keyed by a multi-use instrumentation platform that operates single-
use therapy-specific kits tailored for each patient application.
In 1993, the Company entered into a global marketing alliance with COBE BCT
for worldwide marketing of the AastromReplicell/(TM)/ System for stem cell
therapy. COBE BCT is a leader in the manufacture, sale and customer support of
blood cell processing equipment, including transfusion medicine, therapeutic
apheresis and stem cell therapy.
The Company believes that the AastromReplicell/(TM)/ System can be modified to
produce a wide variety of other cell types for selected emerging therapies being
developed by other companies and institutions. The Company intends to develop
additional strategic collaborations for the development of the
AastromReplicell/(TM)/ System in certain of these other cell therapy market
segments. In ex vivo gene therapy, the Company is also developing the Aastrom
Gene Loader, which is being designed to address the production of gene-modified
cells.
CELL THERAPY
Cell therapy is the transplantation use of living cells in the treatment of
medical disorders. These cells can either be used in conjunction with, or as a
replacement to, traditional pharmaceuticals. Cell therapy has been used for
many years, beginning with simple, but very effective, blood and platelet
transfusion. More recently, cell therapies have expanded to include specialized
procedures including bone marrow, or stem cell transplants. In this procedure,
stem cells are transplanted into patients to restore blood and immune system
function that is damaged or destroyed by aggressive chemotherapy used to treat
the cancer. This form of cell therapy, as with a number of emerging new
therapies, have been hastened by a number of limitations involving the access to
the cells necessary for transplantation.
To date, cell therapies have involved the collection of large amounts of cells
from the patient, or from a matched donor and subsequently re-infused. This
approach is time consuming, expensive and quite invasive to the patient. An
alternative to the collection of large quantities of cells for these therapies
is to grow the cells in culture. However, this approach has been hampered by a
number of technical difficulties and a requirement to comply with stringent
regulatory standards, which have limited the widespread practice of ex vivo cell
production.
The success of cellular therapy is based, in part, on the need for care
providers to be able to access therapeutic quantities of biologically active
cells necessary for patient treatment. The AastromReplicell/(TM)/ System is
being developed to fill this current and growing need in cell therapy.
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In ex vivo gene therapy, genes are introduced into target cells in order to
selectively correct or modulate disease conditions, or to modify cells for
production of a therapeutic protein. The Company believes that the successful
practice of ex vivo gene therapy will require the development of processes and
products for the reliable, high-efficiency transfer of genes into cells and a
means to produce the necessary dose of the genetically modified cells under
current Good Manufacturing Practices ("cGMP").
Stem Cell Therapy
Stem cell therapy is used to treat cancer patients who undergo chemotherapy or
radiation therapy at dose levels that are toxic to the hematopoietic system,
which is comprised of the bone marrow and the cells of the blood and immune
systems. The objective of stem cell therapy is to restore the hematopoietic
system via the infusion and subsequent engraftment of healthy cells to replace
bone marrow and result in the rapid recovery of neutrophils and platelets that
have been destroyed by chemotherapy and radiation therapy. Stem cell therapy
reduces the risk of life-threatening infections and therapy bleeding episodes
following cancer treatments. In order to treat many cancers, high intensity
chemotherapy or radiation therapy is often required, which may substantially
destroy ("myeloablation") or partially destroy ("myelosuppression") the
patient's hematopoietic system.
Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune systems, and early and
late stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment the
growth of bone marrow. In the adult, all of these cell types originate in the
bone marrow. For traditional stem cell transplant procedures, these cells are
currently collected from the donor or patient directly through multiple syringe
aspirations under anesthesia, known as bone marrow collection, or through blood
apheresis following treatment with drugs which cause cells to be released or
mobilized from the bone marrow into the blood. This latter technique is known as
a peripheral blood stem cell ("PBSC") collection. The blood cells found in the
umbilical cord of newborn infants include cells effective for stem cell therapy.
This source of cells is being explored by physicians as a significant new
development in stem cell therapy, but is currently limited by difficulties in
obtaining sufficient quantities of these cells and by prolonged engraftment
times for the cells once transplanted into the patient. See "--Current Stem Cell
Collection Methods."
Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form a new marrow. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may take years
following myeloablative cancer therapy. When the patient's hematopoietic system
is malignant, such as in the case of leukemia, cells from a suitable donor are
generally required in order to avoid reintroducing the disease during cell
infusion. Such donor derived transplants are termed "allogeneic" transplants.
Procedures using cells derived from the patient are termed "autologous"
transplants.
STEM CELL THERAPY MARKET OPPORTUNITY
Stem cell therapy is a widely used medical procedure used in the treatment of
cancer patients. It is estimated that over 50,000 stem cell transplant
procedures are performed annually. Stem cell therapy, in the form of bone marrow
transplantation, was originally used in patients who had received treatment for
blood and bone marrow cancers such as leukemia, and genetic diseases of the
blood. However, because stem cell therapy has been shown to promote the rapid
recovery of hematopoietic function, it is now being increasingly used to enable
patients with other forms of cancer to receive high dose or multicycle
chemotherapy and radiation treatments. These high-intensity therapies are
believed to have a greater probability of eradicating dose-sensitive cancers
but, because of their hematopoietic toxicity, cannot generally be given without
stem cell therapy. As a result, some patients are treated with lower and less
effective doses, and fewer cycles of therapy than might otherwise be used.
Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. The timing and extent of additional cycles of chemotherapy is often
limited by the recovery of a patient's white blood cells and platelets because a
delayed recovery of these cells can leave the patient susceptible to life-
threatening infection and bleeding episodes, and this limitation may allow for
the regrowth of residual tumor cells. Many cancer patients are routinely treated
with growth factors including G-CSF, such as Neupogen and GM-CSF, such as
Leukine, which enhance the development of mature circulating white blood cells
and platelets from the early progenitor bone-marrow derived cells, thereby
decreasing the time between cycles of therapy and the probability of infection.
However, during high dose or multicycle therapy, the stem and progenitor cells
on which
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these growth factors act are often depleted. Without these cells, growth factors
have a limited or negligible effect. Stem cell therapy generally enhances the
effectiveness of growth factors by introducing target stem and progenitor cells
for growth factors to act upon such that patients generally exhibit a more rapid
and consistent hematopoietic recovery.
CURRENT STEM CELL COLLECTION METHODS
Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBSC
collection method.
BONE MARROW HARVEST
A traditional bone marrow harvest is a costly and invasive surgical procedure
in which a physician removes approximately one liter of bone marrow from a
patient or donor. This volume of bone marrow is removed using needles inserted
into the cavity of the hip bone. The bone marrow harvest procedure typically
requires between two to four hours of operating room time, with the physician
often making more than 90 separate puncture sites in the hip bone to collect the
necessary amount of bone marrow. Due to the length of the procedure and the
trauma to the patient, general surgical anesthesia is administered and the
patient is often hospitalized for a day. Frequently, the patient suffers pain
from the procedure for several days after being discharged from the hospital.
Furthermore, complications resulting from the general anesthesia or invasive
nature of the procedure occur in a small percentage of patients. Bone marrow
harvest provides a reliable source of stem and stromal accessory cells and has
been the preferred source of cells in allogeneic transplants.
PBSC MOBILIZATION AND COLLECTION
PBSC mobilization is a technique in which bone marrow-derived cells are
harvested from a patient's or donor's circulating blood, rather than from bone
marrow. In a PBSC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone marrow
to mobilize into the circulating blood. The mobilized cells are then collected
by connecting the patient to a blood apheresis device, often times through the
placement of a catheter which draws and returns large volumes of the patient's
or donor's blood in order to selectively remove the therapeutic volume of stem
and progenitor cells. Each collection procedure typically lasts for two to six
hours and is typically repeated on two to five consecutive days, however,
procedure time has decreased and is expected to continue to decrease as the
procedure is further optimized. Specialized laboratory testing over the period
of mobilization and cell harvesting is necessary to determine that a
sufficient quantity of desired cells has been collected, adding to the cost of
the procedure. The PBSC process has become the predominant procedure in
autologous stem cell therapy.
UMBILICAL CORD BLOOD
Umbilical Cord Blood ("UCB"), which is collected directly from the umbilical
cord of newborn infants, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBSC collection methods. After
collection, UCB is typically frozen for later use in a stem cell therapy
procedure. Storage of UCB samples involves small volumes of cells, compared to
typical bone marrow or PBSC storage. Accordingly, the costs of collection and
storage of UCB cells are comparatively low. UCB may provide a "tumor-free,"
source of cells making it a preferred source of cells for many current stem cell
therapy procedures in metastatic cancer patients. Before UCB can becom e a major
supply source for stem cell therapy, a coordinated UCB banking system must
emerge. In this regard, several UCB banking institutions have been established
to date, and the group is growing in both number and size. The establishment of
these UCB banking institutions is an initial step which may lead to a
coordinated UCB banking system.
PROCEDURE CONSIDERATIONS
Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the high
costs of procuring cells, the invasive nature of traditional cell procurement
techniques, and by the technical difficulties related to those collection
procedures. The Company believes that current charges for typical stem cell
collection procedures through bone marrow harvest or PBSC collection ranges from
$10,000 to $20,000 with considerable variability between institutions.
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Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, and the costs associated with supporting the patient
during post-transplant recovery. Post-transplant costs include hospitalization
time, antibiotic support, management of adverse reactions to the large volume
cell infusions, and infusions of platelets and red blood cells. Any new stem
cell therapy process will generally need to provide similar recovery endpoints
to be competitive with the current procedures. In this regard, PBSC procedures
have gained popularity compared with bone marrow harvests because the number of
platelet transfusions is reduced for some patients.
While UCB is a promissory new source of cells for transplantation, certain
disadvantages exits including the relatively low number of available cells which
may contribute to prolonged engraftment times for the cells once transplanted
into the patient. Unlike bone marrow or PBSC harvest, where the collection of
more cells to meet a particular treatment is typically achievable, the number of
cells available from a UCB donor is limited. This problem is exacerbated by the
required cryopreservation of the cells, which causes significant cell loss. The
resultant low cell number is believed to be responsible for the longer
hematopoietic recovery times observed with UCB transplants, as compared with
bone marrow or PBSC transplants. Further, because of the low cell number, UCB
transplants are typically restricted to small patients. Therefore, increasing
the number of therapeutic cells from a UCB sample may facilitate the more
widespread use of UCB transplants. Aastrom believes that providing the
transplant site with the capability to carry out the UCB cell expansion will be
a major factor in the increased use of UCB for stem cell therapy and a
significant business opportunity.
Products to implement a cell isolation method known as CD34 selection have
been developed by other companies in conjunction with bone marrow harvest and
PBSC collections. CD34 selection is a process designed to isolate specific types
of cells in order to decrease storage and infusion problems associated with the
large volume of fluids collected in bone marrow or multiple apheresis procedures
and to assist in depleting contaminating tumor cells from the transplant cells
collected. CD34 selection is used after the initial collection of stem and
progenitor cells and, therefore, increases the difficulties or costs associated
with the basic cell collection procedures. CD34 selection is also used to assist
in depleting tumor cells from the transplant cells collected.
AASTROM TECHNOLOGY
Aastrom is developing product and proprietary process technologies that are
pioneering the ex vivo production of human stem and progenitor cells. The
Company's initial product candidate, the AastromReplicell/(TM)/ System utilizes
the Company's process technology and is designed to enable the ex vivo
production of human stem and progenitor cells as an alternative to bone marrow
harvest and PBSC mobilization methods and to enhance the clinical utility of UCB
cells. The initial application of the AastromReplicell/(TM)/ System is the
production of cells for stem cell therapy. However, once established for use in
stem cell therapy, the Company plans to leverage the cell production
capabilities of the AastromReplicell/(TM)/ System across multiple cell therapy
opportunities as they develop. As these emerging cell therapies are developed,
Aastrom intends to develop and introduce new therapy kits through collaborative
relationships with others directed toward the treatment of cancer, infectious
diseases, auto-immune diseases and in the restoration of solid tissues.
CORE TECHNOLOGIES
Stem Cell Growth Process
Aastrom has developed proprietary processes and patented technologies for ex
vivo production of therapeutic stem and progenitor cells as well as other key
cells found in human bone marrow. The Company's proprietary process entails
the placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of natural bone marrow. This process enables the stem
and early and late-stage progenitor cells needed for an effective stem cell
therapy procedure to be concurrently expanded. Growth factors can be added to
stimulate specific cell lineages to grow or to increase cell growth to meet a
particular therapeutic objective. The stem cell growth process can best be
completed with little or no additional stem cell selection or purification
procedures. This stem cell replication process can also enable or augment the
genetic modification of cells by providing the cell division step needed for
new genes to integrate into the stem cell DNA. Currently available cell
culture methods tend to result in a loss of stem cells, either through death
or through differentiation into mature cells. The Company has exclusive rights
to several issued U.S. patents that cover these processes and cell
compositions. See "--Additional Stem Cell and Other Cell Therapies."
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Aastrom Cell Culture Chamber
Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale and allows for simple, sterile recovery of the cells for therapeutic use.
The Company believes that the Aastrom cell culture chamber may also be used for
growing other human therapeutic cells, such as T-Cells and dendritic cells used
for immunotherapies, chondrocytes for cartilage replacement, and mesenchymal
tissues for bone and cartilage replacement. The Company holds exclusive rights
to issued U.S. patents and additional applications for its cell culture chamber
device technology. See "--Additional Stem Cell and Other Cell Therapies."
Efficient Gene Transfer
Aastrom has developed proprietary processes and device technology that may
enable increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or gene
loading technology is being pursued by the Company for application in most cell
and tissue types and most vector technologies. The Company intends to develop
products based upon its gene loading technology. Development of additional
products, however, will require the Company to raise additional funds or to seek
collaborative partners, or both, to finance related research and development
activities, as to which there can be no assurance of success. Furthermore, due
to the uncertainties involved, the Company is unable to estimate the length of
time such development may take. If successfully developed into products, the
Company believes that such products would facilitate the advancement of numerous
gene therapy protocols into the clinic and ultimately the market. The Company
has exclusive rights to three issued U.S. patents, and has additional
applications pending, for this technology. See "Aastrom Product Candidates For
Ex Vivo Gene Therapy."
The AastromReplicell/(TM)/ System
The AastromReplicell/(TM)/ System is the Company's lead product under
development. While potentially applicable to multiple cell therapy applications
such as immunotherapy, solid tissue repair and ex vivo gene therapy, the
AastromReplicell/(TM)/ System is being developed initially by the Company for
stem cell therapy. The AastromReplicell/(TM)/ System is a proprietary system
that the Company believes will enable the large scale ex vivo production of a
variety of therapeutic cells at healthcare facilities, independent laboratories,
transplant centers and blood banks, and has been designed to implement Aastrom's
stem cell growth process as well as processes for the production of other cell
types.
The AastromReplicell/(TM)/ System is comprised of several components,
including single-use therapy kits and microprocessor-controlled instruments,
which are at various stages of development. The single use therapy kits contain
a cell cassette cartridge which contains the Aastrom cell culture chamber,
supply waste reservoirs and harvest bag, necessary growth medium and supplements
and process specific software which provides the cell production processing
parameters to the AastromReplicell/(TM)/ System instruments. The microprocessor-
controlled instruments include the AastromReplicell/(TM)/ Incubator which
controls the culture conditions for the operation of the AastromReplicell/(TM)/
Cell Cassette, and the Processor which automates the innoculation of cells into
and harvesting of the cells from the AastromReplicell/(TM)/ Cell Cassette. The
AastromReplicell/(TM)/ System Manager is a user interface computer that is being
developed to simultaneously track and monitor the cell production process in
over twenty-four AastromReplicell/(TM)/ Incubators and record relevant process
variables and operator actions. Prototype components of the
AastromReplicell/(TM)/ System are currently being used in clinical trials and
ongoing development activities are directed at completing other production level
components of the AastromReplicell/(TM)/ System.
The AastromReplicell/(TM)/ System is designed to be operated with minimal
operator activity by a medical or laboratory technician and can implement
clinical scale cell production at the patient care site. The end product of the
AastromReplicell/(TM)/ System process is a blood-bag container with the cell
product. The control and documentation features of the AastromReplicell/(TM)/
System have been designed to meet cGMP requirements for the therapeutic
production of cells.
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AASTROMREPLICELL/(TM)/ SYSTEM FOR STEM CELL THERAPY
The Company's initial application for the AastromReplicell/(TM)/ System is
expected to be in the growing field of stem cell therapy, where the Company
believes that the AastromReplicell/(TM)/ System may address many of the
limitations of existing procedures. The AastromReplicell/(TM)/ System is based
on a comparatively simple process in which a small volume of bone marrow cells
are collected from the patient or donor using a needle aspiration procedure,
typically under a local anesthetic or sedative. Alternatively, UCB cells have
been shown to be a new source of cells for use in stem cell transplantations.
The starting mixture of either bone marrow or UCB cells is quantified, and an
appropriate volume of cells is then inoculated into one or more
AastromReplicell/(TM)/ Cell Cassettes with the necessary growth media. Growth-
factor-stimulated cells are produced using the AastromReplicell/(TM)/ System in
approximately 12 to 13 days, with no further patient involvement. Depending upon
the cell quantity necessary for a therapeutic application, single or multiple
AastromReplicell/(TM)/ Cell Cassettes may be required, with a different volume
requirement of starting cells taken from the patient at the initial visit or
obtained from the UCB bank. The AastromReplicell/(TM)/ System has been designed
to minimize operator involvement during the cell production process, and the
steps required before and after the AastromReplicell/(TM)/ System are standard
laboratory procedures. Cells derived from UCB may also serve as a tumor-free
source of stem and progenitor cells for expansion in the AastromReplicell/(TM)/
System.
POTENTIAL ADVANTAGES OF AASTROMREPLICELL/(TM)/ SYSTEM
The Company believes that the AastromReplicell/(TM)/ System, if approved for
commercial sale by the U.S. Food and Drug Administration ("FDA") and foreign
regulatory agencies, may provide certain improvements and efficiencies over
traditional cell collection and infusion processes. The following table, which
sets forth estimates based on a 1996 survey conducted by the Company of 11 stem
cell transplant physicians at different transplant institutions throughout the
United States, compares estimated patient care episodes and procedure time for
currently established cell collection and infusion techniques with the
AastromReplicell/(TM)/ System method of cell procurement:
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PROCEDURE TIME
CELL SOURCE CARE EPISODES(1) (HOURS)(1)
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Bone Marrow Harvest (2)................... 8 16
PBSC Mobilization and Collection (3)...... 21 39
AastromReplicell/(TM)/ System (4)......... 2 1-3
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(1) Includes all outpatient, inpatient, and home care episodes.
(2) Includes operating room procedure and all preparatory and recovery
procedures.
(3) Based on an average of three rounds of apheresis following cell
mobilization injections.
(4) Projections, based on data accumulated during the Company's research
and clinical trials.
The Company believes that the AastromReplicell/(TM)/ System may provide the
following benefits when compared to current cell collection and infusion
methods:
Cost-Effectiveness. The Company believes the AastromReplicell/(TM)/ System
has the potential to cost-effectively replace or reduce the labor intensive and
invasive cell collection and infusion procedures currently employed for stem
cell therapy and to reduce physician, staff and patient time requirements.
Reduced Patient and Physician Burden. Cell production with the
AastromReplicell/(TM)/ System is expected to require the collection of a small
volume of starting material compared to current collection procedures,
eliminating the requirement for general surgical anesthesia, multiple drug
injections or multiple blood apheresis. Patient benefits are expected to include
fewer needle sticks than with current cell collection and infusion methods and a
reduction in overall patient procedure time. Additionally, Aastrom's process for
cell expansion is expected to minimize the time requirement for physicians
compared with bone marrow harvest.
Enhanced Multicycle High-Dose Chemotherapy. The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
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AastromReplicell/(TM)/ System may enhance the practice of multicycle, high-dose
chemotherapy by providing the ability to produce a therapeutic dose of cells
from a small starting volume. The initial cell collection can be divided into
multiple samples and stored frozen until expansion at a later time is required.
Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by depleting
potentially harmful cells such as T-cells and B-cells. These cells are believed
to be primarily responsible for graft-versus-host disease, a common
manifestation of allogeneic transplants in which the grafted donor's cells
attack the host's tissues and organs.
Tumor Cell Purging. Cancer patients with tumor metastases, in which the
cancer has spread to the blood and bone marrow, have not traditionally been
candidates for autologous stem cell transplants because such transplant might
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells present in their marrow or PBSC transplant, which could
re-establish cancer in the patient following transplant. The Company's initial
clinical results, as well as studies conducted by third-party investigators,
have shown that some primary human tumor cells die or do not grow during
hematopoietic cell culture. The smaller volume of starting cells used for the
AastromReplicell/(TM)/ System compared with bone marrow harvest or PBSC
transplants may provide approximately 10 to 70 fold less tumor cells in a
transplant. Further, in an evaluation of seven tumor-contaminated bone marrow
samples that were expanded with the AastromReplicell/(TM)/ System process, the
presence of breast cancer cells in each sample was either substantially reduced
or was no longer detectable. The Company believes that this combination of
passive depletion during culture with the lower starting volume of tumor cells
may result in a tumor-free or tumor-reduced cell product for transplant. The
clinical benefit of such tumor depletion, if any, will vary depending upon the
type of cancer and state of disease.
Supplemental therapy with AastromReplicell/(TM)/ System produced cells.
Collection of cells for transplant is a variable procedure requiring longer
collection procedures for some patients compared to others. The
AastromReplicell/(TM)/ System offers a means to augment current collection
techniques thereby reducing the overall collection burden for the patient and
care provided to a single care episode, and improving patient recoveries.
CLINICAL DEVELOPMENT
The AastromReplicell/(TM)/ System is an automated clinical system designed to
be used by medical personnel at hospitals and patient care centers to produce
therapeutic cells for the treatment of a broad range of diseases, including
cancer, infectious diseases and the restoration of solid tissues.
The AastromReplicell/(TM)/ System is designed as a family of products
consisting of an instrumentation platform that operates single-use, patient-
specific, therapy kits. Each therapy kit, which is specific to the desired cell
or tissue type, is operated by the AastromReplicell/(TM)/ System instrument
platform which automates the otherwise complex cell production processes. This
instrument platform allows for on site cell manufacturing directly at the
hospital, that is compliant with cGMP's. The reagents, growth medium, cytokines,
and process instructions contained within each therapy kit are procedure
specific for the production of each cell type of therapy. This product design
feature provides for a variety of therapy kits to be integrated into the
AastromReplicell/(TM)/ System product line.
The AastromReplicell/(TM)/ System is being evaluated in multi-site clinical
trials in the U.S. under Investigational Device Exemptions (IDE's) from the FDA
and in Europe. The initial goals of the Company's clinical trial program are to
obtain a Premarket Approval (PMA) in the U.S., necessary to market the
AastromReplicell/(TM)/ System for autologous stem cell therapy and umbilical
cord blood transplants, and to obtain approval in Europe to market the
AastromReplicell/(TM)/ System for a variety of cell therapy applications, by
affixing the CE Mark.
Aastrom is conducting two clinical trials in the U.S. evaluating stem cells
produced in the AastromReplicell/(TM)/ System from a small starting amount of
bone marrow. The first study utilizes cells produced in the
AastromReplicell/(TM)/ System from a small aspirate bone marrow collection as
the sole cellular support following ablative chemotherapy. Initial results from
the first study have demonstrated the ability of the AastromReplicell/(TM)/
System to safely and reliably produce stem and progenitor cells that engraft and
restore blood and immune system function in cancer patients who had undergone
very aggressive chemotherapy. Further, the small volume aspirate, along with a
purging of contaminated tumor cells during the stem cell production has
indicated a way to offer patients a transplant with a lower risk of receiving
back tumor cells.
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In a second U.S. study, the AastromReplicell/(TM)/ System is being used to
compliment traditional therapies by augmenting stem cells collected from a
single PBSC apheresis procedure. The objectives of this study are to demonstrate
that an optimal targeted recovery can be achieved using the
AastromReplicell/(TM)/ System produced cells with a sub-optimal PBSC cell dose
that otherwise would not provide this desired outcome. This procedure appears to
improve the certainty of procedure outcome by providing a more reliable means of
cell collection and patient recovery.
Aastrom has also initiated clinical feasibility trials to evaluate UCB cells
produced in the AastromReplicell/(TM)/ System to improve recoveries of pediatric
and adult patients requiring donor derived (or allogeneic) stem cell
transplants. Preliminary results of the pediatric transplants indicated that
AastromReplicell/(TM)/ System-produced cells were safe and well tolerated by the
patients, and that transplant cell recoveries during the 100-day post-transplant
period were very favorable. Based on the positive data, this pediatric trial was
expanded from 10 to 28 patients. Moreover, several UCB banking
institutions are now being established by other organizations. This banking
infrastructure together with the expansion capabilities of the
AastromReplicell/(TM)/ System may lead to UCB as a promising new source of cells
for therapeutic use.
Aastrom has initiated two clinical sites in Europe to evaluate the use of
AastromReplicell/(TM)/ System cells to promote hematopoietic recovery in breast
cancer patients undergoing aggressive myelosuppressive or myelotoxic
chemotherapy. Assuming the successful completion of these and other clinical
trials, the Company intends to seek approval to market the
AastromReplicell/(TM)/ System in Europe through CE Mark Registration. See
"--Government Regulation--Regulatory Process in Europe."
The preliminary results of the Company's pre-pivotal trials may not be
indicative of results that will be obtained from subsequent patients in the
trials or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trials will be successful, or that PMA
registration or required foreign regulatory approvals for the
AastromReplicell/(TM)/ System will be obtained in a timely fashion, or at all.
See "Business Risks--Uncertainties Related to Clinical Trials."
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
The Company believes that AastromReplicell/(TM)/ System therapy kits may be
developed for application in a variety of other emerging cell therapies in
addition to stem cell therapy. The Company believes that the
AastromReplicell/(TM)/ System has the potential to supplant current manual cell
culture methods to produce therapeutic quantities of cell types such as T-cells,
dendritic cells, chondrocytes, mesenchymal cells, keratinocytes and neuronal
cells. Other than a limited application of chondrocyte therapy, novel cell
therapies are still in early stages of development by third parties, and no
assurance can be given that such other cell therapies will be successfully
developed. Potential advantages of the AastromReplicell/(TM)/ System in these
therapies may include: (i) reducing labor and capital costs; (ii) enhancing
process reliability; (iii) automating quality assurance; (iv) reducing the need
for specialized, environmentally controlled facilities; and (v) providing
greater accessibility of these procedures to care providers and patients and,
(vi) in certain cases, providing a more biologically active cell product.
Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional development
of specialized cell culture environments which may need to be incorporated
within the Company's existing product platform. Such modifications may require
the Company to raise substantial additional funds, or to seek additional
collaborative partners, or both. There can be no assurance that the Company will
be able to successfully modify or develop existing or future products to enable
such additional cell production processes. The Company's business opportunity is
dependent upon successful development and regulatory approval of these novel
cell therapies. No assurance can be given that such novel therapies will be
successfully developed by other companies or approved by applicable regulatory
authorities, or that the Company's processes or product candidates will find
successful application in such therapies. In addition, the Company may be
required to obtain license rights to such technologies in order to develop or
modify existing or future products for use in such therapies. No assurance can
be given that the Company will be able to obtain such licenses or that such
licenses, if available, could be obtained on commercially reasonable terms. See
"--Clinical Development" and "Business Risks--Future Capital Needs; Uncertainty
of Additional Funding."
IMMUNOTHERAPIES
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Immunotherapy involves using cells of the immune system to eradicate a disease
target. T-cell lymphocytes and dendritic cells are being actively investigated
by other companies for this purpose, and the Company anticipates that many of
these procedures will require ex vivo cell production.
T-cells, a class of lymphocyte white blood cells, play a critical role in the
human immune system and are responsible for the human immune response in a broad
spectrum of diseases, including cancers and infectious diseases. Therapeutic
procedures using Cytotoxic T-lymphocytes ("CTLs") involve collecting T-cells
from a patient and culturing them in an environment resulting in T-cells with
specificity for a particular disease target. Clinical trials by third parties
have been initiated to demonstrate CTL effectiveness. The ex vivo production of
these cells under conditions for use in medical treatment represents a critical
step in the advancement of this therapy.
Dendritic cells (potent antigen presenting cells) are believed to play an
important role in the function of the immune system. Researchers believe that
cultured dendritic cells could augment the natural ability of a patient to
present tumor and antigens or antigens from infectious agents to the immune
system and aid in the generation of a cytotoxic T-cell response to the offending
agent.
SOLID TISSUE CELL THERAPIES
One of the newest areas of cell therapy involves the production of
chondrocytes for the restoration of cartilage. Chondrocyte therapy involves the
surgical removal of a small amount of tissue from the patient's knee and a
therapeutic quantity of chondrocytes is produced from this surgical biopsy. The
cells are then implanted into the patient's knee. Published reports indicate
that such cells then reestablish mature articular cartilage. Currently, this
cell production process is completed in highly specialized laboratory facilities
using trained scientists and manual laboratory procedures. The Company believes
that the AastromReplicell/(TM)/ System may have the potential to reduce costs
associated with the cell production procedure and, if successfully developed by
the Company for this application, may eventually facilitate the transfer of the
cell production capability away from specialized facilities directly to the
clinical care sites.
OTHER STEM CELL THERAPY APPLICATIONS
Autoimmune Diseases. Stem cell therapy is under clinical investigation by
third parties for the treatment of other diseases. Clinical studies have
suggested a potential role for stem cell therapy in treatment of autoimmune
diseases such as rheumatoid arthritis, multiple sclerosis and lupus
erythematosus. The generic cause of these diseases is a malfunctioning immune
system, including T-lymphocytes. Clinical trials in which the patient receives
treatment resulting in immune ablation (usually involving myelotoxic cancer
drugs or radiation), followed by stem cell therapy to restore the bone marrow
and cells of the blood and immune system, have demonstrated remission of the
autoimmune disease in some patients.
Organ Transplantation. Recently, a number of academic and corporate
researchers and companies have identified the potential use of stem cell therapy
to facilitate successful solid organ and tissue transplants between human donors
and recipients, as well as using organs from non-human species for
transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent with or prior to
the organ transplant, can provide for reduction of the normal immune rejection
response by the transplant recipient (e.g. heart, lung, liver or kidney
transplants).
A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are used, which has
traditionally been the source of organs for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures and may
pursue development of its products for application in such therapy in the
future.
AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY
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A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells procured from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies, the
ability to produce a therapeutic dose of these gene-modified cells is a major
limitation to the commercialization of these cell therapies. This limitation is
further exacerbated by the additional requirement that the cells be genetically
modified under conditions that are sterile and comply with cGMP's.
Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into a
suitable vector that can be used to transport and integrate the gene into the
DNA of the target cell, and then cause the gene to become expressed. The Company
believes that for ex vivo gene therapy to progress to clinical applications, a
process to produce a sufficient quantity of therapeutic cells is required as is
an efficient means to insert the gene vector into target cells. Gene therapy is
still in an early stage of development by third parties. The Company's business
opportunity is dependent upon the successful development and regulatory approval
of individual gene therapy applications. No assurance can be given that such
applications will be developed or approved or that the Company's processes or
product candidates will find successful applications in such therapies.
Successful development of the Company's processes and product candidates for
application in ex vivo gene therapy will require substantial additional research
and development, including clinical testing, and will be subject to the
Company's ability to finance such activities on acceptable terms, if at all. See
"Business Risks--Future Capital Needs; Uncertainty of Additional Funding."
THE AASTROMREPLICELL/(TM)/ SYSTEM FOR GENE THERAPY
The AastromReplicell/(TM)/ System has been designed to produce cells for
therapy and the Company believes that the AastromReplicell/(TM)/ System may be
useful in many potential ex vivo gene therapy applications. Further, the Company
anticipates that its proprietary stem cell production process technology
implemented by the AastromReplicell/(TM)/ System may provide the conditions for
clinical scale stem cell division, and enable or enhance the introduction of
therapeutic genes into stem cell DNA. The Company believes that its technology
may also enable expansion of more mature progeny of these stem cells to create a
gene therapy cell product with potential short and long term therapeutic effect.
The Company has two principal objectives for the development of
AastromReplicell/(TM)/ System for gene therapy: (i) the enablement of stem cell
gene therapies for a variety of hematologic and other disorders, based on the
AastromReplicell/(TM)/ System's ability to enable large scale stem cell
division ex vivo; and (ii) the enablement of gene transfer and therapeutic
cell production by local and regional primary patient care facilities and
ancillary service laboratories.
THE AASTROM GENE LOADER
The Aastrom Gene Loader process technology, which is under development, is
being designed to enhance the efficiency and reliability of the transfer of new
therapeutic genes, which are carried by vectors, into the target cell. This
process, which is typically inefficient in many human cells inhibits many ex
vivo gene therapies from moving forward in the clinic. The Aastrom Gene Loader
is being designed to incorporate the Company's proprietary directed motion gene
transfer technology. Complete product development is expected to require
additional funding sources or collaborations with others, or both.
The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company's technology under development may favorably influence these gene
therapy applications, the development of which are impeded due to low
transduction efficiencies and the resultant need for use of extreme quantities
of gene vectors and/or target "delivery" tissues.
STRATEGIC RELATIONSHIPS
On October 22, 1993, the Company entered into a Distribution Agreement (the
"Distribution Agreement") with Cobe for Cobe to be the Company's exclusive,
worldwide marketing, distribution and service provider for the
AastromReplicell/(TM)/ System for stem cell therapy applications (the "Stem Cell
Therapy Applications"). Under the terms of the Company's Distribution Agreement
with Cobe, other than with respect to sales to affiliates, the Company is
precluded from selling the
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AastromReplicell/(TM)/ System to customers for stem cell therapy applications.
The Company has, however, reserved the right to sell the AastromReplicell/(TM)/
System for: (i) all diagnostic or other non-therapeutic clinical applications;
(ii) all gene therapy or gene transfer applications, including those for stem
cells; (iii) all non-human applications; (iv) certain permitted clinical
research applications; and (v) all applications that are labeled not for human
use. The Company has also reserved the unconditional right to sell other
products under development, including but not limited to products based upon its
gene loading technology. The initial term of the Distribution Agreement expires
on October 22, 2003, and Cobe has the option to extend the term for an
additional ten-year period. The Company is responsible for the expenses to
obtain FDA and other regulatory approval in the United States, while Cobe is
responsible for the expenses to obtain regulatory approval in foreign countries
to allow for worldwide marketing of the AastromReplicell/(TM)/ System for Stem
Cell Therapy Applications. See "Business Risks--Consequences of Cobe
Relationship."
Under the terms of the Distribution Agreement, the Company will realize
approximately 58% to 62% of the net sales price at which Cobe ultimately sells
the AastromReplicell/(TM)/ System for Stem Cell Therapy Applications, subject to
certain negotiated discounts and volume-based adjustments and subject to the
obligation of the Company to make aggregate royalty payments of up to 5% to
certain licensors of its technology. The Company is also entitled to a premium
on United States sales in any year in which worldwide sales exceed specified
levels.
The Distribution Agreement may be terminated by Cobe upon twelve months prior
notice to the Company in the event that any person or entity other than Cobe
beneficially owns more than 50% of the Company's outstanding Common Stock or
voting securities. The Distribution Agreement may also be terminated by Cobe, if
Cobe, determines that commercialization of the AastromReplicell/(TM)/ System for
stem cell therapy on or prior to December 31, 1998 is unlikely.
In conjunction with the Distribution Agreement, the Company also entered into
a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"), whereby Cobe
acquired certain option, registration, preemptive and other rights pertaining to
shares of the Company's stock. Pursuant to such preemptive rights, Cobe elected
to purchase 714,200 shares of Common Stock in the Company's initial public
offering in February 1997. See "Description of Capital Stock--Rights of Cobe"
and "Certain Transactions."
The Company has entered into a Strategic Planning Consulting Services and
Collaboration Agreement (the "Consulting Agreement") with Burrill & Company, LLC
("Burrill"), pursuant to which Burrill will advise the Company on potential
strategic alliances and seek to identify potential collaborations. Pursuant to
the Consulting Agreement, Burrill will be paid a monthly retainer of $10,000 and
will be reimbursed for expenses. Aastrom has issued Burrill an immediately
exercisable warrant to purchase 100,000 shares of Common Stock at an exercise
price of $7.24 and a second warrant, which vests over a one-year period ending
on October 1998, to purchase 100,000 shares at an exercise price of $7.24. The
Consulting Agreement is terminable by either party following periods of up to 30
days following notice.
The Consulting Agreement also provides for payments to Burrill that are based
on the timing and amount of proceeds Aastrom may receive from any future
strategic alliances. In the event that the Company enters into strategic
alliances (which exclude minor technology license agreements and customary
manufacturing or supply agreements that do not involve equity investments in
Aastrom, as well as performance pursuant to any of Cobe's existing agreements
with Aastrom), the Company will pay Burrill a success fee ranging from 4% to
7.5% of the proceeds in connection with the strategic alliance. In addition to
the success fee, Aastrom will issue to Burrill additional warrants to purchase
up to 500,000 shares of Common Stock, depending upon the achievement of certain
milestones.
MANUFACTURING
The Company has established relationships with third party manufacturers which
are FDA registered as suppliers for the manufacture of medical products to
manufacture various components of the AastromReplicell/(TM)/ System.
In May 1994, the Company entered into a Collaborative Product Development
Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this agreement, the
Company and SeaMED will collaborate on the further design of certain instrument
components in the AastromReplicell/(TM)/ System, and enable SeaMED to
manufacture pre-production units of the instrument components for laboratory and
clinical evaluation. The Company is paying SeaMED for its design and pre-
production work on a time and materials basis, utilizing SeaMED's customary
hourly billing rates and actual costs for materials. In April 1998 the Company
entered into a manufacturing agreement with SeaMED for the commercial
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manufacturing of the instrument components of the AastromReplicell/(TM)/ System
pursuant to a pricing formula set forth in the agreement. The initial term of
the manufacturing agreement is three years from the date of the initial shipment
of instruments by SeaMED, after which the agreement is automatically renewed
until terminated upon a 24-month notice from SeaMED or a 6-month notice from the
Company. The Company retains all proprietary rights to its intellectual property
which is utilized by SeaMED pursuant to this agreement. During the initial
three-year term of the manufacturing agreement, SeaMED is regarded as the
Company's preferred supplier and the Company will purchase a minimum of 65% of
its instrument requirements for the AastromReplicell/(TM)/ System.
In November 1994, the Company entered into a Collaborative Product Development
Agreement with Ethox Corporation ("Ethox"). Pursuant to this agreement, the
Company and Ethox collaborated on the design of certain bioreactor assembly and
custom tubing kit components of the AastromReplicell/(TM)/ System. The Company
is paying Ethox for its design and production work on a time and
materials'basis, utilizing Ethox's customary hourly billing rates and actual
costs for materials. The Company retains all proprietary rights to its
intellectual property which are utilized by Ethox pursuant to this agreement.
In March 1996, the Company entered into a five-year License and Supply
Agreement with Immunex Corporation ("Immunex") to purchase and resell certain
cytokines and ancillary materials for use in conjunction with the
AastromReplicell/(TM)/ System. The agreement required the Company to pay Immunex
an initial up-front fee of $1,500,000 to be followed by subsequent annual
renewal payments equal to $1,000,000 per year during the term of the agreement
in addition to payment for supplies purchased by the Company. In August 1997,
the Company and Immunex amended the agreement to expand the Company's
territorial rights to use and sell such materials to a worldwide basis. Unless
earlier terminated or renewed by the Company for an additional five-year term,
the agreement will expire in April 2001. Pursuant to an agreement between
Immunex and the Company, the annual fee due in March 1998 was paid by the
Company through the issuance of $1,100,000 in the Company's Common Stock. The
agreement may be terminated by either party effective immediately upon written
notice of termination to the other party in the event that such party materially
breaches the agreement and such breach continues unremedied after notice and
expiration of a specified cure period or in the event that a bankruptcy
proceeding is commenced against a party and is not dismissed or stayed within a
45-day period. In addition, Immunex has the right to cease the supply to the
Company of cytokines and ancillary materials if the Company fails to purchase a
minimum amount of its forecasted annual needs from Immunex after notice to the
Company and expiration of a specified cure period. The Company also has the
right to terminate the agreement at any time subject to the payment to Immunex
of a specified amount for liquidated damages. In the event that Immunex elects
to cease to supply to the Company cytokines and ancillary materials or is
prevented from supplying such materials to the Company by reason of force
majeure, limited manufacturing rights will be transferred to the Company under
certain circumstances. There is, however, no assurance that the Company could
successfully manufacture the compounds itself or identify others that could
manufacture these compounds to acceptable quality standards and costs, if at
all.
In December 1996, the Company entered into a Collaborative Supply Agreement
with Anchor Advanced Products, Inc., Mid-State Plastics Division ("MSP"). Under
this agreement, MSP will conduct both pre-production manufacturing development
and commercial manufacturing and assembly of the Cell Cassette component of the
AastromReplicell/(TM)/ System for the Company. During the initial phase of the
seven-year agreement, the Company will pay MSP for its development activities on
a time and materials basis. Upon reaching certain commercial manufacturing
volumes, MSP will be paid by the Company on a per unit basis for Cell Cassettes
delivered to the Company under a pricing formula specified in the agreement.
Throughout the term of this agreement, the Company has agreed to treat MSP as
its preferred supplier of Cell Cassettes, using MSP as its supplier of at least
60% of its requirements for Cell Cassettes.
There can be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Business Risks--Manufacturing and Supply Uncertainties;
Dependence on Third Parties."
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. The
Company has exclusive rights to 15 issued U.S. patents that present claims to
(i) certain methods
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for ex vivo stem cell division as well as ex vivo human hematopoietic stem cell
stable genetic transformation and expanding and harvesting a human hematopoietic
stem cell pool; (ii) certain apparatus for cell culturing, including a
bioreactor suitable for culturing human stem cells or human hematopoietic cells;
(iii) certain methods of infecting or transfecting target cells with vectors;
and (iv) a cell composition containing human stem cells or progenitor cells, or
genetically modified stem cells, when such cells are produced in an ex vivo
medium exchange culture. Patents equivalent to two of these U.S. patents have
also been issued in other jurisdictions: one in Australia and another in Canada
and under the European Patent Convention. These patents are due to expire
beginning in 2006. In addition, the Company and its exclusive licensors have
filed applications for patents in the United States and equivalent applications
in certain other countries claiming other aspects of the Company's products and
processes, including a number of U.S. patent applications and corresponding
applications in other countries related to various components of the
AastromReplicell/(TM)/ System.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or
any future patent applications of the Company or its licensors will be issued,
that the scope of any patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the patents that have been or
may be issued to the Company or its licensors will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by the Company. Furthermore, there
can be no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any patents
that have been or may be issued to the Company or its licensors. Since patent
applications in the United States are maintained in secrecy until patents issue,
the Company also cannot be certain that others did not first file applications
for inventions covered by the Company's and its licensors' pending patent
applications, nor can the Company be certain that it will not infringe any
patents that may issue to others on such applications.
The Company relies on certain licenses granted by the University of Michigan
and others for certain patent rights. If the Company breaches such agreements or
otherwise fails to comply with such agreements, or if such agreements expire or
are otherwise terminated, the Company may lose its rights in such patents, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Research and License Agreements."
The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company's
policy to require its employees, consultants, contractors, manufacturers,
outside scientific collaborators and sponsored researchers, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual 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 limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential
information. In the case of employees, consultants and contractors, the
agreements generally provide that all inventions conceived by the individual
while rendering services to the Company shall be assigned to the Company as the
exclusive property of the Company. There can be no assurance, however, that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or unpatentable
know-how will not otherwise become known or be independently developed by
competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. If the Company's
technology components, devices, designs, products, processes or other subject
matter are claimed under other existing United States or foreign patents or are
otherwise protected by third party proprietary rights, the Company may be
subject to infringement actions. In such event, the Company may challenge the
validity of such patents or other proprietary rights or be required to obtain
licenses from such companies in order to develop, manufacture or market its
products. There can be no assurances that the Company would be able to obtain
such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. Furthermore, the failure to either develop a
commercially viable alternative or obtain such licenses could result in delays
in marketing the Company's proposed products or the inability to proceed with
the development, manufacture or sale of products requiring such licenses, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. If the Company is required to defend itself
against charges of patent infringement or to protect its own proprietary rights
against third parties, substantial costs will be incurred regardless of whether
the Company is successful.
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Such proceedings are typically protracted with no certainty of success. An
adverse outcome could subject the Company to significant liabilities to third
parties and force the Company to curtail or cease its development and sale of
its products and processes.
Certain of the Company's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business Innovation
Research Grant obtained from the Department of Health and Human Services. As a
result of such funding, the U.S. Government has certain rights in the technology
developed with the funding. These rights include a non-exclusive, paid-up,
worldwide license under such inventions for any governmental purpose. In
addition, the government has the right to require the Company to grant an
exclusive license under any of such inventions to a third party if the
government determines that (i) adequate steps have not been taken to
commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs or (iii) such action is necessary to meet requirements
for public use under federal regulations. Additionally, under the federal Bayh
Dole Act, a party which acquires an exclusive license for an invention that was
partially funded by a federal research grant is subject to the following
government rights: (i) products using the invention which are sold in the United
States are to be manufactured substantially in the United States, unless a
waiver is obtained; (ii) if the licensee does not pursue reasonable
commercialization of a needed product using the invention, the government may
force the granting of a license to a third party who will make and sell the
needed product; and (iii) the U.S. Government may use the invention for its own
needs.
RESEARCH AND LICENSE AGREEMENTS
In March 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been clarifying
amendments to the License Agreement, in March 1992, October 1993 and June 1995.
Pursuant to this License Agreement, (i) the Company acquired exclusive worldwide
license rights to the patents and know-how for the production of blood cells and
bone marrow cells as described in the University's research project or which
resulted from certain further research conducted through December 1994, and (ii)
the Company is obligated to pay to the University a royalty equal to 2% of the
net sales of products which are covered by the University's patents. Unless it
is terminated earlier at the Company's option or due to a material breach by the
Company, the License Agreement will continue in effect until the latest
expiration date of the patents to which the License Agreement applies.
In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to
Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to the License Agreement, the Company
has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under the terms of
the License Agreement, the Company is to pay to Dr. Cremonese a royalty of 3% of
net sales of the products which are covered by said patent, subject to specified
minimum royalty payments ranging from $20,000 to $50,000 per year, commencing in
calendar year 1997. Unless earlier terminated or modified, the License Agreement
will continue in effect until the latest expiration date of the patents to which
the License Agreement applies, which latest expiration date is currently August
2009. The License Agreement may be terminated by either party upon default by
the other party of any of its obligations under the agreement without cure after
expiration of a 30-day notice period. The Company also has the right to
terminate the License Agreement at any time without cause upon 30 days prior
written notice to Dr. Cremonese or to transfer the license to a non-exclusive
basis.
GOVERNMENT REGULATION
The Company's research and development activities and the manufacturing and
marketing of the Company's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States, the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the United States, in addition to
meeting FDA regulations, the Company is also subject to other federal laws, such
as the Occupational Safety and Health Act and the Environmental Protection Act,
as well as certain state laws.
REGULATORY PROCESS IN THE UNITED STATES
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To the Company's knowledge, it is the first to develop a cell culture system
for ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate the
Company's products is uncertain.
The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, and as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that it
intends to regulate the AastromReplicell/(TM)/ System as a Class III medical
device through the Center for Biologics Evaluation and Research. However, there
can be no assurance that FDA will ultimately regulate the AastromReplicell/(TM)/
System as a medical device.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the AastromReplicell/(TM)/ System. The FDA is still in
the process of developing its requirements with respect to somatic cell therapy
and gene cell therapy products and has recently issued draft documents
concerning the regulation of umbilical cord blood stem cell products, as well as
cellular and tissue-based products. If the FDA adopts the regulatory approach
set forth in the draft document, the FDA may require separate regulatory
approval for such cells in some cases, called a biologic license application
("BLA"). This proposal may indicate that the FDA will extend a similar approval
requirement to other types of cellular therapies. Any such additional regulatory
or approval requirements could have a material adverse impact on the Company.
Approval of new medical devices and biological products is a lengthy procedure
leading from development of a new product through preclinical and clinical
testing. This process takes a number of years and the expenditure of significant
resources. There can be no assurance that the Company's product candidates will
ultimately receive regulatory approval.
Regardless of how the Company's product candidates are regulated, the Federal
Food, Drug, and Cosmetic Act and other Federal statutes and regulations govern
or influence the research, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, distribution, use, reporting, advertising and promotion
of such products. Noncompliance with applicable requirements can result in civil
penalties, recall, injunction or seizure of products, refusal of the government
to approve or clear product approval applications or to allow the Company to
enter into government supply contracts, withdrawal of previously approved
applications and criminal prosecution.
DEVICES
In order to obtain FDA approval of a new medical device, sponsors must
generally submit proof of safety and efficacy. In some cases, such proof entails
extensive preclinical and clinical laboratory tests. The testing, preparation of
necessary applications and processing of those applications by the FDA is
expensive and may take several years to complete. There can be no assurance that
the FDA will act favorably or in a timely manner in reviewing submitted
applications, and the Company may encounter significant difficulties or costs in
its efforts to obtain FDA approvals which could delay or preclude the Company
from marketing any products it may develop. The FDA may also require
postmarketing testing and surveillance of approved products, or place other
conditions on the approvals. These requirements could cause it to be more
difficult or expensive to sell the products, and could therefore restrict the
commercial applications of such products. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. For patented technologies, delays imposed by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit such technologies.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE submission with the FDA prior to commencing human clinical
trials. The IDE submission must be supported by data, typically including the
results of pre-clinical and laboratory testing. Following submission of the IDE,
the FDA has 30 days to review the application and raise safety and other
clinical trial issues. If the Company is not notified of objections within that
period, clinical trials may be initiated, and human clinical trials may commence
at a specified number of investigational sites with the number of patients
approved by the FDA.
The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, Quality System
Regulation ("QSR"), 510(k) pre-market notification, and are subject to other
general controls. Class II devices may be subject to additional
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regulatory controls, including performance standards and other special controls,
such as postmarket surveillance. Class III devices, which are either invasive or
life-sustaining products, or new products never before marketed (for example,
non-"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and Class
II devices.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported by
extensive data, including preclinical and human clinical trial data, to prove
the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days to
review a PMA application once it is filed, although PMA application reviews more
often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.
Some of the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted several IDEs for the
AastromReplicell/(TM)/ System, and is currently conducting pre-pivotal clinical
studies under these IDEs. The Company believes that the AastromReplicell/(TM)/
System product will be regulated by the FDA as a Class III device, although
there can be no assurance that the FDA will not choose to regulate this product
in a different manner.
The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's QSR regulations. These
regulations will require that the Company and any contract manufacturer, design,
manufacture and service products and maintain documents in a prescribed manner
with respect to manufacturing, testing, distribution, storage, design control
and service activities. The Medical Device Reporting regulation requires that
the Company provide information to the FDA on deaths or serious injuries alleged
to be associated with the use of its devices, as well as product malfunctions
that are likely to cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits a company from
promoting an approved device for unapproved applications and reviews company
labeling for accuracy.
BIOLOGICAL PRODUCTS
For certain of the Company's new products which may be regulated as biologics,
the FDA requires (i) preclinical laboratory and animal testing, (ii) submission
to the FDA of an investigational new drug ("IND") application which must be
effective prior to the initiation of human clinical studies, (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
product for its intended use, (iv) submission to the FDA of a biologic license
application ("BLA") and (v) review and approval of the BLA as well as
inspections of the manufacturing facility by the FDA prior to commercial
marketing of the product.
Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the IND.
Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If the Company is
not notified of objections within that period, clinical trials may be initiated.
Clinical trials are typically conducted in three sequential phases. Phase I
represents the initial administration of the drug or biologic to a small group
of humans, either healthy volunteers or patients, to test for safety and other
relevant factors. Phase II involves studies in a small number of patients to
assess the efficacy of the product, to ascertain dose tolerance and the optimal
dose range and to gather additional data relating to safety and potential
adverse effects. Once an investigational drug is found to have some efficacy and
an acceptable safety profile in the targeted patient population, multi-center
Phase III studies are initiated to establish safety and efficacy in an expanded
patient population and multiple clinical study sites. The FDA reviews both the
clinical plans and the results of the trials and may request the Company to
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to the
FDA in the form of a BLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse
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effects be reported to the FDA and may also require post-marketing testing to
monitor for adverse effects, which can involve significant expense.
Under current requirements, facilities manufacturing biological products must
be licensed. To accomplish this, an BLA must be filed with the FDA. The BLA
describes the facilities, equipment and personnel involved in the manufacturing
process. An establishment license is granted on the basis of inspections of the
applicant's facilities in which the primary focus is on compliance with cGMP's
and the ability to consistently manufacture the product in the facility in
accordance with the BLA. If the FDA finds the inspection unsatisfactory, it may
decline to approve the BLA, resulting in a delay in production of products.
As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may also
be required for a biological product to be shipped out of state.
REGULATORY PROCESS IN EUROPE
The Company believes that the AastromReplicell/(TM)/ instruments and
disposables, will be regulated in Europe as a Class I Sterile or Class IIb
medical device, under the authority of the new Medical Device Directives
("MDD") being implemented by European Union ("EU") member countries. This
classification applies to medical laboratory equipment and supplies including,
among other products, many devices that are used for the collection and
processing of blood for patient therapy. Certain ancillary products (e.g.,
biological reagents) used as part of the Aastrom/(TM)/ System are expected to
be considered Class III medical devices.
The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private and state organizations which
operate under license from the member states of the EU to certify that
appropriate quality assurance standards and compliance procedures are followed
by developers and manufacturers of medical device products or, alternatively,
that a manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries.
COMPETITION
The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, medical device, medical products, chemical and specialized
biotechnology companies, many of which have financial, technical and marketing
resources significantly greater than those of the Company. In addition, many
biotechnology companies have formed collaborations with large, established
companies to support research, development and commercialization of products
that may be competitive with those of the Company. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting research activities and seeking patent protection and may
commercialize products on their own or through joint ventures. The Company's
product development efforts are primarily directed toward obtaining regulatory
approval to market the AastromReplicell/(TM)/ System for stem cell therapy. That
market is currently dominated by the bone marrow harvest and PBSC collection
methods. The Company's clinical data, although early, suggests that cells
expanded in the AastromReplicell/(TM)/ System using its current process will
enable hematopoietic recovery within the time frames currently achieved by bone
marrow harvest, however, neutrophil and platelet recovery times may be slower
than with PBSC collection methods. The Company is evaluating techniques and
methods to optimize the cells produced in the Aastrom/(TM)/ System to reduce the
recovery time of neutrophils and platelets in patients. There can be no
assurance that if such procedure optimization does not lead to recovery times
equal to or faster than those of PBSC collection methods, such outcome would not
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the bone marrow harvest and PBSC
collection methods have been widely practiced for a number of years and,
recently, the patient costs associated with these procedures have begun to
decline. There can be no assurance that the AastromReplicell/(TM)/ System
method, if approved for marketing, will prove to be competitive with these
established collection methods on the basis of hematopoietic recovery time, cost
or otherwise. The Company is aware of certain other products manufactured or
under development by competitors that are used for the prevention or treatment
of certain diseases and health conditions which the Company has targeted for
product development. In particular, the Company is aware that potential
competitors such as
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Amgen, Inc., CellPro, Incorporated, VimRx Pharaceuticals, Inc. Novartis, A.G.,
Baxter Healthcare Corp. and Rhne-Poulenc Rorer Inc. ("RPR") are in advanced
stages of development of technologies and products for use in stem cell therapy
and other market applications currently being pursued by the Company. In
addition, Cobe, a significant shareholder of the Company, is a market leader in
the blood cell processing products industry and, accordingly, a potential
competitor of the Company. There can be no assurance that developments by others
will not render the Company's product candidates or technologies obsolete or
noncompetitive, that the Company will be able to keep pace with new
technological developments or that the Company's product candidates will be able
to supplant established products and methodologies in the therapeutic areas that
are targeted by the Company. The foregoing factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's products under development are expected to address a broad range
of existing and new markets. The Company believes that its stem cell therapy
products will, in large part, face competition by existing procedures rather
than novel new products. The Company's competition will be determined in part by
the potential indications for which the Company's products are developed and
ultimately approved by regulatory authorities. In addition, the first product to
reach the market in a therapeutic or preventive area is often at a significant
competitive advantage relative to later entrants to the market. Accordingly, the
relative speed with which the Company or its corporate partners can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market are expected to be important
competitive factors. The Company's competitive position will also depend on its
ability to attract and retain qualified scientific and other personnel, develop
effective proprietary products, develop and implement production and marketing
plans, obtain and maintain patent protection and secure adequate capital
resources. The Company expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, value and patent position.
EMPLOYEES
As of August 31, 1998, the Company employed approximately 87 individuals. A
significant number of the Company's management and professional employees have
had prior experience with pharmaceutical, biotechnology or medical product
companies. None of the Company's employees are covered by collective bargaining
agreements, and management considers relations with its employees to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their respective ages as of August
31, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
R. Douglas Armstrong, Ph.D...... 45 President and Chief Executive Officer
William L. Odell................ 40 Senior Vice President Product Operations
Todd E. Simpson................. 37 Vice President Finance & Administration,
Chief Financial Officer, Secretary and
Treasurer
Alan K. Smith, Ph.D............. 43 Vice President Research
Bruce V. Husel.................. 40 Vice President Quality Systems
</TABLE>
R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director and
as its President and Chief Executive Officer. From 1987 to 1991, Dr. Armstrong
served in different capacities, including as Executive Vice President and a
Trustee of the La Jolla Cancer Research Foundation ("LJCRF") (now the Burham
Institute), a scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.
William Odell joined the Company in August 1998 as Senior Vice President,
Product Operations. Prior to joining Aastrom, Mr. Odell was a Vice President at
Mitchell International, a healthcare consulting firm. Prior to that, Mr. Odell
served at Owens & Minor, Inc. as Division Vice President, where he was
responsible for managing sales, marketing, operations and customer service for
the Chicago division. Mr. Odell has also held senior marketing and product
development
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positions with Smiths Industries Medical Systems, Intertech Resources and Baxter
International. Mr. Odell received his Bachelor of Science degree in Business
Administration from the University of Illinois at Champaign/Urbana.
Todd E. Simpson joined the Company in January 1996 as Vice President, Finance
and Administration and Chief Financial Officer and is also the Company's
Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of Integra
LifeSciences Corporation ("Integra"), a biotechnology company, which acquired
Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection with the
reorganization of Telios under Chapter 11 of the U.S. Bankruptcy Code. Mr.
Simpson served as Vice President of Finance and Chief Financial Officer of
Telios up until its acquisition by Integra and held various other financial
positions at Telios after joining that company in February 1992. Telios was a
publicly-held company engaged in the development of pharmaceutical products for
the treatment of dermal and ophthalmic wounds, fibrotic disease, vascular
disease, and osteoporosis. From August 1983 through February 1992, Mr. Simpson
practiced public accounting with the firm of Ernst & Young, LLP. Mr. Simpson is
a Certified Public Accountant and received his B.S. degree in Accounting and
Computer Science from Oregon State University.
Bruce V. Husel joined the Company in November 1997 as Vice President, Quality
Systems. From May 1994 to September 1997, Mr. Husel served as Director of
Quality Assurance for Sanofi Diagnostics Pasteur, where he led efforts to
achieve EN 46001 registration and prepare for CE Marking. From June 1992 to May
1994, Mr. Husel was Director of Quality and Regulatory Affairs for Baxter
Anesthesia Division (formerly known as Bard MedSystems). Prior to that, he
served as Quality Manager of McGaw, Inc. Mr. Husel received his B.B. degree in
Electrical Engineering from Rice University in 1980, an M.S degree in
Engineering Management from Southern Methodist University in 1986 and an M.B.A.
degree in Accounting from the University of Texas at Dallas in 1987.
Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Geneic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In this capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in Europe and currently in pivotal clinical trials in the United
States. Dr. Smith has also held positions as Research and Development Manager at
BioSpecific Technologies and as Director of Biochemistry at HyClone
Laboratories. Dr. Smith received his B.S. degree in Chemistry from Southern Utah
State College in 1976 and a Ph.D. in Biochemistry from Utah State University in
1983. Dr. Smith is a director of Chata Biosystems, Inc., a privately held
pharmaceutical service company.
ITEM 2. PROPERTIES
The Company leases approximately 22,000 square feet of office and research and
development space in Ann Arbor, Michigan under a lease agreement expiring in
August 2000. The Lease is renewable at the option of the Company for up to an
additional five year term. The Company believes that its facilities are adequate
for its current needs. However, additional facilities may be required to support
expansion of research and development activities or to assume manufacturing
operations which are currently fulfilled through contract manufacturing
relationships.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings, although from time
to time it may become involved in disputes in connection with the operation of
its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the Company's fiscal year ended June 30, 1998.
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PART II
Certain information required by Part II is omitted from this Report, in
that the Company will deliver to the shareholders of the Company its Annual
Report to Shareholders, and certain information included therein is incorporated
herein by reference and filed as Exhibit 13.1 to this Report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Certain information regarding the market for the Company's capital stock is
incorporated by reference to the Company's Annual Report to Shareholders under
the caption "Market for Registrant's Common Equity and Related Shareholders
Matters."
ITEM 6. SELECTED FINANCIAL DATA
The information relating to selected financial data is incorporated by
reference to the Company's Annual Report to Shareholders under the caption
"Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information with respect to the management's discussion and analysis of
financial condition and results of operations is incorporated by reference to
the Company's Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
BUSINESS RISKS
The Company's business is subject to a number of risks and uncertainties,
including those discussed below.
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
The Company has not completed the development or clinical trials of any of
its cell culture technologies or product candidates and, accordingly, has not
begun to market or generate revenue from their commercialization. Furthermore,
the Company's technologies and product candidates are based on cell culture
processes and methodologies which are not widely employed. Commercialization of
the Company's lead product candidate, the AastromReplicell/(TM)/ System, will
require substantial additional research and development by the Company as well
as substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the AastromReplicell/(TM)/ System or its
other product candidates, or successfully market its technologies or product
candidates, which lack of success would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company or its collaborators may encounter problems and delays relating to
research and development, regulatory approval and intellectual property rights
of the Company's technologies and product candidates. There can be no assurance
that the Company's research and development programs will be successful, that
its cell culture technologies and product candidates will facilitate the ex vivo
production of cells with the expected biological activities in humans, that its
technologies and product candidates, if successfully developed, will prove to be
safe and efficacious in clinical trials, that the necessary regulatory approvals
for any of the Company's technologies or product candidates and the cells
produced in such products will be obtained or, if obtained, will be as broad as
sought, that patents will issue on the Company's patent applications or that the
Company's intellectual property protections will be adequate. The Company's
product development efforts are primarily directed toward obtaining regulatory
approval to market the AastromReplicell/(TM)/ System as an alternative to the
bone marrow harvest and peripheral blood stem cell ("PBSC") collection methods.
These stem cell collection methods have been widely
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<PAGE>
practiced for a number of years, and there can be no assurance that any of the
Company's technologies or product candidates will be accepted by the marketplace
as readily as these or other competing processes and methodologies, or at all.
The failure by the Company to achieve any of the foregoing would have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
The approval of the FDA will be required before any commercial sales of the
Company's product candidates may commence in the United States, and approvals
from foreign regulatory authorities will be required before international sales
may commence. Prior to obtaining necessary regulatory approvals in the U.S., the
Company will be required to demonstrate the safety and efficacy of its processes
and product candidates and the cells produced by such processes and in such
products for application in the treatment of humans through extensive
preclinical studies and clinical trials. The Company is currently conducting
pre-pivotal clinical trials to demonstrate the safety and biological activity of
patient-derived or UCB cells produced in the Company's prototype of the
AastromReplicell/(TM)/ System in a limited number of patients. If the results
from these pre-pivotal trials are successful, the Company intends to seek
clearance from the FDA to commence pivotal clinical trials. The results of
preclinical studies and clinical trials of the Company's product candidates,
however, may not necessarily be predictive of results that will be obtained from
subsequent or more extensive clinical trials. Further, there can be no assurance
that pre-pivotal or pivotal clinical trials of any of the Company's product
candidates will demonstrate the safety, reliability and efficacy of such
products, or of the cells produced in such products, to the extent necessary to
obtain required regulatory approvals or market acceptance.
The ability of the Company to complete its clinical trials in a timely manner
is dependent upon many factors, including the rate of patient enrollment.
Patient enrollment is a function of many factors, including the size of the
patient population, the proximity of suitable patients to clinical sites and the
eligibility criteria for the study. The Company has experienced delays in
patient accrual in its current pre-pivotal clinical trials. Further delays in
patient accrual, in the Company's current pre-pivotal clinical trials, or in
pivotal trials planned to be conducted, could result in increased costs
associated with clinical trials or delays in receiving regulatory approvals and
commercialization, if any. Furthermore, the progress of clinical investigations
with the AastromReplicell/(TM)/ System and the Company's other product
candidates will be monitored by the FDA, which has the authority to cease
clinical investigations, at any time, due to patient safety or other
considerations. Any of the foregoing would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Uncertainty of Regulatory Approval; Extensive Government Regulation."
The Company's current pre-pivotal trials are designed to demonstrate specific
biological safety and activity of cells produced in the AastromReplicell/(TM)/
System, but are not designed to demonstrate long-term sustained engraftment of
such cells. The patients enrolled in these pre-pivotal trials will have
undergone extensive chemotherapy treatment prior to the infusion of cells
produced in the AastromReplicell/(TM)/ System. Such treatments will have
substantially weakened these patients and may have irreparably damaged their
hematopoietic systems. Due to these and other factors, it is possible that
patients may die or suffer severe complications during the course of the current
pre-pivotal trials or future trials. For example, in the trials to date,
patients who were in the transplant recovery process have died from
complications related to the patient's clinical condition that, according to the
physicians involved, were unrelated to the AastromReplicell/(TM)/ System
procedure. Further, there can be no assurance that patients receiving cells
produced with the Company's technologies and product candidates will demonstrate
long-term engraftment in a manner comparable to cells obtained from current stem
cell therapy procedures, or at all. The failure to adequately demonstrate the
safety or efficacy of the Company's technologies and product candidates,
including long-term sustained engraftment, or the death of, or occurrence of
severe complications in, one or more patients could substantially delay, or
prevent, regulatory approval of such product candidates and have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES
The Company does not operate and has no current intention to operate
manufacturing facilities for the production of its product candidates. The
Company currently arranges for the manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so in the foreseeable future. The Company
has entered into collaborative product development and supply agreements with
SeaMED Corporation ("SeaMED"), Ethox Corporation ("Ethox") and Anchor Advanced
Products, Inc., Mid-State Plastics Division ("MSP"), for
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<PAGE>
the collaborative development and manufacture of certain components of the
AastromReplicell/(TM)/ System and is dependent upon those suppliers to
manufacture its products. The Company is also dependent upon Immunex Corporation
("Immunex"), Life Technologies, Inc. and Biowhittaker for the supply of certain
cytokines, serum and media to be used in the AastromReplicell/(TM)/ System. With
regard to cytokines that are not commercially available from other sources,
Immunex is currently the Company's sole supplier and few alternative supply
sources exist. Apart from SeaMED, Ethox, MSP and Immunex, the Company currently
does not have contractual commitments from any of these manufacturers or
suppliers. There can be no assurance that the Company's supply of such key
cytokines, components and other materials will not become limited, be
interrupted or become restricted to certain geographic regions. Additionally,
there can be no assurance that the Company will not require additional
cytokines, components and other materials to manufacture, use or market its
product candidates, or that necessary key components will be available for use
on a sustained basis, if at all, by the Company in the markets in which it
intends to sell its products. There can also be no assurance that the Company
will be able to obtain alternative components and materials from other
manufacturers of acceptable quality, or on terms or in quantities acceptable to
the Company. In the event that any of the Company's key manufacturers or
suppliers fail to perform their respective obligations or the Company's supply
of such cytokines, components or other materials becomes limited or interrupted,
the Company would not be able to conduct clinical trials or market its product
candidates on a timely and cost-competitive basis, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES
Certain of the compounds used by the Company in its current stem cell
expansion process involve the use of animal-derived products. The availability
of these compounds for clinical and commercial use may become limited by
suppliers or restricted by regulatory authorities, which may impose a potential
competitive disadvantage for the Company's products compared to competing
products and procedures. There can be no assurance that the Company will not
experience delays or disadvantages related to the future availability of such
materials. Any restriction on the use of such materials could have a material
adverse effect on the Company's business, financial condition and results of
operations, and there can be no assurance that the Company will be able to
develop or obtain alternative compounds.
Like SeaMED, Ethox, MSP and Immunex, other suppliers would need to meet FDA
manufacturing requirements and undergo rigorous facility and process validation
tests required by federal and state regulatory authorities. Any significant
delays in the completion and validation of such facilities could have a material
adverse effect on the ability of the Company to complete clinical trials and to
market its products on a timely and profitable basis, which in turn would have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parities for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis.
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES
The Company is a development stage company and there can be no assurance that
its product applications for cell therapy will be successful. The Company has
not yet completed the development and clinical trials of any of its product
candidates and, accordingly, has not yet begun to generate revenues from the
commercialization of any of its product candidates. Aastrom was incorporated in
1989 and has experienced substantial operating losses since inception. As of
June 30, 1998, the Company has incurred net operating losses totaling
approximately $58.5 million. Such losses have resulted principally from costs
incurred in the research and development of the Company's cell culture
technologies and the AastromReplicell/(TM)/ System, general and administrative
expenses, and the prosecution of patent applications. The Company expects to
incur significant and increasing operating losses until product sales commence,
primarily owing to the expansion of its research and development programs,
including preclinical studies and clinical trials. The amount of future losses
and when, if ever, the Company will achieve profitability, are uncertain. The
Company's ability to achieve profitability will depend, among other things, on
successfully completing the development of its product candidates, obtaining
regulatory approvals, establishing manufacturing, sales and marketing
arrangements with third parties, and raising sufficient funds to finance its
activities. No assurance can be given that the Company's product development
efforts will be successful, that required regulatory approvals
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will be obtained, that any of the Company's product candidates will be
manufactured at a competitive cost and will be of acceptable quality, or that
the Company will be able to achieve profitability or that profitability, if
achieved, can be sustained.
LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE
RELATIONSHIPS
The Company has limited internal sales, marketing and distribution
capabilities. If any of the Company's product candidates are successfully
developed and the necessary regulatory approvals are obtained, the Company
intends to market such products through collaborative relationships with
companies that have established sales, marketing and distribution capabilities.
The Company has established a strategic alliance with Cobe for the worldwide
distribution of the AastromReplicell/(TM)/ System for stem cell therapy and
related uses. Cobe has the right to terminate its Distribution Agreement with
the Company upon twelve months notice upon a change of control of the Company,
other than to Cobe, or if Cobe determines that commercialization of the
AastromReplicell/(TM)/ System for stem cell therapy on or prior to December 31,
1998 is unlikely. See "--Consequences of Cobe Relationship."
The amount and timing of resources that Cobe commits to its strategic alliance
activities with the Company are, to a significant extent, outside of the control
of the Company. There can be no assurance that Cobe will pursue the marketing
and distribution of the Company's products, continue to perform its obligations
under its agreements with the Company or that the Company's strategic alliance
with Cobe will result in the successful commercialization and distribution of
the Company's technologies and product candidates. There can also be no
assurance that Cobe will be successful in its efforts to market and distribute
the Company's products for stem cell therapy. The suspension or termination of
the Company's strategic alliance with Cobe or the failure of the strategic
alliance to be successful may have a material adverse effect on the Company's
business, financial condition and results of operations.
Subject to the contractual requirements of the Cobe relationship, the Company
will seek to enter into other agreements relating to the development and
marketing of product candidates and in connection with such agreements may rely
upon corporate partners to conduct clinical trials, seek regulatory approvals
for, manufacture and market its potential products. There can be no assurance
that the Company will be able to establish collaborative relationships for the
development or marketing of the Company's product candidates on acceptable
terms, if at all, and if such relationships are established, that they will be
successful or sustained on a long-term basis. The inability of the Company to
establish such collaborative relationships may require the Company to curtail
its development or marketing activities with regard to its potential products
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
To date, Aastrom has funded its operations primarily through the sale of
equity securities and corporate collaborations. The Company anticipates that the
net proceeds from the sale of the Series I Shares, together with the Company's
available cash and expected interest income thereon, will be sufficient to
finance the development and manufacture of the AastromReplicell/(TM)/ System for
use in clinical trials, expanded clinical trials, other research and development
and working capital and other corporate requirements until mid 1999. This
estimate is based on certain assumptions which could be negatively impacted by
the matters discussed under this heading and elsewhere under the caption
"Business Risks." In order to grow and expand its business, and to introduce its
product candidates into the marketplace, the Company will need, among other
things, to raise additional funds. The development of the Company's products for
the expansion of additional cell types will require the Company to raise
additional funds or to seek collaborative partners, or both, to finance related
research and development activities.
The Company's future capital requirements will depend upon many factors,
including, but not limited to, continued scientific progress in its research and
development programs, costs and timing of conducting clinical trials and seeking
regulatory approvals and patent prosecutions, competing technological and market
developments, possible changes in existing collaborative relationships, the
ability of the Company to establish additional collaborative relationships, and
effective commercialization activities and facilities expansions if and as
required. Because of the Company's potential long-term funding requirements, it
may attempt to access the public or private equity markets if and whenever
conditions are favorable, even if it does not have an immediate need for
additional capital at that time. There can be no assurance that any such
additional funding will be available to the Company on reasonable terms, or at
all. If adequate funds are not available, the Company may be required to delay
or terminate research and development programs, curtail capital expenditures,
and reduce
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business development and other operating activities. The Company intends to seek
additional collaborative partners to assist in the development of certain of its
products. If the Company is not successful in finding, entering into and
maintaining such arrangements, its development efforts could be delayed.
Furthermore, there can be no assurance that the Company will be able to
implement collaborative development agreements under acceptable terms, if at
all. Any of the foregoing capital constraints would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Managements' Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The Company's research and development activities, preclinical studies,
clinical trials, and the anticipated manufacturing and marketing of its product
candidates are subject to extensive regulation by the FDA and other regulatory
authorities in the United States. These activities are also regulated in other
countries where the Company intends to test and market its product candidates.
The approval of the FDA will be required before any commercial sales of the
Company's product candidates may commence in the United States. Additionally,
the Company will be required to obtain approvals from foreign regulatory
authorities before international sales may commence.
The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug and Cosmetic Act, or as biological products
under the Public Health Service Act, or both. Different regulatory requirements
may apply to the Company's products depending on how they are categorized by the
FDA under these laws. To date, the FDA has indicated that it intends to regulate
the AastromReplicell/(TM)/ System for stem cell therapy as a Class III medical
device through the Center for Biologics Evaluation and Research. However, there
can be no assurance that the FDA will ultimately regulate the
AastromReplicell/(TM)/ System for stem cell therapy as a medical device or that
regulatory approval for such product will be obtained in a timely fashion or at
all.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the AastromReplicell/(TM)/ System. The FDA is in the
process of developing its requirements with respect to somatic cell therapy and
gene cell therapy products, and recently proposed a new type of license for
autologous cells manipulated ex vivo and intended for structural repair or
reconstruction; autologous cells are cells obtained from, and administered to
the same patient. This proposal may indicate that the FDA will impose a similar
approval requirement on other types of autologous cellular therapies, such as
autologous cells for stem cell therapy. Any such additional regulatory or
approval requirement could significantly delay the introduction of the Company's
product candidates to the market, and have a material adverse effect on the
Company's business, financial condition and results of operations. Until the FDA
issues definitive regulations covering the Company's product candidates, the
regulatory guidelines or requirements for approval of such product candidates
will continue to be subject to significant uncertainty.
Before marketing, the AastromReplicell/(TM)/ System or other product
candidates developed by the Company must undergo an extensive regulatory
approval process. The regulatory process, which includes preclinical studies and
clinical trials to establish safety and efficacy, takes many years and requires
the expenditure of substantial resources. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent FDA approval. In addition, delays or rejections may be
encountered based upon changes in FDA policy for medical product approvals
during the period of product development, changes in FDA classification of the
Company's products, and FDA regulatory review of applications submitted by the
Company for product approval. Similar delays may also be encountered in foreign
countries. There can be no assurance that, even after the expenditures of
substantial time and financial resources, regulatory approval will be obtained
for any products developed by the Company. Moreover, if regulatory approval of a
product is obtained, such approval may be subject to limitations on the
indicated uses for which it may be marketed. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections by the FDA,
and later discovery of previously unknown problems with a product, manufacturer
or facility may result in restrictions on such product or manufacturer,
including a withdrawal of the product from the market. Failure to comply with
the applicable regulatory requirements can, among other things, result in fines,
suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. Further, additional governmental regulation may be
established which could prevent or delay regulatory approval of the Company's
products.
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The Company believes that the AastromReplicell/(TM)/ System's components will
be regulated in Europe as Class I Sterile, Class IIb and Class III medical
devices, under the authority of the new Medical Device Directives ("MDD") being
implemented by European Union ("EU") member countries. In order for the Company
to market its products in Europe, it must obtain a CE Mark from a Notified Body
to certify that the Company and its operations comply with certain minimum
quality standards and compliance procedures, or, alternatively, that its
manufactured products meet a more limited set of requirements. There can be no
assurance that the Company and its suppliers will be able to meet these minimum
requirements, or, if met, that the Company and its suppliers will be able to
maintain such compliance. The result of such non-compliance would have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance, however, that the
AastromReplicell/(TM)/ System will ultimately be regulated in Europe as
currently expected, and, if the AastromReplicell/(TM)/ System is not so
regulated, the Company could be forced to obtain additional regulatory approvals
and could be subject to additional regulatory requirements and uncertainty,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulations."
CONSEQUENCES OF COBE RELATIONSHIP
Cobe is the largest single shareholder of the Company, beneficially owning
approximately 20.2% of the outstanding Common Stock (prior to conversion of any
1998 Series Shares into Common Stock, but including the shares of Common Stock
issuable upon conversion of the outstanding 5 1/2% Convertible Preferred Stock
as of June 30, 1998). In addition, Cobe has certain preemptive rights to
maintain its relative percentage ownership and voting interest in the Company.
Cobe also has an option, until February 2000, to purchase from the Company an
amount of Common Stock equal to 30% of the Company's fully diluted shares after
the exercise of such option, at a purchase price equal to 120% of the public
market trading price of the Company's Common Stock. If such option is exercised,
Cobe would significantly increase its ownership interest in the Company and, as
a consequence of such share ownership, obtain effective control of the Company.
Such effective control would include the ability to influence the outcome of
shareholder votes, including votes concerning the election of directors, the
amendment of provisions of the Company's Restated Articles of Incorporation or
Bylaws, and the approval of mergers and other significant transactions. Cobe
also has been granted a "right of first negotiation" in the event that the
Company determines to sell all, or any material portion, of its assets to
another company or to merge with another company. Edward C. Wood, Jr., the
President of Cobe BCT, is a director of the Company. Furthermore, the Company
has agreed to use reasonable and good faith efforts to cause a nominee
designated by Cobe to be elected to the Board of Directors for as long as Cobe
owns at least 15% of the outstanding Common Stock. The existence of the
foregoing rights or the exercise of such control by Cobe could have the effect
of delaying, deterring or preventing certain takeovers or changes in control of
the management of the Company, including transactions in which shareholders
might otherwise receive a premium for their shares over then current market
prices.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is engaged in the development of medical products and processes
which will face competition in a marketplace characterized by rapid
technological change. Many of the Company's competitors have significantly
greater resources than the Company, and have developed and may develop product
candidates and processes that directly compete with the Company's products.
Moreover, competitors that are able to achieve patent protection, obtain
regulatory approvals and commence commercial sales of their products before the
Company, and competitors that have already done so, may enjoy a significant
competitive advantage. The Company's product development efforts are primarily
directed toward obtaining regulatory approval to market the
AastromReplicell/(TM)/ System for stem cell therapy. That market is currently
dominated by the bone marrow harvest and PBSC collection methods. The Company's
clinical data, although early, suggests that cells expanded in the
AastromReplicell/(TM)/ System using its current process will enable
hematopoietic recovery within the time frames currently achieved by bone marrow
harvest, however, neutrophil and platelet recovery times may be slower than with
PBSC collection methods. The Company is evaluating techniques and methods to
optimize the cells produced in the AastromReplicell/(TM)/ System to reduce the
recovery time of neutrophils and platelets in patients. There can be no
assurance that if such procedure optimization does not lead to recovery times
equal to or faster than those of PBSC collection methods, such outcome would not
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the bone marrow harvest and PBSC
collection methods have been widely practiced for a number of years and,
recently, the patient costs associated with these procedures have begun to
decline. There can be no assurance that the AastromReplicell/(TM)/ System
method, if approved for marketing, will prove to be competitive with these
established
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collection methods on the basis of hematopoietic recovery time, cost or
otherwise. The Company also is aware of certain other products manufactured or
under development by competitors that are used for the prevention or treatment
of certain diseases and health conditions which the Company has targeted for
product development. In particular, the Company is aware that competitors such
as Amgen, Inc., CellPro, Incorporated, Novartis, A.G., VimRx Pharmaceuticals,
Inc. and Rhone-Poulenc Rorer Inc. ("RPR") are in advanced stages of development
of technologies and products for use in stem cell therapy and other market
applications currently being pursued by the Company. In addition, Cobe, a
significant shareholder of the Company, is a market leader in the blood cell
processing products industry and, accordingly, a potential competitor of the
Company. There can be no assurance that developments by others will not render
the Company's product candidates or technologies obsolete or noncompetitive,
that the Company will be able to keep pace with new technological developments
or that the Company's product candidates will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes, preserve
its trade secrets, defend and enforce its rights against infringement and
operate without infringing the proprietary rights of third parties, both in the
United States and in other countries. The validity and breadth of claims in
medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. No assurance can be given that any patents
based on pending patent applications or any future patent applications of the
Company or its licensors will be issued, that the scope of any patent protection
will exclude competitors or provide competitive advantages to the Company, that
any of the patents that have been or may be issued to the Company or its
licensors will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held or
licensed by the Company. Furthermore, there can be no assurance that others
have not developed or will not develop similar products, duplicate any of the
Company's products or design around any patents that have been or may be issued
to the Company or its licensors. Since patent applications in the United States
are maintained in secrecy until patents issue, the Company also cannot be
certain that others did not first file applications for inventions covered by
the Company's and its licensors' pending patent applications, nor can the
Company be certain that it will not infringe any patents that may issue to
others on such applications. The Company relies on certain licenses granted by
the University of Michigan for certain of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose its
rights under the patents held by the University of Michigan, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also relies on trade secrets and
unpatentable know-how which it seeks to protect, in part, by confidentiality
agreements with its employees, consultants, suppliers and licensees. There can
be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
or unpatentable know-how will not otherwise become known or be independently
developed by competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products or
maintain its competitive position with respect to its products. If the Company's
technology components, devices, designs, products, processes or other subject
matter are claimed under the existing United States or foreign patents or are
otherwise protected by third party proprietary rights, the Company may be
subject to infringement actions. In such event, the Company may challenge the
validity of such patents or other proprietary rights or be required to obtain
licenses from such companies in order to develop, manufacture or market its
products. There can be no assurance that the Company would be able to obtain
such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. Furthermore, the failure to either develop a
commercially viable alternative or obtain such licenses could result in delays
in marketing the Company's proposed products or the inability to proceed with
the development, manufacture or sale of products requiring such licenses, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. If the Company is required to defend itself
against charges of patent infringement or to protect its own proprietary rights
against third parties, substantial costs will be incurred regardless of whether
the Company is successful. Such proceedings are typically protracted with no
certainty of success. An adverse outcome could subject the Company to
significant liabilities to third parties, and force the Company to curtail or
cease its development and sale of its products and processes. See "Business--
Patents and Proprietary Rights."
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NO ASSURANCE OF THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its product candidates
will depend in part on the extent to which payment for the Company's products
and related treatments will be available from government healthcare programs,
such as Medicare and Medicaid, as well as private health insurers, health
maintenance organizations and other third party payors. Government and other
third-party payors are increasingly attempting to contain health care costs, in
part by challenging the price of medical products and services. Reimbursement
by third-party payors depends on a number of factors, including the payor's
determination that use of the product is safe and effective, not experimental or
investigational, medically necessary, appropriate for the specific patient and
cost-effective. Since reimbursement approval is required from each payor
individually, seeking such approvals is a time-consuming and costly process
which will require the Company to provide scientific and clinical support of the
use of each of the Company's products to each payor separately. Significant
uncertainty exists as to the payments status of newly approved medical products,
and there can be no assurance that adequate third-party payments will be
available to enable the Company to establish or maintain price levels sufficient
to realize an appropriate return on its investment in product development. If
adequate payment levels are not provided by government and third-party payors
for use of the Company's products, the market acceptance of those products will
be adversely affected.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's product candidates, that
any reimbursement granted will be maintained, or that limits on reimbursement
available form third-party payors will not reduce the demand for, or negatively
affect the price of, the Company's products. The unavailability or inadequacy
of third-party reimbursement for the Company's product candidates would have a
material adverse effect on the Company. Finally, the Company is unable to
forecast what additional legislation or regulation relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company's
business.
HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. In the event of any contamination or injury from these
materials, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. Furthermore, the
failure to comply with current or future regulations could result in the
imposition of substantial fines against the Company, suspension of production,
alteration of its manufacturing processes or cessation of operations. There can
be no assurance that the Company will not be required to incur significant costs
to comply with any such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect on the Company's business,
financial condition and results of operations. Any failure by the Company to
control the use, disposal, removal or storage of, or to adequately restrict the
discharge of, or assist in the cleanup of, hazardous chemicals or hazardous,
infectious or toxic substances could subject the Company to significant
liabilities, including joint and several liability under certain statutes. The
imposition of such liabilities would have a material adverse effect on the
Company's business, financial condition and results of operations.
PRODUCT LIABILITY AND LIMITED INSURANCE
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of the AastromReplicell/(TM)/ System during
research and development efforts, including clinical trials, or after
commercialization results in adverse effects. As a result, the Company may incur
significant product liability exposure. There can be no assurance that existing
insurance coverage will be adequate or that adequate insurance coverage for
future clinical trials or commercial activities will be available at an
acceptable cost, if at all, or that a product liability claim would not
materially adversely affect the business, financial condition or results of
operations of the Company.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part upon the Company's ability to
attract and retain highly qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research and
academic institutions and other entities. There can be no assurance that the
Company will be successful in hiring or retaining key personnel. See "Business--
Employees--Executive Officers of the Company."
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SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FOR DILUTION
On July 2, 1998 the Company sold 5,000 shares of its newly created 1998
Series I Convertible Stock (the "Series I Stock") to one investor for an
aggregate purchase price of $5 million. The shares of Series I Stock are
convertible, at the option of the holder, into shares of the Company's Common
Stock at the lower of (i) $4.81, or (ii) a price based on the market price of
the Company's Common Stock prior to conversion. With limited exceptions, the
shares of Series I Stock are not convertible into Common Stock until March 30,
1999 and, subject to extension under certain circumstances, will automatically
convert into Common Stock on July 2, 2001, unless converted sooner. In general,
the Company may require the holders to convert the Series I Stock if the average
closing bid price of the Company's Common Stock exceeds $9.62 for specified
periods after July 2, 1999.
Future sales of shares by existing stockholders and sales of substantial
amounts of Common Stock in the public market following the conversion of the
1998 Series Shares could adversely affect the market price of the Company's
Common Stock and the Company's ability to raise capital. Substantially all of
the outstanding shares of Common Stock and the shares issuable upon the
conversion of the various series of preferred stock of the Company are freely
tradeable, subject to restrictions imposed by Rule 144 under the Securities Act
of 1933, as amended, with respect to sales by affiliates.
As of September 21, 1998, 5,000 of the Series I Shares were issued and
outstanding, and none of the Series II Shares were outstanding, though the
Selling Shareholder is obligated under the Purchase Agreement to purchase 3,000
Series II Shares upon satisfaction of certain conditions. The 1998 Series
Shares are each convertible into such number of shares of Common Stock as is
determined by dividing the stated value ($1,000) of each 1998 Series Share (as
such value is increased by a premium based on the number of days the 1998 Series
Shares are held) by the then current conversion price (which is determined by
reference to the then current market price). If circumstances were such that
the Selling Shareholder was able to and did convert all of its Series I Shares
as of September 21, 1998, the Selling Shareholder would have received 2,077,456
shares of Common Stock, but this number of shares could prove to be
significantly greater in the event of a decrease in the trading price of the
Common Stock. Purchasers of Common Stock could therefore experience substantial
dilution of their investment upon conversion of the 1998 Series Shares.
Similarly, issuance and sale of the shares of Common Stock upon conversion of
the Series II Shares could result in substantial dilution of existing
shareholders and could adversely affect the market price for the Common Stock.
The 1998 Series Shares are not registered and may be sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The shares of Common Stock into which the 1998
Series Shares may be converted are being registered pursuant to a registration
statement.
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
As of August 31, 1998, the Company's directors, executive officers, and
certain principal shareholders, including Cobe, affiliated with members of the
Board of Directors and their affiliates beneficially own approximately 29% of
the outstanding shares of Common Stock (prior to conversion of any 1998 Series
Shares into Common Stock, but including the shares of Common Stock issuable upon
conversion of the outstanding 5 1/2% Convertible Preferred Stock). Accordingly,
such shareholders, acting together, may have the ability to exert significant
influence over the election of the Company's Board of Directors and other
matters submitted to the Company's shareholders for approval. The voting power
of these holders may discourage or prevent certain takeovers or changes in
control of the management of the Company unless the terms are approved by such
holders. See "Principal Shareholders."
POSSIBLE STOCK PRICE AND VOLUME VOLATILITY
The trading price and volume of the Company's Common Stock has experienced
significant volatility. The trading price and volume of the Common Stock and the
price at which the Company may sell securities in the future could be subject to
wide fluctuations in response to announcements of clinical results, research
activities, technological innovations or new products by the Company or
competitors, changes in government regulation, developments concerning
proprietary rights, variations in the Company's operating results, announcements
by the Company of regulatory developments, litigation, disputes concerning
patents or proprietary rights or public concern regarding the safety, efficacy
or other implications of the products or methodologies to be developed by the
Company or its collaborators or enabled by the Company's technology, general
market conditions, the liquidity of the Company or its ability to raise
additional funds, and other factors or events. In
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addition, the stock market has experienced extreme fluctuations in price and
volume. This volatility has significantly affected the market prices for
securities of emerging technology companies for reasons frequently unrelated to
or disproportionate to the operating performance of the specific companies.
These market fluctuations, as well as shortfalls in revenue or earnings as
compared with public market analysts' expectations, changes in such analysts'
recommendations or projections and fluctuations in the stock markets generally,
as well as sales or offers of the large amounts of Shares, may adversely affect
the market price of the Common Stock. In addition, since the Company's initial
public offering in February 1997, the average daily trading volume of the Common
Stock on the Nasdaq National Market has generally been relatively low. There can
be no assurance that a more active trading market will develop in the future.
ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND MICHIGAN LAW
The Company's Restated Articles of Incorporation authorize the Board of
Directors to issue, without shareholder approval, an additional 2,792,000 shares
of preferred stock with voting, conversion, and other rights and preferences
that could materially and adversely affect the voting power or other rights of
the holders of Common Stock. The issuance of preferred stock or of rights to
purchase preferred stock could be used to discourage an unsolicited acquisition
proposal. The Company's Bylaws contain procedural restrictions on director
nominations by shareholders and the submission of other procedures required for
director nominations and shareholder proposals could discourage a proxy contest,
make more difficult the acquisition of a substantial block of Common Stock, or
limit the price that investors might be willing to pay in the future for shares
of Common Stock. The Company's Restated Articles of Incorporation eliminate the
right of shareholders to act without a meeting, do not provide for cumulative
voting in the election of directors and provide that the holders of at least
two-thirds of the outstanding shares of Common Stock must approve certain
transactions resulting in a change of control of the Company. In addition,
certain provisions of Michigan laws applicable to the Company, including, but
not limited to, provisions requiring class or series votes in certain
circumstances with respect to proposed business combinations, could also delay
or make more difficult a merger, tender offer or proxy contest involving the
Company.
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company's 5 1/2% Convertible Preferred Stock accrues a dividend at
5 1/2% per annum, payable, at the Company's option, in cash or through the
issuance of shares of Common Stock of the Company. As of June 30, 1998, 72,940
shares have been issued as payment of this dividend.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including, but not limited to, statements regarding: uncertainties related to
product development and marketability; uncertainties related to clinical trials;
manufacturing and supply uncertainties and dependence on third parties; history
of operating losses and anticipation of future losses; limited sales and
marketing capabilities and dependence on collaborative relationships; future
capital needs and uncertainty of additional funding; uncertainty of regulatory
approval and extensive government regulation; consequences of Cobe relationship;
competition and technological change; uncertainty regarding patents and
proprietary rights; no assurance of third party reimbursement; hazardous
materials; and potential product liability and availability of insurance. These
statements are subject to risks and uncertainties, including those set forth
under this caption, and actual results could differ materially from those
expressed or implied in these statements. All forward-looking statements
included in this Report are made as of the date hereof, and the Company assumes
no obligation to update any such forward-looking statement or reason why actual
results might differ.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information relating to Company's financial statements as of June 30,
1996, 1997, and 1998 for each of the three years in the period ended June 30,
1998 and for the period from Inception to June 30, 1998 and the report of
independent accountants are incorporated by reference to the Company's Annual
Report to Shareholders as set forth under the caption "Financial Statements and
Supplementary Data."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information relating to the Company's accountants is incorporated by
reference to the Company's Annual Report to Shareholders as set forth under the
caption "Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure."
PART III
Certain information required by Part III is omitted from this Report, and
is incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with its Annual Meeting of Shareholders to be held on November 11,
1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of the Company is incorporated by
reference to the Proxy Statement as set forth under the caption "General
Information--Board of Directors." Information relating to the executive officers
of the Company is set forth in Part I of this Report under the caption
"Executive Officers of the Company."
Information with respect to delinquent filings pursuant to Item 405 of
Regulation S-K is incorporated by reference to the Proxy Statement as set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the caption "Executive Compensation and
Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of the Company
by certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "General Information--Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the captions "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation."
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS.
The information relating to the Company's financial
statements is incorporated by reference to the Company's
Annual Report to Shareholders under the caption "Financial
Statements."
2. FINANCIAL STATEMENT SCHEDULE:
All schedules are omitted because they are not applicable or
not required, or because the required information is
included in the Financial Statements or Notes thereto.
3. EXHIBITS:
See Exhibit Index.
(b) REPORTS ON FORM 8-K:
On July 15, 1998, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K, dated July 15,
1998, which contains disclosure under Item 5.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 28, 1998 AASTROM BIOSCIENCES, INC.
By: /s/ R. Douglas Armstrong
-----------------------------------------
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on September 28, 1998 by the following persons in
the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ R. Douglas Armstrong President, Chief Executive Officer and Director
- ------------------------------- (Principal Executive Officer)
R. Douglas Armstrong, Ph.D.
/s/ Todd E. Simpson Vice President, Finance & Administration, Chief
- ------------------------------- Financial Officer, Secretary and Treasurer
Todd E. Simpson (Principal Financial and Accounting Officer)
/s/ Robert J. Kunze Chairman of the Board and Director
- -------------------------------
Robert J. Kunze
/s/ Stephen G. Emerson Director
- -------------------------------
Stephen G. Emerson, M.D., Ph.D.
/s/ Mary L. Campbell Director
- -------------------------------
Mary L. Campbell
/s/ Horst R. Witzel, Dr.-Ing Director
- -------------------------------
Horst R. Witzel, Dr.-Ing.
/s/ Edward C. Wood, Jr. Director
- -------------------------------
Edward C. Wood, Jr.
</TABLE>
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.1* Restated Articles of Incorporation of the Company.
3.2** Bylaws, as amended.
4.1** Specimen Common Stock Certificate.
4.2** Amended and Restated Investors' Rights Agreement, dated April 7, 1992.
10.1**# Form of Indemnification Agreement.
10.2**# Amended and Restated 1992 Incentive and Non-Qualified Stock Option
Plan and forms of agreements thereunder.
10.3**# 1996 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.4**# 1996 Employee Stock Purchase Plan and form of agreement thereunder.
10.5** Stock Purchase Agreement, dated October 22, 1993, between Cobe
Laboratories, Inc. and the Company and amendment thereto dated October
29, 1996.
10.6**+ Distribution Agreement, dated October 22, 1993, between Cobe BCT, Inc.
and the Company and amendments thereto dated March 29, 1995, September
11, 1995 and October 29, 1996.
10.7** Lease Agreement, dated May 18, 1992, between Domino's Farms Holdings,
L.P. and the Company and amendments thereto dated February 26, 1993,
October 3, 1994, November 16, 1994 and July 29, 1996.
10.8**# Promissory Note, dated November 18, 1993, for $120,000 loan by the
Company to R. Douglas Armstrong, Ph.D. and amendment thereto dated
October 30, 1996.
10.9**# Promissory Note, dated October 20, 1993, for $47,303 loan by the
Company to Stephen G. Emerson, M.D., Ph.D. and amendment thereto dated
October 30, 1996.
10.11** Stock Purchase Commitment Agreement, dated October 15, 1996, between
the State Treasurer of the State of Michigan and the Company.
10.12** Convertible Loan Commitment Agreement, dated October 15, 1996, between
the State Treasurer of the State of Michigan and the Company.
10.13** Letter Agreement, dated November 11, 1996, between the Company and
Cobe Laboratories, Inc.
10.16** Collaborative Supply Agreement, dated December 16, 1996, between the
Company and Anchor Advanced Products, Inc. Mid-State Plastics
Division.
10.19**# 401(k) Plan.
10.20**# Form of Employment Agreement.
10.21** License Agreement, dated July 17, 1992, between J.G. Cremonese and
the Company and related addenda thereto dated July 14, 1992 and July
7, 1993.
10.22**+ Collaborative Product Development Agreement, dated May 10, 1994,
between SeaMED Corporation and the Company.
10.23**+ Collaborative Product Development Agreement, dated November 8, 1994,
between Ethox Corporation and the Company.
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
10.24**+ License and Supply Agreement, dated April 1, 1996, between Immunex
Corporation and the Company.
10.26** License Agreement, dated March 13, 1992, between the Company and the
University of Michigan and amendments thereto dated March 13, 1992,
October 8, 1993 and June 21, 1995.
10.27**# Employee Proprietary Information and Invention Agreement, effective
June 1, 1991, between the Company and R. Douglas Armstrong, Ph.D.
10.29**# Employment Agreement, dated December 8, 1995, between the Company and
Todd E. Simpson.
10.32**# Employment Agreement, dated October 26, 1995, between the Company and
Alan K. Smith, Ph.D.
10.38****# Second Amendment to Promissory Note payable to the Company by Stephen
G. Emerson, M.D., Ph.D., dated June 30, 1997.
10.39****# Second Amendment to Promissory Note payable to the Company by R.
Douglas Armstrong, Ph.D., dated June 30, 1997.
10.40**** Amendment to License and Supply Agreement, dated August 25, 1997,
between Immunex Corporation and the Company.
10.41+ Manufacturing Supply Agreement, dated as of August 14, 1998,, by and
between the Company and SeaMED Corporation.
10.42#% Employment Agreement, dated August 10, 1998, by and between the
Company and Bruce Husel.
10.42# Employment Agreement, dated August 10, 1998, by and between the
Company and William Odell.
10.43% Strategic Planning Consulting Services and Collaboration Agreement,
dated October 7, 1997, between Burrill & Company, LLC and the
Company.
11.1 Statement regarding computation of net loss per share.
13.1 Annual Report to Shareholders.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
_______________
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, as filed on March 7, 1997.
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-15415), declared effective on February 3, 1997.
*** Incorporated by reference to the Company's Current Report on Form 8-K, as
filed on July 16, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1997, as filed on September 25, 1997.
% Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-37439), as filed on October 8, 1997.
+ Confidential treatment has been requested as to a portion of this exhibit.
# Management contract or compensatory plan or arrangement covering executive
officers or directors of the Company.
38
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
MANUFACTURING SUPPLY AGREEMENT
[*] = CERTAIN INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
<TABLE>
<S> <C>
1. Manufacture, Delivery and Acceptance of Instrument Units............... 1
1.1 Manufacture of Instrument Units.................................. 1
1.2 Specifications, DMR and Changes.................................. 1
1.3 Forecast and Order Schedule...................................... 2
1.4 "*".............................................................. 3
1.5 Shipment and Risk of Loss........................................ 3
1.6 "*".............................................................. 3
1.7 Inspection and Acceptance........................................ 3
2. Continuing Obligations of SeaMED....................................... 4
2.1 Engineering Support.............................................. 4
2.2 Maintenance of Adequate Facilities and Manufacturing Practices... 5
2.3 No Subcontracting................................................ 5
2.4 Inventory and Insurance.......................................... 5
2.5 Aastrom's Equipment.............................................. 5
2.6 Financial Condition.............................................. 5
3. Manufacturing Process, Registration and Compliance..................... 6
3.1 Manufacturing Process............................................ 6
3.2 Registration and Compliance...................................... 6
4. Price and Payment Terms................................................ 6
4.1 Price............................................................ 6
4.2 Price Adjustments................................................ 6
4.3 Payment Terms.................................................... 7
5. Warranties............................................................. 7
5.1 Manufacturer's Warranty.......................................... 7
5.2 Limitation on Liability.......................................... 7
5.3 Aastrom's Warranty............................................... 8
5.4 Disclaimer of Warranties......................................... 8
6. Records; Inspection and FDA Reports.................................... 8
6.1 Records Inspection............................................... 8
6.2 FDA Inspection Reports........................................... 8
7. Indemnification........................................................ 9
7.1 By SeaMED........................................................ 9
7.2 By Aastrom....................................................... 9
7.3 Patent Infringement.............................................. 9
7.4 Control of Action................................................ 9
7.5 Insurance........................................................ 9
</TABLE>
i
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
<TABLE>
<C> <S> <C>
8. "*" ................................................................. 10
8.1 Continuing Prohibition.......................................... 10
8.2 "*"............................................................. 10
8.3 No Use of Aastrom's Proprietary Information..................... 10
9. Proprietary Information................................................ 10
9.1 Aastrom's Property; Use of Property by SeaMED................... 10
9.2 Inventions...................................................... 11
9.3 Nondisclosure................................................... 11
9.4 Confidentiality................................................. 11
10. Term................................................................... 11
11. Default and Termination............................................... 11
11.1 Breach......................................................... 11
11.2 Remedy......................................................... 12
11.3 Obligations Upon Termination................................... 12
12. Miscellaneous......................................................... 13
12.1 Independent Contractors........................................ 13
12.2 Causes Beyond Control.......................................... 13
12.3 Successors and Assigns......................................... 13
12.4 Applicable Law................................................. 13
12.5 Severability................................................... 13
12.6 Entire Agreement; Modification and Waiver...................... 13
12.7 Counterparts................................................... 13
12.8 Dispute Resolution............................................. 13
12.9 Notices........................................................ 14
</TABLE>
EXHIBIT A General Description of the System and the Instrument
EXHIBIT B Specifications for the Instruments
EXHIBIT C Document Change Control Agreement
EXHIBIT D Pricing
ii
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Section
-------
<S> <C>
AAA........................................................................ 12.8
Agreement.................................................................. Intro
CPS......................................................... Recital A, Exhibit A
Development Agreement.................................................. Recital A
DMR........................................................................ 1.2(b)
FDA.................................................................. 2.1(d),.5.1
Firm Order Period............................................................. 1.3
Instrument............................................................. Recital A
SeaMED..................................................................... Intro
Specifications............................................................. 1.2(a)
System................................................................. Recital A
</TABLE>
iii
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
MANUFACTURING SUPPLY AGREEMENT
This Manufacturing Supply Agreement (the "Agreement") is entered into as of
April 14, 1998, by and between Aastrom Biosciences, Inc., a Michigan corporation
("Aastrom"), and SeaMED Corporation, a Washington corporation ("SeaMED").
A. Aastrom and SeaMED previously entered into a Collaborative Product
Development Agreement dated May 10, 1994 (the "Development Agreement"), pursuant
to which SeaMED agreed to collaborate with Aastrom to complete the necessary
design work for, and produce pre production units of, an instrument or
instruments (the "Instrument") for a proprietary Aastrom Cell Production System
(CPS) which is used for cell growth (the "System"). Attached hereto as Exhibit
-------
A is a general description of the System, including the Instrument.
- -
B. Pursuant to the terms of Section 6 of the Development Agreement, the
parties agreed to enter into a manufacturing agreement for SeaMED to manufacture
commercial units of the Instrument.
C. In accordance with Section 6 of the Development Agreement, the parties
are entering into this Agreement to set forth the terms and conditions pursuant
to which SeaMED will manufacture commercial units of the Instrument for Aastrom.
D. The terms and conditions of the Development Agreement shall remain in
effect until such time as Aastrom issues to SeaMED a purchase order for the
production version of the Instruments as set forth in the Specifications and
such order has been accepted by SeaMED, with such acceptance not being
unreasonably withheld.
AGREEMENT
NOW, THEREFORE, the parties hereby agree as follows:
1. Manufacture, Delivery and Acceptance of Instrument Units.
--------------------------------------------------------
1.1 Manufacture of Instrument Units. SeaMED shall manufacture and
-------------------------------
sell to Aastrom so many of the Instrument units as Aastrom may order, with each
Instrument unit being manufactured in accordance with (i) the then-current
specifications as set forth in this Agreement; (ii) then current applicable Good
Manufacturing Practices (as described in Title 21 of the U.S. Code of Federal
Regulations, Part 820); and (iii) any other applicable standards (UL, CSA, IEC
and TUV) for manufacturing of the Instrument. SeaMED shall maintain its
manufacturing facility, equipment and procedures so as to obtain and comply with
EN 46001 certification in accordance with the EC Medical Directives, and shall
apply the EC mark to Instrument units intended for the European market.
1.2 Specifications, DMR and Changes.
--------------------------------
(a) Specifications. SeaMED shall manufacture the Instruments in
--------------
accordance with the specifications attached hereto as
Exhibit B
---------
1
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
("Specifications") and no part of SeaMED's responsibility may be
subcontracted without the prior written consent of Aastrom.
(b) Establish DMR. SeaMED shall prepare a Device Master Record ("DMR")
-------------
covering the manufacture of the Instruments from the Specifications,
other requirements and technical information to be provided by
Aastrom, and manufacturing quality processes and procedures
established by SeaMED in accordance with SeaMED's Device Master
Record Procedure. "*"
(c) Specification and DMR Changes. Notwithstanding any provision of this
-----------------------------
Agreement to the contrary, SeaMED shall not have the right to change
the Specifications or DMR except as in accordance with the procedure
set forth in Exhibit C. If a Party desires a change to
Specifications or any part of the DMR, it shall submit a proposed
change in accordance with the procedure set forth in Exhibit C,
setting forth a detailed description and drawings thereof. The
Parties shall work in good faith as expeditiously as is reasonable
to reach a determination whether a change to Specifications will be
made and, if so, when such change will be implemented and the effect
that such change will have, if any, on quantities, quality criteria,
price and delivery dates.
1.3 Forecast and Order Schedule. Every month during the term of this
---------------------------
Agreement, Aastrom shall provide SeaMED with a rolling forecast of the
anticipated quantity of Instrument units Aastrom intends to purchase each month
from SeaMED for the following twelve-month period. The quantities given for the
first six months of each twelve-month rolling forecast shall be firm orders (the
"Firm Order Period") and Aastrom shall issue its purchase order therefor.
Quantities beyond the foregoing Firm Order Period are for planning purposes
only. SeaMED shall fulfill all orders submitted by Aastrom, and SeaMED shall
have no right to unreasonably limit the number Instruments being added to the
Firm Order Period by Aastrom. For example, the forecasted quantity of
Instrument units that Aastrom intends to purchase from SeaMED during the period
from January through December would contain a Firm Order Period that includes
the quantities to be delivered from January through June. In February of that
year, Aastrom would finalize the quantity of units to be delivered by SeaMED in
July which would become part of the Firm Order Period and SeaMED would have no
right to unreasonably limit the quantity of Instrument units being added to the
Firm Order Period for Delivery in July. Such update to the forecast will be
performed on a monthly basis. Further, SeaMED shall use its best reasonable
efforts to accommodate Aastrom requested changes to the forecasted volumes and
delivery dates during the Firm Order Period, with such requested changes to be
received from Aastrom in writing. In the event that SeaMED determines that
economies can be achieved by purchasing materials to meet Aastrom's forecasts
beyond those set forth in Aastrom's purchase order, SeaMED may purchase such
materials only upon the written approval of Aastrom. SeaMED shall have no
obligation to purchase materials without a purchase order from Aastrom except as
necessary to meet Aastrom's firm purchase orders or other written authorization
2
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
received from Aastrom to procure materials. Aastrom shall pay SeaMED for all
materials and direct costs expended by SeaMED to fill Aastrom's firm purchase
orders for Instruments in the event that they are not used to fulfill such
purchase orders or other written authorization to procure materials.
1.4 "*"
1.5 Shipment and Risk of Loss. SeaMED shall deliver the Instrument
-------------------------
units FOB SeaMED's manufacturing facility, for shipment to Aastrom's premises in
Ann Arbor, Michigan, or to such other address as specified by Aastrom. Title
and risk of loss shall pass to Aastrom upon SeaMED's delivery of the Instrument
units to a licensed carrier approved by Aastrom for shipment to Aastrom. At the
request of Aastrom, SeaMED shall obtain insurance, acceptable to Aastrom, for
each instrument shipment with the cost of such insurance to be paid by SeaMED
and invoiced to Aastrom.
1.6 "*"
1.7 Inspection and Acceptance. Promptly after Aastrom receives a
-------------------------
shipment of the Instruments "*", Aastrom, or its designee, shall inspect the
Instruments to verify that they have been manufactured in accordance with the
required Specifications. Delivery of each Instrument unit shall be deemed
accepted by Aastrom unless SeaMED is notified in writing of Aastrom's rejection
of such delivery within thirty (30) days after the delivery date of the
Instrument "*", due to a failure thereof to comply with the Specifications,
including the acceptance test criteria. In the event that SeaMED receives such
notice, SeaMED shall take all necessary actions to remedy and correct any non-
conforming Instrument units. "*" If an Instrument is found later to be non-
conforming to the required Specifications, the fact that Aastrom did not
discover the non-conformance earlier shall not impair Aastrom's warranty rights
under Section 5.1 below.
2. Continuing Obligations of SeaMED.
--------------------------------
2.1 Engineering Support. During the term of this Agreement, SeaMED
--------------------
shall collaborate with Aastrom and any other design contractors designated by
Aastrom with regard to engineering support necessary to support the manufacture
of the Instruments. Without limiting the foregoing, SeaMED shall:
(a) Assist Aastrom with respect to planning for any manufacturing
issues that arise in connection with Instrument, including issues relating to
manufacturing process development and validation, component sourcing, and
maintenance of DMR documentation requirements;
(b) Assist Aastrom to establish a reliability goal for the
Instrument, calculate the reliability of the Instrument units at certain
established review points during the design and development of the Instrument,
and perform demonstration tests on pilot production units produced by SeaMED;
3
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
(c) Maintain working drawings for manufacturing and testing the
Instrument units, including without limitation, (i) specifications for component
parts to be acquired from specified vendors, (ii) drawings and specifications
for component parts, (iii) test and acceptance procedures and criteria, (iv)
subassembly specifications, drawings and requirements, (v) costed bill of
materials, and (vi) revised Specifications, including product specific
manufacturing procedures, DMR, routing and processes which revised
Specifications shall be subject to the prior written approval of Aastrom in
accordance with Exhibit C;
(d) To the extent required for submittal to the U.S. Food and Drug
Administration ("FDA") (or comparable foreign agencies) for Aastrom's IDE and/or
PMA (or comparable foreign approvals), prepare a detailed description of
SeaMED's manufacturing methods, processes, procedures and facility applicable to
Aastrom's Instrument; and
(e) Collaborate with Aastrom on any engineering projects that Aastrom
may request. Aastrom shall deliver to SeaMED a written request for such
engineering work and SeaMED shall deliver to Aastrom a proposal which, if
acceptable to Aastrom, will be authorized by Aastrom prior to the initiation of
work by SeaMED. "*"
2.2 Maintenance of Adequate Facilities and Manufacturing Practices
--------------------------------------------------------------
SeaMED shall assemble all of the Instrument units in an environment where
current good manufacturing practices are followed. Inasmuch as SeaMED's U.S.,
European Economic Community and other foreign body facility registration and
inspection records are extremely important to Aastrom's ability to obtain prompt
regulatory approval for Aastrom's System, SeaMED hereby agrees to use its best
efforts to maintain in good standing all appropriate regulatory facility
registrations and inspection records stated in Section 3.2 and Section 6.
2.3 No Subcontracting. No part of SeaMED's obligations under this
-----------------
Agreement shall be subcontracted by SeaMED without the prior written approval of
Aastrom.
2.4 Inventory and Insurance. All inventory of components and
-----------------------
materials purchased by SeaMED to make Instrument units shall be owned by SeaMED
and shall be insured against risk of loss by SeaMED. Any components and
materials purchased by Aastrom and delivered to SeaMED for SeaMED to use to make
Instrument units shall be covered by SeaMED's insurance policy for risk of loss
while said items remain in SeaMED's facility, with Aastrom being the loss payee
therefor.
2.5 Aastrom's Equipment SeaMED shall install, maintain and account
-------------------
for all tools, fixtures, molds, dies or other equipment provided or paid for by
Aastrom for manufacture of the Instrument at SeaMED's facility and at any of
SeaMED's permitted subcontractor facilities. SeaMED hereby acknowledges that
Aastrom's equipment is the sole and exclusive property of Aastrom and shall
identify and tag such items as Aastrom's equipment. SeaMED shall ensure that
such tags are properly placed and maintained on all of Aastrom's equipment and
hereby covenants that, during the term of this Agreement:
4
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
(i) SeaMED, and any permitted subcontractor of SeaMED using Aastrom's
equipment, shall utilize Aastrom's equipment solely for
manufacturing Aastrom's requirements of the Instrument as
provided hereunder,
(ii) SeaMED shall not encumber any of Aastrom's equipment, nor shall
SeaMED permit Aastrom's equipment to become encumbered as a
result of any act or omission of SeaMED or a subcontractor of
SeaMED.
Within twenty (20) business days following termination or expiration
of this Agreement and at Aastrom's request, SeaMED agrees to properly pack and
return to Aastrom or it designee, or cause to be properly packed and returned to
Aastrom or its designee, F.O.B., point of shipment, all of Aastrom's equipment,
the same to be shipped to such facility as Aastrom directs at Aastrom's expense.
2.6 Financial Condition. Each party shall give written notification
-------------------
to the other party of any material adverse financial condition affecting the
party, including without limitation: (i) the filing of a significant lawsuit
against the party, (ii) the lack of cash funds available to pay all obligations
of the party as they become due, (iii) the lack of resources available to enable
the party to fully and promptly perform its obligations under this Agreement on
schedule, or (iv) any other condition which may jeopardize or impair the full
and prompt performance by the party of its obligations under this Agreement.
Said notification shall be given within five (5) days after the occurrence or
realization of said adverse condition.
3. Manufacturing Process, Registration and Compliance.
--------------------------------------------------
3.1 Manufacturing Process. SeaMED shall furnish to Aastrom copies of
----------------------
the documentation which fully describes in detail the manufacturing and testing
processes, methods and techniques used to manufacture and test the Instrument,
including without limitation, all necessary Instrument information,
documentation, drawings, equipment lists, material lists, traceable recordings,
tooling, suppliers, Specifications and description of manufacturing methods,
facilities and processes (including DMR) required by U.S. or foreign regulatory
agencies, to enable the continued manufacture of the Instrument. SeaMED shall
provide copies of such information in printed and/or electronic form as Aastrom
may request and at Aastrom's reasonable expense. As changes or improvements are
contemplated in said manufacturing, the documentation describing the changes and
improvements will be furnished to Aastrom for approval prior to implementation.
SeaMED acknowledges that the System is a PMA device and that changes to the
manufacturing and testing process will likely require submission to FDA and FDA
approval prior to implementation. SeaMED acknowledges that similar regulatory
review and approval will be required for non-U.S. sale of Instruments. "*"
3.2 Registration and Compliance. SeaMED hereby represents to Aastrom
---------------------------
that it is registered with the FDA as a contract medical device manufacturer in
accordance with the Federal Food, Drug and Cosmetic Act 21 CFR Part 807, as
amended. SeaMED also hereby represents that it has achieved EN46001
certification by TUV as notified body and that during
5
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
the term of this Agreement, shall maintain and document a quality system as may
be required as a condition of maintaining such registration and certification.
4. Price and Payment Terms.
-----------------------
4.1 Price. Subject to Section 4.2, Aastrom shall compensate SeaMED
-----
for SeaMED's manufacture and supply of Instrument units as further described on
Exhibit D attached hereto. The prices set forth on Exhibit D shall include all
- --------- ---------
packaging, packing and taxes, except sales taxes imposed upon the sale or
transfer of the Instrument. The cost of freight and insurance incurred by SeaMED
on Aastrom's account, if any, shall be invoiced to Aastrom. Aastrom shall have
no liability for such taxes if it has complied with resale tax certificate
requirements. Furthermore, if Aastrom is liable to pay these taxes, they shall
be specifically listed on SeaMED's invoice.
4.2 Price Adjustments. "*", either SeaMED or Aastrom may request a
-----------------
change in the purchase price based upon the pricing formula set forth in Exhibit
-------
D, to accommodate increased or decreased costs of manufacture, or an increase or
- -
decrease in the number of Instrument units ordered by Aastrom. Such request and
change shall be based upon demonstrated increased or decreased costs of
components or labor for the units manufactured and to be manufactured or
increase or decrease in volume of units ordered by Aastrom. If any costs of
components or labor decrease during the term of this Agreement, or if the number
of units manufactured is materially greater than the estimated number used for
establishing the previous price, then SeaMED shall reduce the purchase price to
reflect such changes. Similarly, if the costs of components or labor increase,
or the number of units manufactured is materially less than the estimated number
used for establishing the previous price, then SeaMED and Aastrom shall increase
the price to reflect such changes. "*"
4.3 Payment Terms. Aastrom shall pay SeaMED the invoiced price in
-------------
U.S. dollars for each shipment of Instrument units accepted by Aastrom within
thirty (30) days after the later of (i) the date the invoice for such shipment
is received by Aastrom, or (ii) the date the shipment of Instruments is
delivered by SeaMED to Aastrom or Aastrom's designee. Unless otherwise
specified or required by law, all prices will be quoted and billed exclusive of
federal, state, or local excise, sales, or other similar taxes. Although the
parties do not expect any such taxes, if any such taxes are payable, they will
appear as an additional item on the invoices.
5. Warranties.
----------
5.1 Manufacturer's Warranty. "*" During the Warranty Period, SeaMED
-----------------------
warrants that each Instrument unit (i) shall be manufactured in full compliance
with the Specifications, (ii) shall be free from defects in material and
workmanship, and (iii) shall be free from defects in design as to those specific
elements for which SeaMED was primarily responsible for the design, as specified
in the Project Plan, as amended, as such term is defined in the Development
Agreement. As to the elements of the Instrument for which SeaMED was not
primarily responsible for the design, SeaMED makes no warranty as to design.
SeaMED further warrants that the manufacture, assembly and delivery of the
Instrument hereunder shall be in compliance with (a) all applicable federal,
state and local laws, rules, regulations and executive
6
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
orders, including without limitation, all of the employee compensation, health
and safety and environmental laws applicable to SeaMED's facility, and all U.S.
customs laws and regulations, and applicable regulations of the FDA and the
European Community and Japanese equivalent of the FDA; and (b) performed in a
professional, workmanlike manner in accordance with prevailing industry
standards. SeaMED understands that Aastrom may sell the Instrument to hospital
customers or other users. SeaMED agrees that the foregoing warranties are for
the benefit of Aastrom and any ultimate end-user of the Instrument.
5.2 Limitation on Liability. "*"
-----------------------
5.3 Aastrom's Warranty. Aastrom warrants that all elements of the
------------------
Instrument units for which SeaMED was not primarily responsible for the design
shall be free from defects in design.
5.4 Disclaimer of Warranties. EXCEPT FOR THE WARRANTIES SET FORTH IN
------------------------
THIS SECTION, THE PARTIES DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR ANY IMPLIED WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE.
6. Records; Inspection and FDA Reports.
-----------------------------------
6.1 Records Inspection. SeaMED shall keep full and complete records
------------------
with respect to its manufacture of the Instrument, including a Device History
Record which will document that each Instrument has been manufactured in
accordance with the DMR and Specifications, and all records of costs and
purchase price adjustments. All such manufacturing records shall be owned by
Aastrom. At Aastrom's request, SeaMED shall allow Aastrom or its designee to
inspect and audit such records. Additionally, at Aastrom's request, SeaMED
shall allow Aastrom to inspect the facility where the Instrument units are
manufactured, and to inspect any work in progress on the Instruments, for
quality control purposes. Further, at Aastrom's request, SeaMED shall make
available to Aastrom or its designee all information as Aastrom may reasonably
request relating to the purchase of components and to the manufacture, assembly
and shipment of the Instrument, and to the performance by SeaMED of its
obligations hereunder.
6.2 FDA Inspection Reports SeaMED shall provide Aastrom with
----------------------
copies of any FDA Form 483 observations, follow-up warning letters and/or close-
out reports for those portions of FDA CGMP / QSR compliance inspection reports
relating specifically to the Instrument or the System's regulatory submission
for any facility where the Instrument is manufactured and will work closely with
Aastrom when responding to Form 483 observations that impact the Instrument or
System. "*" SeaMED shall immediately report to Aastrom in writing any adverse
events, circumstances, or potential problems relating to SeaMED's registrations
and inspections that could adversely effect the Instrument or the System
approval. SeaMED shall furnish to Aastrom a copy of the facility registrations
and inspection reports specifically related to the System applicable as of the
date of this Agreement and throughout the term of this Agreement. SeaMED shall
allow Aastrom and its agent to review and inspect SeaMED's facilities, and
regulatory compliance files, and correspondence to and from the FDA
7
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
regarding inspections, registrations, and audits that pertain directly to the
Instruments or any regulatory submission with regard to the System.
7. Indemnification.
---------------
7.1 By SeaMED. SeaMED shall indemnify, defend and hold harmless
---------
Aastrom and its officers, directors, employees and agents for any loss, claim,
cost or damage arising out of any claim or action for bodily injury based on the
use of any Instrument unit to the extent that such loss, claim, cost or damage
results, directly or indirectly, (i) from a breach by SeaMED of its warranties
as set forth in this Agreement, or (ii) from any negligent, willful or
intentional acts by SeaMED.
7.2 By Aastrom. Aastrom shall indemnify, defend and hold harmless
----------
SeaMED and its officers, directors, employees and agents for any loss, claim,
cost or damage arising out of any claim or action for bodily injury based on the
use of any Instrument unit to the extent such loss, claim, cost or damage does
not result from SeaMED's acts described in Section 7.1 above, but rather
results, directly or indirectly, (i) from the negligent, willful or intentional
acts of Aastrom or its agents (other than SeaMED), (ii) from a breach by Aastrom
of its warranties with respect to the Instrument unit, or (iii) from any product
liability claim related to, or arising out of, the Instrument units, other than
those claims described in Section 7.1 above.
7.3 Patent Infringement. Aastrom shall indemnify and hold SeaMED
-------------------
harmless from any loss, damage, or cost (including reasonable attorneys' fees
and expenses) arising from any claim that the Instrument or its operation
infringes a United States patent, trademark, copyright, or other proprietary
right, including trade secrets. SeaMED shall indemnify and hold Aastrom
harmless from any loss, damage, or cost (including reasonable attorneys' fees
and expenses) arising from any claim that SeaMED's manufacturing processes or
methods infringes a United States patent or other proprietary right, including
trade secrets.
7.4 Control of Action. "*"
-----------------
7.5 Insurance. SeaMED agrees to provide and maintain, at its sole
---------
expense, comprehensive general liability insurance, including product liability
insurance, covering worldwide sales of, and bodily injury and property damage
claims of third parties for accidents or injuries arising out of the use of, the
Instrument units manufactured by SeaMED. Said insurance shall have a combined
single limit of $5 million per occurrence, as a total limit of liability for any
one occurrence with respect to bodily injury and property damage, with a
deductible of no higher than $25,000, and with no aggregate annual limit.
Within ten (10) days after the Effective Date, SeaMED will furnish to Aastrom
certificates of insurance evidencing that such insurance is in effect. "*"
8. "*".
---
8.1 Continuing Prohibition. At all times both during and after the
----------------------
term of this Agreement, SeaMED shall not make or sell, or enable others to make
or sell, the Instrument, excepting only for making and selling the Instrument
for Aastrom. Similarly, at all times
8
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
SeaMED shall not use, or enable others to use, any of Aastrom's proprietary
information as further described in Section 9 below.
8.2 "*"
8.3 No Use of Aastrom's Proprietary Information. "*", SeaMED shall
-------------------------------------------
not thereafter render any services or make or sell any product for any other
party which services or products use or arise out of technology developed or
owned by Aastrom or developed by SeaMED on behalf of Aastrom. Such methods or
systems shall include, without limitation, those presently in the course of
development by Aastrom and those which shall be developed by SeaMED and/or
Aastrom and/or the other design contractors in furtherance of this Agreement.
SeaMED acknowledges and agrees that Aastrom has a legitimate business purpose in
precluding SeaMED from divulging or otherwise using any and all information
derived by SeaMED in the course of performing this Agreement, and that Aastrom
intends to use the Instrument and related methods and systems for its own
business purpose and competitive advantage in the marketplace.
9. Proprietary Information.
-----------------------
9.1 Aastrom's Property; Use of Property by SeaMED. SeaMED recognizes
---------------------------------------------
the proprietary interest of Aastrom in the techniques, designs, specifications,
drawings and other technical data now existing or developed during the term of
this Agreement relating to the System. SeaMED acknowledges and agrees that such
techniques, designs, specifications, drawings and technical data relating to the
System, whether developed by SeaMED alone, in conjunction with others, or
otherwise, shall be and is the property of Aastrom. SeaMED shall cooperate
fully in communicating to Aastrom or its agents the property described above.
SeaMED hereby waives any and all right, title and interest in and to such
proprietary information. SeaMED shall have the right to use any technology,
information, samples, documents and other proprietary information of Aastrom
provided in connection with the manufacturing activities described herein solely
and exclusively for the purpose of manufacturing the Instrument for Aastrom and
for no other purpose.
9.2 Inventions. As to any improvement to the Instrument, any
----------
component thereof or any disposable used in connection therewith, which is made
by SeaMED's employees or agents in the course of SeaMED's work for Aastrom, or
as a result thereof, which improvement constitutes a patentable invention,
SeaMED hereby agrees to promptly disclose the same to Aastrom, and SeaMED hereby
agrees to assign to Aastrom, and SeaMED hereby agrees to cause the
inventor/employee to assign to Aastrom, all ownership rights in the invention;
and SeaMED shall cause said inventor/employee to sign appropriate patent
applications prepared at the expense of Aastrom.
9.3 Nondisclosure. SeaMED acknowledges and agrees that Aastrom is
-------------
entitled to prevent Aastrom's competitors from obtaining and utilizing Aastrom's
trade secrets. SeaMED agrees during the term hereof and thereafter to hold
Aastrom's trade secrets and other confidential or proprietary information in
strictest confidence and not to use them for purposes other than performance
hereunder, and not to disclose them or allow them to be disclosed, directly or
indirectly, to any other person or entity, other than to persons engaged by
SeaMED for
9
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
the purpose of performance hereunder, without Aastrom's prior written consent.
SeaMED acknowledges the confidential nature of its relationship with Aastrom and
of any information relating to the Instrument, Aastrom, or its distributors,
agents, clients or customers which SeaMED may obtain during the term hereof.
SeaMED also agrees to place any persons to whom said information is disclosed
for purposes of performance hereunder under a legal obligation to treat such
information as strictly confidential.
9.4 Confidentiality. The provisions and arrangements made under
---------------
this Agreement are confidential between parties. Each party shall protect
confidential information in the same manner it protects its own confidential
materials. Neither party shall make any reference to this Agreement or any
provision hereof in any publicly disseminated literature, printed matter, or
other publicity issued by or for it, except (i) as required by law, (ii) in
connection with a public or private offer or sale of securities, a business
collaboration or transaction, or a governmental or industry regulatory
communication, or (iii) in a fashion and at a time mutually agreed upon by both
parties after the execution of this Agreement. After Aastrom has sold an
Instrument in the ordinary course of business, SeaMED may add Aastrom to
SeaMED's list of customers and may show external product photographs for
marketing purposes but may not disclose the other business terms of this
Agreement to other third parties.
10. Term. The term of this Agreement shall commence on the
----
Effective Date and shall continue in full force and effect until "*" after the
date of shipment by SeaMED of an initial Instrument unit pursuant to this
Agreement. The term of this Agreement shall be renewed automatically after the
initial term for an indefinite continuous term unless (i) SeaMED gives Aastrom
written notice of its intent not to renew at least "*" prior to expiration of
the initial term; or (ii) Aastrom gives SeaMED written notice of its intent not
to renew at least "*" prior to expiration of the initial term. The renewed term
of this Agreement may be terminated at any time by SeaMED giving Aastrom a "*"
written notice of termination, or by Aastrom giving SeaMED a "*" written notice
of termination.
11. Default and Termination.
-----------------------
11.1 Breach. The occurrence of any one or more of the following
------
events shall constitute an event of default hereunder, and upon the expiration
of any applicable time period for a cure, shall constitute a breach of this
Agreement, giving rise to the rights identified in Section 11.2 hereof:
(a) If Aastrom shall default hereunder in the payment of funds
when due and such default continues for a period of thirty (30) days after
written notice thereof;
(b) If either party fails to faithfully perform or observe any
agreement or condition to be performed by such party and if such default
continues for a period of thirty (30) days after written notice thereof,
specifying the nature of such default;
(c) If any proceeding is commenced by or for either party under
any of the bankruptcy laws, or if either party is adjudged insolvent by any
court, makes an assignment for the benefit of creditors, or enters into a
general extension agreement with creditors that either
10
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
Party reasonably determines has materially impaired the other Party's ability to
perform under this Agreement;
(d) If SeaMED shall breach its obligation to timely repair any
defective Instrument unit pursuant to Section 1.7 or Section 5.2; or
(e) If SeaMED shall breach its obligations of "*"
confidentiality set forth in Sections "*" hereof.
(f) SeaMED breach shall not include events that are design
changes, software or other factors under the primary control of Aastrom or as
set forth in Section 12.2.
11.2 Remedy In addition to all rights and remedies provided under
------
law, the non-defaulting party shall have the right, in the event of default, to
terminate this Agreement and any obligations imposed on such non-defaulting
party hereunder subject to Section 11.3 below.
11.3 Obligations Upon Termination. Upon any termination of this
----------------------------
Agreement, (i) both parties shall fully perform all of their obligations
accruing up through the date of termination and "*"complete any work in process
if so requested by Aastrom upon termination of this Agreement.
12. Miscellaneous
-------------
12.1 Independent Contractors The relationship between Aastrom and
-----------------------
SeaMED hereunder shall be that of independent contractors, and nothing in this
Agreement shall be deemed to constitute a joint venture, partnership, agency or
employer/employee arrangement between the parties. Neither party shall have any
authority or power to bind the other party or to contract in the name of, or
make any representations or warranties, express or implied, on behalf of the
other party, or otherwise create any liability against the other party in any
way for any purpose.
12.2 Causes Beyond Control The parties hereto shall not be
---------------------
responsible for any loss or breach due to delay in delivery or performance
hereunder caused by governmental regulations, controls or directions, outbreak
of a state of emergency, hostilities, civil commotion, riots, epidemics, acts of
God, other natural casualties, fires, strikes, walkouts or other similar cause
or causes beyond the control of the parties. In the event that any party shall
be delayed in, or prevented from, performing its obligations under this
Agreement as a result of any of the foregoing, such party shall promptly notify
the other party of such delay or cessation in performance. "*"
12.3 Successors and Assigns The rights and remedies of Aastrom under
----------------------
this Agreement shall inure to the benefit of the successors, assigns and
transferees of Aastrom. "*"
12.4 Applicable Law. The construction of this Agreement, and the
--------------
rights and liabilities of the parties hereto, shall be governed by the laws of
the State of Michigan.
11
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
12.5 Severability Each term, condition or provision of this
------------
Agreement shall be viewed as separate and distinct, and in the event that any
such term, condition or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue in full
force and effect.
12.6 Entire Agreement; Modification and Waiver This Agreement
-----------------------------------------
contains the entire agreement and understanding between the parties and
supersedes all prior agreements and understandings between them relating to the
subject matter hereof, including but not limited to any terms contained in the
Development Agreement pertaining to the commercial manufacture by SeaMED of
Instrument units for Aastrom. This Agreement may not be amended or modified
except by an instrument in writing, signed by duly authorized representatives of
both parties. The waiver, express or implied, by any party of any right
hereunder or of any failure to perform or breach hereof by any other party shall
not be deemed to constitute a waiver of any other right hereunder or of any
claim in respect of any other failure to perform or breach.
12.7 Counterparts This Agreement may be executed in counterparts all
------------
of which together shall constitute one and the same instrument.
12.8 Dispute Resolution. Any controversy or claim arising out of or
------------------
relating to this Agreement, or the breach or interpretation hereof, shall be
resolved through good faith negotiation between the principals of the parties
hereto. Any controversy or claim not resolved by mutual agreement shall be
submitted to binding arbitration in Ann Arbor, Michigan, in accordance with the
rules of the American Arbitration Association ("AAA") as then in effect; and
judgment upon the award rendered in such arbitration shall be final and may be
entered in any court having jurisdiction thereof. Notice of the demand for
arbitration shall be filed in writing with the other party to this Agreement and
with the AAA. In no event shall the demand for arbitration be made after the
date when institution of legal or equitable proceedings based on such claim,
dispute or other matter in question would be barred by the applicable statute of
limitations. This agreement to arbitrate shall be specifically enforceable under
the prevailing arbitration law. The party most prevailing in said arbitration,
as determined by the arbitrator based upon the parties' respective claims and
positions, shall be entitled to recover from the non-prevailing party all
attorneys' fees and other costs incurred in connection with the arbitration
proceeding.
12.9 Notices. All notices and other communications permitted or
-------
required under this Agreement shall be in writing and shall be deemed to have
been given when received at the addresses set forth on the signature page
hereof, or at such other address as may be specified by one party in writing to
the other. Said written notice may be given by mail, telecopy, rush delivery
service, personal delivery or any other means.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
AASTROM:
AASTROM BIOSCIENCES, INC.
12
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
a Michigan corporation
By:
---------------------------------------
Name: R. Douglas Armstrong, Ph.D.
Title: President and CEO
P.O. Box 376
Ann Arbor, MI 48106
Attn: R. Douglas Armstrong, Ph.D.
Fax: (313) 665-0485
SEAMED:
SEAMED CORPORATION
a Washington corporation
By:
---------------------------------------
Name: W. Robert Berg
Title: President and CEO
14500 N.E. 87th Street
Redmond, WA 98052
Attn: W. Robert Berg
Fax: (425) 867-0622
13
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
EXHIBIT A
General Description of the System and the Instrument
1.1 The Aastrom Cell Production System represents technology for the ex vivo
growth and expansion of human stem and hematopoietic progenitor cells as
well as other human cells and tissues. In stem cell therapy, the system is
intended to provide cells in sufficient volume and with the necessary
characteristics to complete a stem cell transplantation or a nadir
prevention/rescue resulting from therapies such as high dose chemotherapy
or radiation. These cells are grown from a small starting population of
cells normally obtained from the bone marrow, umbilical cord blood or
peripheral blood. The use of Cell Production System provides for
production of cells that can be safely infused in a patient to augment
recovery of a compromised hematopoietic system.
1.2 The Aastrom Cell Production System consists of (1) a disposable Cell
Cassette cartridge where the growth and expansion of cells takes place, (2)
an Incubator unit and companion System Manager module that monitors the
expansion process, (3) Processor unit that facilitates the initial filling
and inoculation of cells into the Cell Cassette as well as the final
harvest of cells at the completion of the expansion process from the Cell
Cassette, (4) growth medium as required by the cell culture (to which
specified growth factors and glutamine are added), (5) harvest reagents
which facilitate the removal of the expanded cells from the Cell Cassette,
(6) a system Rack will be available to conveniently integrate multiple
Incubator units.
1.2.1 The disposal Cell Cassette contains the cell and medium contact
components for the incubation period and provides a functionally
closed environment in which the cell expansion can occur. The
Cell Cassette is provided fully assembled in a sterile package.
In addition to a Cell Culture Chamber, the medium contact
components include a reservoir for medium supply, a pump
mechanism for delivery of the medium to the growth chamber,
valves to facilitate filling and harvesting, a reservoir for the
collection of waste medium exiting the growth chamber, and a
reservoir for the collection of harvested cells.
The Cell Cassette also includes a gas chamber which is supplied
with a controlled mixture of gases for pH stability and
oxygenation of the growth chamber through a gas permeable,
hydrophobic membrane that separates the two chambers.
An Identification key containing a non-volatile memory device is
attached to the Cell Cassette at the beginning of use and
accessed by the System electronics during the cell expansion
process to record pertinent data. The Identification Key is
detached after cell harvest, and can be archived as part of the
patient specific cell expansion record.
A-1
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
1.2.2 The Incubator unit provides the biological and physical
environment to support the cell growth process. The Cell Cassette
is inserted into the Incubator unit after inoculation is complete
and controls: the flow of medium to the Cell Culture Chamber; the
temperature of the growth medium supply compartment; the
temperature of the growth chamber compartment; and the
concentration and flow rate of gases delivered to the gas
chamber. The Incubator unit provides various safety/alarm
parameters to ensure that the cell expansion process is
proceeding as expected.
The Incubator unit receives commands from keys on its front panel
and communicates with the operator through a central System
Manager. An integral Incubator display also provides information
to the operator. Up to fifty Incubator units can be connected to
the System Manager. Each Incubator has its own micro-processor
controlled systems and operates independently of the System
Manager. As such, it will continue to function in the event of
failure of the System Manager.
1.2.3 The Processor performs the initial setup of the Cell Cassette
with growth medium (supplemented with growth factors) and the
inoculation of cells. The same unit also performs the removal of
the cells from the Cell Cassette at the completion of the cell
expansion process. The System design provides for the appropriate
level of sterility assurance during the inoculation and harvest
procedures.
1.2.3.1 During initial set up and fill, the operator loads the
Cell Cassette onto the Processor, connects the medium
supply (supplemented with growth factors) to the Cell
Cassette and transfers the medium to an internal
reservoir. The operator is prompted to manually and
aseptically inject the cells into the Cell Cassette at
the appropriate time. The process then continues under
software control until the Cell Cassette is ready to be
placed in the Incubator unit for cell expansion.
1.2.3.2 At the completion of the expansion process, the
operator loads the Cell Cassette back into the
Processor, attaches the harvest reagents, and
harvesting of the expanded cells proceeds under
software control. At the completion of the harvest
process, the expanded cell product is contained in a
single container to facilitate washing and preparation
for direct infusion or cryopreservation.
1.2.4 The Growth Medium for the expansion of hematopoietic cells will
be distributed as a separate item in packaging that will
facilitate the addition of growth factors and glutamine followed
by sterile connection to the Cell Cassette just prior to use.
A-2
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
1.2.5 The Harvest Reagents needed for the process will be
distributed as separate items in packaging that will
facilitate an aseptic connection to the Cell Cassette for
cell harvest.
1.2.6 The system Rack conveniently integrates several Incubators
and the System Manager. The Rack organizes connections to
the facility and the inter connections between the various
modules.
1.2.7 The Application Key is preprogrammed to contain the
instructions required for automatic control of the Processor
and Incubator operation. It is inserted into the Cell
Cassette at the clinical site prior to inoculation of the
Cell Cassette and used by the Processor and Incubator to
record normal and abnormal processing events, as well as the
current state of cell production in the devices. It is the
procedure stored on the Application Key that determines the
controlled culture conditions needed to allow different
types of cells to survive, replicate and differentiate.
The Instrument consists of the components described in paragraphs 1.2.2
(Incubator and System Manager), 1.2.3 (Processor), 1.2.6 (Rack) and 1.2.7
(Application Key).
A-3
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
EXHIBIT B
Specifications for the Instruments
Instrument Specifications are defined in the following SeaMED documents
<TABLE>
<CAPTION>
Document No. Description
- ------------ -----------
<S> <C>
"*" Specification HDW Requirements Incubator Argonaut
"*" Specification HDW Requirements Processor Argonaut
"*" Specification HDW Requirements Rack Argonaut
"*" Specification HDW Requirements System Manager Argonaut
To be Determined Specification HDW Requirements Application Key Argonaut
</TABLE>
B-1
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
EXHIBIT C
Document Change Control Agreement
1. Purpose and Scope of This Agreement.
-----------------------------------
1.1 The objective of this agreement is to define the document change
control process for documents involved in SeaMED's manufacture of Instruments
for Aastrom.
1.2 "*"
1.3 "*"
1.4 "*"
2. "*"
2.1 "*"
2.2 "*"
2.2.1 "*"
2.2.2 "*"
2.2.3 "*"
2.2.4 "*"
2.3 "*"
3. "*"
3.1 "*"
3.2 "*"
3.3 "*"
3.4 "*"
3.5 "*"
3.6 "*"
3.7 "*"
C-1
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
4. "*"
4.1 "*"
4.2 "*"
5. Document Change Authorization.
-----------------------------
Aastrom Biosciences, Inc. designated representatives with authority to
approve/disapprove proposed changes. Aastrom Biosciences, Inc. is responsible
for providing SeaMED with updated names of designated representatives.
<TABLE>
<CAPTION>
Name (printed) Signature Initial
-------------- --------- -------
<S> <C> <C> <C>
Representative James Maluta
-------------------------- ----------------------- ---------
Alternate Bruce Husel
-------------------------- ----------------------- ---------
Alternate Brian Hampson
-------------------------- ----------------------- ---------
</TABLE>
Agreed to, for Aastrom Biosciences, Inc.
- -------------------------- -----
Name Date
Agreed to, for SeaMED Corp.
- -------------------------- -----
Document Control Supervisor Date
- -------------------------- -----
Project Director Date
C-2
<PAGE>
Exhibit 10.41
"Confidential Treatment Requested"
EXHIBIT D
Pricing
I. Purchase Price. The following formula schedule is used to calculate
--------------
the Purchase Price for the Instrument.
"*"
D-1
<PAGE>
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
This employment Agreement (the "Agreement") is entered into as of August 10,
1998, by and between Aastrom Biosciences, Inc., a Michigan corporation
("Employer") and WILLIAM ODELL ("Employee").
NEW THEREFORE, the parties agree as follows:
1. EMPLOYMENT Employer hereby engages Employee, and Employee hereby
accepts such engagement, upon the terms and conditions set forth herein.
2. DUTIES Employee is engaged as Sr. Vice President Product
Operations. Employee shall perform faithfully and diligently the duties
customarily performed by persons in the position for which employee is engaged,
together with such other reasonable and appropriate duties as Employer shall
designate from time to time. Employee shall devote Employee's full business time
and efforts to the rendition of such services and to the performance of such
duties. As a full-time employee of Employer, Employee shall not be entitled to
provide consulting services or other business or scientific services to any
other party, without the prior written consent of Employer.
3. COMPENSATION
3.1 BASE SALARY During the term of this Agreement, as
compensation for the proper and satisfactory performance of all duties to be
performed by Employee hereunder, Employer shall pay Employees at an annual
salary rate of One Hundred Eighty-Five Thousand Dollars ($185,000), payable in
semi-monthly installments, less required deductions for state and federal
withholding tax, Social Security and all other employee taxes and payroll
deductions. The base salary shall be subject to review and adjustment on an
annual basis.
4. TERM
4.1 COMMENCEMENT The employment relationship pursuant to this
Agreement shall commence on or before August 17th, 1998.
4.2 TERMINATION AT WILL Although Employer and Employee anticipate a
long and mutually rewarding employment relationship, either party may terminate
this Agreement, without cause, upon fourteen (14) days' prior written notice
delivered to the other. It is expressly understood and agreed that the
employment relationship is "at will," and with no agreement for employment for
any specified term, and with no agreement for employment for so long as
Employee performs satisfactorily. Provided, however, before Employer exercises
this right of termination at will, Employer shall first either (i) discuss with
Employee the needs of Employer and why Employee no longer meets those needs, or
(ii) discuss with Employee any concerns or dissatisfactions which Employer has
with Employee's performance, and give to Employee a reasonable opportunity to
remedy those concerns or dissatisfactions, to the reasonable satisfaction of
Employer.
4.3 TERMINATION FOR CAUSE Either party may terminate this
employment relationship immediately upon notice to the other party in the event
of any good cause, such as a default, dishonesty, neglect of duties, failure to
perform by the other party, or death or disability of Employee.
4.4 PAYMENT OF COMPENSATION UPON TERMINATION Upon termination for
cause, Employee shall be entitled to the compensation set forth as "base salary"
herein, prorated to the effective date of such termination as full compensation
for any and all claims of Employee under this Agreement.
1
<PAGE>
5. FRINGE BENEFITS
5.1 CUSTOMARY FRINGE BENEFITS Employee shall be entitled
to such fringe benefits as Employer customarily makes available to employees
of Employer engaged in the same or similar position as Employee ("Fringe
Benefits"). Such Fringe Benefits may include vacation leave, sick leave, and
health insurance coverage. Employer reserves the right to change the Fringe
Benefits on a prospective basis, at any time, effective upon delivery of
written notice to Employee.
5.2 ACCUMULATION Employee shall not earn and accumulate
unused vacation in excess of Fifteen (15) days. Employee shall not earn and
accumulate sick leave or other Fringe Benefits in excess of an unused amount
equal to twice the amount earned for one year. Further, Employee shall not be
entitled to receive payments in lieu of said Fringe Benefits, other than for
unused vacation leave earned and accumulated at the time the employment
relationship terminates.
6. INVENTION, TRADE SECRETS AND CONFIDENTIALITY
6.1 DEFINITIONS
6.1.1 Invention Defined. As used herein
"Invention" means inventions, discoveries, concepts, and ideas, whether
patentable or copyrightable or not, including but not limited to processes,
methods, formulas, techniques, materials, devices, designs, programs
(including computer programs), computer graphics, apparatus, products, as well
as improvements thereof or know-how related thereto, relating to any present
or anticipated business or activities of Employer.
6.1.2 Trade Secret Defined. As used herein "Trade
Secret" means, without limitation, any document or information relating to
Employer's products, processes or services, including documents and
information relating to Inventions, and to the research, development,
engineering or manufacture of Inventions, and to Employer's purchasing,
customer or supplier lists, which documents or information have been disclosed
to Employee or known to Employee as a consequence of or through Employee's
employment by Employer (including documents, information or Inventions
conceived, originated, discovered or developed by Employee), which is not
generally known in the relevant trade or industry.
6.2 INVENTIONS
6.2.1 Disclosure. Employee shall disclose promptly
to Employer each Invention, whether or not reduced to practice, which is
conceived or learned by Employee (either alone or jointly with others) during
the term of his employment with Employer. Employee shall disclose in
confidence to Employer all patent applications filed by or on behalf of
Employee during the term of his employment and for a period of three (3)
years thereafter. Any disclosure of an Invention, or any patent application,
made within one (1) year after termination of employment shall be presumed to
relate to an Invention made during Employee's term of Employment with
Employer, unless Employee clearly proves otherwise.
6.2.2 Employer Property; Assignment. Employee
acknowledges and agrees that all Inventions which are discovered, conceived,
developed, made, produced or prepared by Employee (alone or in conjunction
with others) during the duration of Employee's employment with Employer shall
be the sole property of Employer. Said property rights of Employer include
without limitation all domestic and foreign patent rights, rights of
registration or other protection under the patent and copyright laws, and all
other rights pertaining to the Inventions. Employee further agrees that all
services, products and Inventions that directly or indirectly result from
engagement with Company shall be deemed "works for hire" as that term is
defined in Title 17 of the United States Codes, and accordingly all rights
associated therewith shall vest in the Company. Notwithstanding the foregoing,
Employee hereby assigns to Employer all of Employee's right, title and
2
<PAGE>
interest in any such services, products and Inventions, in the event any such
services, products and Inventions shall be determined not to constitute "works
for hire."
6.2.3 Exclusion Notice. The Assignment by Employee of
Inventions under this Agreement does not apply to any Inventions which are owned
or controlled by Employee prior to the commencement of employment of Employee by
Employer (all of which are set forth on Exhibit "A" hereto). Additionally,
Employee is not required to assign an idea or invention where the Invention or
idea meets all of the following criteria; namely if the invention or idea: (i)
---
was created or conceived without the use of any of Employer's equipment,
supplies, facilities, or trade secret information, and (ii) was developed
entirely on Employee's own time, and (iii) does not relate to the business of
Employer, and (iv) does not relate to Employer's actual or demonstrably
anticipated research or development, and (v) does not result from any work
performed by Employee for Employer.
6.2.4 Patents and Copyrights; Attorney-in-Fact. Both before
and after termination of this Agreement (and with reasonable compensation paid
by Employer to Employee after termination), Employee agrees to assist the
Employer to apply for, obtain and enforce patents on, and to apply for, obtain
and enforce copyright protection and registration of, the Inventions described
in Section 6.2.2 in any and all countries. To that end, Employee shall (at
Employer's request) without limitation, testify in any proceeding, and execute
any documents and assignments determined to be necessary or convenient for use
in applying for, obtaining, registering and enforcing patent or copyright
protection involving any of the Inventions. Employee hereby irrevocably
appoints Employer, and its duly authorized officers and agents, as Employee's
agent and attorney-in-fact, to act for and in behalf of Employee in filing all
patent applications, applications for copyright protection and registration,
amendments, renewals, and all other appropriate documents in any way related
to the Inventions described in Section 6.2.2.
6.3 TRADE SECRETS
6.3.1 Acknowledgment of Proprietary Interest. Employee
recognizes the proprietary interest of Employer in any Trade Secrets of
Employer. Employee acknowledges and agrees that any and all Trade Secrets of
Employer, whether developed by Employee alone or in conjunction with others or
otherwise, shall be and are the property of Employer.
6.3.2 Covenant Not to Divulge Trade Secrets. Employee
acknowledges and agrees that Employer is entitled to prevent the disclosure of
Trade Secrets of Employer. As a portion of the consideration for the
employment of Employee and for the compensation being paid to Employee by
Employer, Employee agrees at all times during the term of the employment by
Employer and thereafter to hold in strictest confidence, and not to use,
disclose or allow to be disclosed to any person, firm, or corporation, Trade
Secrets of Employer, including Trade Secrets developed by Employee, other than
disclosures to persons engaged by Employer to further the business of
Employer, and other than use in the pursuit of the business of Employer.
6.3.3 Confidential Information of Others. Employee
represents and warrants that if Employee had any confidential information
belonging to others, Employee will not use or disclose to Employer any such
information or documents. Employee represents that his employment with
Employer will not require him to violate any obligation to or confidence with
any other party.
6.4 NO ADVERSE USE Employee will not at any time use Employer's
Trade Secrets or Inventions in any manner which may directly or indirectly have
an adverse effect upon Employer's business, nor will Employee perform any acts
which would tend to reduce Employer's proprietary value in Employer's Trade
Secrets or Inventions.
3
<PAGE>
6.5 RETURN OF MATERIALS AT TERMINATION In the event of any
termination of Employee's employment, Employee will promptly deliver to Employer
all materials, property, documents, data, and other information belonging to
Employer or pertaining to Trade Secrets or Inventions. Employee shall not take
any materials, property, documents or other information, or any reproduction or
excerpt thereof, belonging to Employer or containing or pertaining to any Trade
Secrets or Inventions.
6.6 REMEDIES UPON BREACH In the event of any breach by Employee
of the provision in this Section 6, Employer shall be entitled, if it so
elects, to institute and prosecute proceedings in any court of competent
jurisdiction, either in law or in equity, to enjoin Employee from violating
any of the terms of this Section 6, to enforce the specific performance by
Employee of any of the terms of this Section 6, and to obtain damages for any
of them, but nothing herein contained shall be construed to prevent such
remedy or combination of remedies as Employer may elect to Invoke. The failure
of Employer to promptly institute legal action upon any breach of this Section
6 shall not constitute a waiver of that or any other breach hereof.
7. COVENANT NOT TO COMPETE Employee agrees that, during Employee's
employment, Employee will not directly or indirectly compete with Employer in
any way, and that Employee will not act as an officer, director, employee,
consultant, shareholder, lender or agent of any other entity which is engaged in
any business of the same nature as, or in competition with, the business in
which Employer is now engaged, or in which Employer becomes engaged during the
term of Employee's employment, or which is involved in science or technology
which is similar to Employer's science or technology.
8. GENERAL PROVISIONS
8.1 ATTORNEYS' FEES In the event of any dispute or breach arising
with respect to this Agreement, the party prevailing in any negotiations or
proceedings for the resolution or enforcement thereof shall be entitled to
recover from the losing party reasonable expenses, attorneys' fees and costs
incurred therein.
8.2 AMENDMENTS No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by both
parties hereto. There shall be no implied-in-fact contracts modifying the terms
of this Agreement.
8.3 ENTIRE AGREEMENT This Agreement constitutes the entire
agreement between the parties with respect to the employment of Employee. This
Agreement supersedes all prior agreements, understandings, negotiations and
representation with respect to the employment relationship.
8.4 SUCCESSORS AND ASSIGNS The Rights and obligations of
Employer under this Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of Employer. Employee shall not be
entitled to assign any of Employee's rights or obligations under this
Agreement.
8.5 WAIVER Either party's failure to enforce any provision of this
Agreement shall not in any way be construed as a waiver of any such provision,
or prevent that party thereafter from enforcing each and every other provision
of this Agreement.
8.6 SEVERABLE PROVISIONS The provisions of this Agreement are
severable, and if any or more provisions may be determined to be judicially
unenforceable, in whole or in part, the remaining provisions shall nevertheless
be binding and enforceable.
8.7 EMPLOYMENT ELIGIBILITY During the term of this Agreement,
Employee shall maintain citizenship in the United States or documentation to
establish employment eligibility in compliance with the Federal Immigration
Reform and Control Act of 1986.
4
<PAGE>
9. EMPLOYEE'S REPRESENTATIONS Employee represents and warrants
that Employee (i) is free to enter this Agreement and to perform each of the
terms and covenants contained herein, (ii) is not restricted or prohibited,
contractually or otherwise, from entering into and performing this Agreement,
and (iii) will not be in violation or breach of any other agreement by reason
of Employee's execution and performance of this Agreement.
IN WITNESS THEREOF, the parties have executed this Agreement as of the
date set forth above.
EMPLOYER:
Aastrom Biosciences, Inc.
By: /s/ R. Douglas Armstrong
-----------------------------------
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
EMPLOYEE:
/s/ William Odell
- ---------------------------------------
William Odell
Address: 570 Chateaux Brione Dr.
-----------------------
Barrington, IL 60010
-----------------------
5
<PAGE>
EXHIBIT A
List of Prior Inventions
(Section 6.2.3)
None, other than the following:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
6
<PAGE>
Exhibit 11.1
AASTROM BIOSCIENCES, INC.
(a development stage company)
STATEMENT RE COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1996 (1) 1997 (1) 1998
---------- ---------- ---------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding (1)..................................... 1,812,000 6,328,000 13,363,000
Weighted average number of common shares
representing assumed conversion of Series A,
Series B, Series C, Series D and Series E Preferred
Stock from the date of issuance..................... 7,457,000 4,900,000 -
----------- ----------- ------------
Weighted average number of common and common
equivalent shares outstanding....................... 9,269,000 11,228,000 13,363,000
============ =========== ============
Computation of net loss applicable to common
shares (2):
Net loss......................................... $(9,917,000) $(14,288,000) $(17,233,000)
Dividends on 5.5% Convertible Preferred Stock... - - (351,000)
Charge related to issuance of 5.5% Convertible
Preferred Stock............................. - - (3,439,000)
----------- ------------ -------------
Net loss applicable to common shares.................. $(9,917,000) $(14,288,000) $ (21,023,000)
============ ============ =============
Net loss per common share (Basic and Diluted)......... $ (1.07) $ (1.27) $ (1.57)
</TABLE>
- -------------------------
(1) Reflects the February 1998 adoption, of Securities and Exchange Commission
Staff Accounting Bulletin No. 98 ("SAB 98"), which modified the methods used
in computing net loss per common share as previously set forth in SFAS 128.
As set forth in SAB 98, the Company has retroactively applied SAB 98 for all
periods presented in the accompanying financial statements.
(2) The computations of net loss per common share for the year ended June 30,
1998 include an adjustment for dividends paid on the 5.5% Convertible
Preferred Stock reflects a one-time charge of $3,439,000 related to the sale
of the such stock in December 1997. The one-time charge and dividends
affect only the computation of net loss per common share and are not
included in the computation of net loss for the periods.
<PAGE>
EXHIBIT 13.1
AASTROM BIOSCIENCES, INC.
1998 ANNUAL REPORT
ADVANCING THE PRACTICE OF CELL THERAPY
(Color cover has collage of male figure with small amount of cells leaving body,
surgery scene, globe, AastromReplicell(TM) System, large amount of cells going
back into male figure watermark over entire cover: infectious disease,
autoimmune disease, oncology, solid tissue repair)
- - COVER
MISSION
Aastrom Biosciences is pioneering clinical systems for the practical enablement
of ex vivo cell production and genetic modification of cells used in
transplantation therapies for the treatment of cancer and infectious diseases,
and in the restoration of tissues.
(Photo of AastromReplicell(TM) System)
I. PROFILE
-------
Aastrom Biosciences, Inc. (Nasdaq: ASTM) is developing automated clinical
systems designed to produce human cells to enable therapeutic procedures using
living cells for the restoration of normal tissues in patients treated for
cancer and other diseases. The Company's lead product candidate, the
AastromReplicell(TM) Cell Production System, is designed as a family of products
keyed by a multi-use instrumentation platform that operates single-use therapy-
specific kits tailored for each patient application. The AastromReplicell(TM)
System is currently in multi-site clinical trials for the production of both
bone marrow and umbilical cord blood cells to restore blood and immune system
function in patients following aggressive chemotherapy used to treat cancer and
other diseases.
The Company intends to obtain permission to affix the CE Mark to the
AastromReplicell(TM) System by year-end 1998, which is necessary for product
introduction in Europe. The Company also intends to initiate pivotal clinical
trials necessary to seek regulatory approval for product introduction in the
U.S. Designed to place patient-specific cell production capabilities directly
into patient treatment centers, the AastromReplicell(TM) System is being
developed to be the first cost-effective product to fill a current and growing
need in the emerging cell therapy market for access to needed numbers of
transplantable cells.
II. ACCOMPLISHMENTS
---------------
Steady progress has been made in several key aspects of the business:
. Initiation of stem cell therapy clinical trials in Europe;
. Announcement of initial positive clinical results and expansion of U.S. stem
cell therapy trials;
. Initiation, and then expansion of, a multi-center cord blood transplant
clinical trial;
. Award of several key pioneering patents;
<PAGE>
. Completion of two public equity financings totaling $16 million and award of
research grants providing funding of up to $1.3 million;
. Scientific journal publication of studies demonstrating reduction or purging
of tumor cells by the AastromReplicell(TM) System.
- - INSIDE FRONT COVER
TO OUR SHAREHOLDERS:
The evolution of a new medical technology from the laboratory to clinical
practice is both challenging and exciting. Aastrom Biosciences is in the
process of making this transition, and we are looking forward to changing the
lives of patients through our products for the growing practice of cell therapy,
and thereby building value for our shareholders.
There is an increasing need in medicine for the use of living cells to
transplant into patients to restore or repair different tissues that have been
damaged by disease, injury or toxic treatments. Numerous researchers around the
world have learned how to grow these valuable cells, but generally by using
highly technical, hands-on laboratory procedures which have not been practical
in a typical hospital setting. Aastrom has developed a novel platform product
line - the AastromReplicell(TM) Cell Production System - that is designed to
enable hospitals to routinely produce cells for transplantation therapies.
This year, Aastrom has successfully used prototypes of the AastromReplicell(TM)
System in clinical trials. In studies underway at multiple clinical sites in
the United States, bone marrow cells produced using the AastromReplicell(TM)
System were successfully used to complete a full bone marrow transplant in
cancer patients. Those same cells also enabled an otherwise ineffective blood
stem cell transplant to become effective. These demonstrations are an important
part of the foundation we are building for the use of this product in standard
stem cell therapy procedures for cancer patients.
Another type of clinical study was also initiated this year, designed for the
AastromReplicell(TM) System to produce transplant cells from donor umbilical
cord blood (UCB) samples. Children who have aggressive blood diseases, such as
leukemia, are in need of stem cells from a transplant to obtain a new blood and
immune system, but they lack a suitable bone marrow or blood stem cell donor.
Cord blood from donors has been shown to be an effective alternative source of
these cells and is being increasingly saved for these types of transplants.
Generally, the more cells available, the better the patient recovery, but
unfortunately, the quantity of cord blood available from a single donor is
limited, resulting in problematic recoveries and survival. The
AastromReplicell(TM) System is being used in a trial at Duke University Medical
Center (under the direction of Joanne Kurtzberg, M.D.) to increase the number of
transplantable cord blood cells in an effort to improve recovery outcomes in
children with these types of otherwise fatal blood diseases. This trial,
conducted under an FDA Investigational Device Exemption, was expanded this year
based on positive initial results. A similar clinical study, using
AastromReplicell(TM) System-expanded cord blood cells for adult cancer patients,
is also underway at Loyola University Medical Center in Chicago and Hackensack
Medical Center in New Jersey.
-2-
<PAGE>
In addition to stem cell therapy, the AastromReplicell(TM) System is designed to
be used for other cell types and therapies. In this regard, we have been
conducting preclinical studies with cells such as T-cells and dendritic cells to
be used in the treatment of cancer and viral infections. In an important new
development, the unique growth environment of the AastromReplicell(TM) System
has now been shown to produce certain cell types that have improved biologic
function compared
- - PAGE 1
with cells produced using other cell culture approaches. This important
advancement supports the design and function of the AastromReplicell(TM) System
to provide both clinical access to desired cells, as well as an improved
therapeutic cell product.
A principal objective for Aastrom is to now advance the AastromReplicell(TM)
System to commercialization. There are three key steps needed to accomplish
this objective: (i) complete the transition of the AastromReplicell(TM) System
from prototype to the production level; (ii) demonstrate the use of the
AastromReplicell(TM) System in clinical treatments; and (iii) gain approval from
the applicable regulatory agencies.
Aastrom is on track to have the AastromReplicell(TM) System platform and the
lead stem cell therapy kits at final production level as early as the end of
1998, after which we will pursue the CE Mark necessary to begin marketing in
certain European countries. In the United States, the production- level system
will be used to begin the pivotal clinical trials necessary to support an FDA
regulatory filing. The clinical utility of the system is now being demonstrated
in our clinical trials. As these trial results are published in medical
journals, the medical marketplace will become increasingly informed of the
AastromReplicell(TM) System's potential for the treatment of patients.
To support this progress, Aastrom has been growing and we now have approximately
85 people on staff, with key personnel additions this year in our quality
system, clinical, regulatory and product support areas. We continue to conduct
our manufacturing through contract relationships with specialized medical device
manufacturers. Toward this end, we completed our commercial instrument
manufacturing agreement with SeaMed Corporation (Nasdaq: SEMD) this year.
As you are aware, in recent months small cap healthcare stocks have suffered a
valuation decline. Data provided by SG Cowen Securities indicate that this
sector - which includes Aastrom - declined over 40% from August 1997 to August
1998. As a member of this group, Aastrom's stock has also dropped over this
period. While disappointing, we do not believe that this trend reflects our
extensive progress over this period which has positioned us for the completion
of the AastromReplicell(TM) System, the initiation of U.S. pivotal trials, and
our preparation for European launch of the AastromReplicell(TM) System for stem
cell therapy.
-3-
<PAGE>
The emergence of new cell therapies holds a promising and bright future in
improving patient care, and Aastrom has strengthened its position as a leader to
enable key therapies to transition from the laboratory to the hospital. Your
support of the Company is an integral part of our progress -- and it is this
progress that should, in return, enhance the value for you, our shareholders.
Sincerely,
(Signature, and color photo of Douglas Armstrong)
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
September 30, 1998
- - PAGE 2
III. AASTROM'S ROLE IN THE NEXT GENERATION OF CELL THERAPY
-----------------------------------------------------
(Color schematic of AastromReplicell(TM) System Person getting prescription
from doctor for cells, operator of AastromReplicell(TM) System producing cells,
illustration of male figure receiving cells)
Cell therapy, the practice of using living cells to treat a medical disorder,
has been used for many years, beginning with simple, but very effective, blood
and platelet transfusions. More recently, the field of cell therapy has
expanded to include bone marrow, or stem cell transplants, primarily used for
the treatment of cancer patients following aggressive disease treatments.
Critical to the success of cell therapies is the ability for physicians to have
access to the cells necessary for transplantation. Current approaches to cell
therapy have involved the collection of large amounts of cells from patients or
matched donors, which are then transplanted to the patient. Large volume cell
collection is often time consuming, costly and invasive to the patient or donor.
The AastromReplicell(TM) System is designed to be the first cost-effective
clinical system to place patient-specific cell manufacturing capabilities
directly in patient treatment centers, thereby enabling physicians to access
cells as they do with traditional pharmaceuticals. An improved availability and
access to cells should expand the use of current cell therapies, as well as
increase the breadth of new disease treatments with cells.
The AastromReplicell(TM) System is designed as a family of products consisting
of an instrumentation platform that operates single-use, patient-specific
therapy kits. The initial application of the AastromReplicell(TM) System is in
the production of cells for stem cell therapy. However, once established for
use in stem cell therapy, the Company plans to leverage the cell production
capabilities of the AastromReplicell(TM) System across multiple cell therapy
opportunities directed toward the treatment of cancer, infectious diseases,
autoimmune diseases and in the restoration of solid tissues.
STEM CELL THERAPY Stem cell therapy is an established and reimbursed medical
procedure used in patients to restore blood and immune system function following
very aggressive, and
-4-
<PAGE>
quite toxic therapies to treat cancer and other diseases. Approximately 50,000
stem cell transplant procedures are currently performed worldwide each year.
Current procedures for obtaining the cells necessary for transplant (bone marrow
harvest or peripheral blood stem cell "PBSC" collections) are time consuming,
expensive and invasive to the patient or donor. The AastromReplicell(TM) System
provides an alternative to these collection procedures by enabling the
production of cells from a small starting volume of either bone marrow or
umbilical cord blood cells over a twelve-day expansion period, after which cells
are available for transplant to the patient. Further, the automation enabled
through the AastromReplicell(TM) System allows physician and patient access to
cells, which are manufactured directly on-site by hospital personnel.
(Color chart comparing Cell Therapy Challenge to Aastrom Solution)
- - PAGE 3
The AastromReplicell(TM) System is being evaluated in multi-site clinical trials
in the U.S. and Europe. The initial goals of the Company's clinical trial
program are to obtain a Premarket Approval (PMA) in the U.S., necessary to
market the AastromReplicell(TM) System for autologous stem cell therapy and
umbilical cord blood transplants, and to obtain approval in Europe to market the
AastromReplicell(TM) System for a variety of cell therapy applications, by
affixing the CE Mark.
BONE MARROW TRANSPLANTATION IN CANCER PATIENTS In collaboration with its
clinical trial partners at Loyola University Medical Center and Hackensack
University Medical Center, Aastrom is conducting two clinical trials evaluating
stem cells produced in the AastromReplicell(TM) System from a small starting
amount of bone marrow. The first study utilizes cells produced in the
AastromReplicell(TM) System from small aspirate bone marrow collections as the
sole cellular support following ablative chemo-therapy. Initial results from the
first study have demonstrated the ability of the AastromReplicell(TM) System to
safely and reliably produce stem and progenitor cells that engraft and restore
blood and immune system function in cancer patients who had undergone very
aggressive chemotherapy. Further, the small volume aspirate, along with a
purging of contaminated tumor cells during the stem cell production has
indicated a way to offer patients a transplant with a lower risk of receiving
back tumor cells. In a second study, the AastromReplicell(TM) System is being
used to complement traditional therapies by augmenting stem cells collected from
a single PBSC apheresis procedure. The objectives of this study are to
demonstrate that an optimal targeted transplant recovery can be achieved using
AastromReplicell(TM) System-produced cells with a PBSC dose of cells that would
otherwise not provide this desired outcome. This procedure appears to improve
the certainty of procedure outcome by providing a more reliable means of cell
collection and patient recovery. (Color graphic of a small blood bag with
caption: Aastrom's cell production process begins with a small starting volume
of cells taken either from the patient or a donor. Color graphic of large blood
bag with caption: Using theAastromReplicell(TM) System, the small quantity of
cells is expanded to provide patients with therapeutic quantities of cells
necessary for treatment.)
-5-
<PAGE>
UMBILICAL CORD BLOOD: NEW HOPE FOR CANCER AND BLOOD DISEASE PATIENTS Aastrom
has also initiated clinical feasibility trials to evaluate umbilical cord blood
(UCB) cells produced in the AastromReplicell(TM) System to improve transplant
recoveries of pediatric and adult patients requiring donor-derived (or
allogeneic) stem cell transplants. Preliminary results of the pediatric
transplants indicated that AastromReplicell(TM) System-produced cells were safe
and well tolerated by the patients, and that transplant cell recoveries during
the 100-day post-transplant period were very favorable. Based on the positive
data, this pediatric trial was expanded from 10 to 22 patients in May 1998. The
banking infrastructure together with the expansion capabilities of the
AastromReplicell(TM) System may lead to UCB as a promising new source of cells
for therapeutic use. (Color photo of Dr. Joanne Kurtzberg with Fabiana Leibel,
cord blood transplant patient with the caption: "We are pleased with Fabiana's
progress following her cord blood transplant using cells produced in the
AastromReplicell(TM) System." Joanne Kurtzberg, M.D. Director, Pediatric Bone
Marrow Transplant Program at Duke University Medical Center (right) with Fabiana
Leibel, cord blood transplant patient
- - PAGE 4
IV. BOARD OF DIRECTORS
------------------
Robert J. Kunze, (Chairman)
Partner, McFarland and Dewey
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer,
Aastrom Biosciences, Inc.
Stephen G. Emerson, M.D., Ph.D.
Professor of Medicine,
University of Pennsylvania
Mary L. Campbell
General Partner,
Enterprise Development Fund
Horst R. Witzel, Dr.-Ing.
Chairman of the Board of Executive Directors (Retired),
Schering AG
Edward C. Wood, Jr.
President,
COBE BCT, Inc.
V. CORPORATE OFFICERS
------------------
-6-
<PAGE>
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
William L. Odell
Senior Vice President Product Operations
Todd E. Simpson
Vice President Finance and Administration,
Chief Financial Officer
Alan K. Smith, Ph.D.
Vice President Research
Bruce V. Husel
Vice President Quality Systems
VI. CORPORATE HEADQUARTERS
----------------------
24 Frank Lloyd Wright Dr., Lobby L
Ann Arbor, MI 48105
Tel: (734) 930-5777
Fax: (734) 665-0485
VII. TRANSFER AGENT AND REGISTRAR
----------------------------
Communications concerning stock transfer requirements,
lost certificates and change of address should be directed to:
VIII. CONTINENTAL STOCK TRANSFER & TRUST COMPANY
------------------------------------------
Two Broadway
New York, NY 10004
Tel: (212) 509-4000
IX. GENERAL COUNSEL
---------------
Gray Cary Ware & Freidenrich
4365 Executive Dr., Suite 1600
San Diego, CA 92121
X. INDEPENDENT ACCOUNTANTS
-----------------------
PricewaterhouseCoopers LLP
2050 N. Woodward Ave, Suite 200
Bloomfield Hills, MI 48304
-7-
<PAGE>
XI. INVESTOR RELATIONS
------------------
General shareholder inquiries, including requests for the Company's Annual
Report on Form 10-K should be directed to:
Todd E. Simpson
Vice President Finance and Administration,
Chief Financial Officer
Aastrom Biosciences, Inc.
P.O. Box 376
Ann Arbor, MI 48106
Tel: (734) 930-5777
Fax: (734) 665-0485
http://www.aastrom.com
XII. ANNUAL MEETING
--------------
The Annual Meeting of Shareholders will be held on Wednesday, November 11, 1998
at 9:00 a.m. at:
Holiday Inn North Campus
3600 Plymouth Rd.
Ann Arbor, MI 48105
XIII. STOCK LISTING
-------------
Since February 4, 1997 the Company's Common Stock has been quoted on the Nasdaq
National Market under the symbol "ASTM". The following table sets forth the
high and low sales prices per share of Common Stock as reported on the Nasdaq
National Market:
Price Range of Common Stock
Period ended 6/30/97: High Low
3rd Quarter 7 5/8 5 1/4
4th Quarter 8 1/2 3 1/2
Year ended 6/30/98:
1st Quarter 9 15/16 3 1/4
2nd Quarter 8 1/8 4 3/8
3rd Quarter 6 1/2 4 3/8
4th Quarter 6 3/4 3 1/2
As of August 31, 1998, there were approximately 190 holders
of record of the Common Stock. The Company has never
paid any cash dividends on its Common Stock and does not
-8-
<PAGE>
anticipate paying such cash dividends in the foreseeable future. The Company
currently anticipates that it will retain all future earnings, if any, for use
in the development of its business.
XIV. TRADEMARKS
----------
Aastrom(TM), AastromReplicell(TM) System and the Company's stylized logo are
registered trademarks of Aastrom Biosciences, Inc.
This document contains forward-looking statements, including without
limitation statements concerning product development objectives, clinical trial
results, regulatory filings and anticipated reviews, and potential advantages of
the AastromReplicellTM System, which involve certain risks and uncertainties.
Actual results may differ significantly from the expectations contained in the
forward-looking statements. Among the factors that may result in differences are
the results obtained from clinical trial and development activities, regulatory
approval requirements and outcomes, and the availability of resources. These and
other significant factors are discussed in greater detail in Aastrom's Annual
Report on Form-10K and other filings with the Securities and Exchange
Commission.
- - BACK INSIDE COVER
(Color Logo of Aastrom Biosciences, Inc.)
24 Frank Lloyd Wright Dr., Lobby L
Ann Arbor, MI 48105
Tel: (734) 930-5777
Fax: (734) 665-0485
- - BACK COVER
-9-
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the fiscal years ended June 30, 1996, 1997
and 1998 and for the period from Inception to June 30, 1998 and the balance
sheet data at June 30, 1997 and 1998, are derived from, and are qualified by
reference to, the audited financial statements included in the Company's report
on Form 10-K and should be read in conjunction with those financial statements
and notes thereto. The statement of operations data for the fiscal years ended
June 30, 1994 and 1995, and the balance sheet data at June 30, 1994, 1995 and
1996, are derived from audited financial statements not included herein. The
data set forth below are qualified by reference to, and should be read in
conjunction with, the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended June 30, Inception to
------------------------------------------------------------------------ June 30,
1994 1995 1996 1997 1998 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development agreements... $ 49,000 $ 396,000 $ 1,342,000 $ 230,000 $ 3,000 $ 2,020,000
Grants................................ 823,000 121,000 267,000 148,000 246,000 2,389,000
------------ ------------ ------------ ------------ ------------ ------------
Total revenues.......................... 872,000 517,000 1,609,000 378,000 249,000 4,409,000
Costs and expenses:
Research and development.............. 5,627,000 4,889,000 10,075,000 13,357,000 15,498,000 53,930,000
General and administrative............ 1,565,000 1,558,000 2,067,000 1,953,000 2,858,000 11,900,000
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses................ 7,192,000 6,447,000 12,142,000 15,310,000 18,356,000 65,830,000
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations.................... (6,320,000) (5,930,000) (10,533,000) (14,932,000) (18,107,000) (61,421,000)
Other income (expense):
Interest income....................... 245,000 279,000 678,000 676,000 886,000 3,138,000
Interest expenses..................... (65,000) (66,000) (62,000) (32,000) (12,000) (263,000)
------------ ------------ ------------ ------------ ------------ ------------
Net loss................................ $ (6,140,000) $ (5,717,000) $ (9,917,000) $(14,288,000) $(17,233,000) $(58,546,000)
============ ============ ============ ============ ============ ============
Net loss applicable to
common shares......................... $ (6,140,000) $ (5,717,000) $ (9,917,000) $(14,288,000) $(21,023,000)
============ ============ ============ ============ ============
Net loss per common share (Basic and
diluted).............................. $ (1.00) $ (.78) $ (1.07) $ (1.27) $ (1.57)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding.................... 6,127,000 7,309,000 9,269,000 11,228,000 13,363,000
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $ 6,730,000 $ 11,068,000 $ 10,967,000 $ 17,007,000 $ 11,212,000
Working capital......................... 6,187,000 10,319,000 9,851,000 15,600,000 10,121,000
Total assets............................ 8,227,000 12,551,000 12,673,000 18,410,000 12,374,000
Long-term capital lease
obligations........................... 425,000 412,000 189,000 65,000 -
Deficit accumulated during the
development stage..................... (11,391,000) (17,108,000) (27,025,000) (41,313,000) (58,897,000)
Total shareholders' equity.............. 6,985,000 11,186,000 10,850,000 16,583,000 10,846,000
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Since its inception, the Company has been in the development stage and engaged
in research and product development, conducted principally on its own behalf but
also in connection with various collaborative research and development
agreements with other entities. The Company does not expect to generate positive
cash flows from operations for at least the next several years and until product
sales commence. Until product sales commence, the Company expects that its
revenue sources will continue to be limited to grant revenue, research funding
and milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future cash payments and revenues,
if any, will be subject to significant fluctuations, based in part on the
success of the Company's research activities, the receipt of necessary
regulatory approvals, the timing of the achievement of certain other milestones
and the extent to which associated costs are reimbursed under grant or other
arrangements. Substantially all of the Company's revenues from product sales, if
any, will be subject to the Company's obligation to make aggregate royalty
payments of up to 2% to certain licensors of its technology. Further, under the
Company's Distribution Agreement with Cobe, Cobe will perform marketing and
distribution activities and in exchange will receive approximately 38% to 42% of
the Company's product sales in the area of stem cell therapy, subject to
negotiated discounts and volume-based adjustments. Research and development
expenses may fluctuate due to the timing of expenditures for the varying stages
of the Company's research and clinical development programs. Research and
development expenses will increase as product development programs and
applications of the Company's products progress through research and development
stages. Under the Company's License Agreement with Immunex, annual renewal fees
of $1,000,000 are payable in each of the next two fiscal years. Under the
Company's Distribution Agreement with Cobe, regulatory approval activities for
the Company's products for stem cell therapies outside of the United States will
be conducted, and paid for, by Cobe. As a result of these and other factors, the
Company's results of operations have fluctuated and are expected to continue to
fluctuate significantly from year to year and from quarter to quarter and
therefore may not be comparable to or indicative of the result of operations for
any future periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In the
near term, the Company plans moderate growth in employee headcount necessary to
address increasing requirements in the areas of product development, research,
clinical and regulatory affairs, quality systems and administration. Assuming
capital is available to finance such growth, the Company's operating expenses
will continue to increase as a result. At least until such time as the Company
enters into arrangements providing research and development funding or initiates
product sales, the net loss will continue to increase as well. The Company has
never been profitable and does not anticipate having net income unless and until
product sales commence. Through June 30, 1998, the Company has accumulated
losses of $58,546,000. There can be no assurance that the Company will be able
to achieve profitability on a sustained basis, if at all.
RESULTS OF OPERATIONS
Total revenues were $249,000 in 1998, $378,000 in 1997 and $1,609,000 in 1996.
Grant revenues increased to $246,000 in 1998 from $148,000 in 1997 and were
$267,000 in 1996, reflecting the timing of grant awards and related research
activities, to the extent that such associated costs are reimbursed under the
grants. Grant revenues accounted for 99%, 39% and 17% of total revenues for the
years ended June 30, 1998, 1997 and 1996, respectively, and are recorded on a
cost-reimbursement basis. Revenues from research and development agreements
totaled $3,000 in 1998, $230,000 in 1997 and $1,342,000 in 1996. Revenues in
1996, reflect research funding received by the Company under its collaboration
with Rhone-Poulenc Rorer, Inc. (RPR) which commenced in September 1995 and ended
in September 1996. Revenues from RPR accounted for 52% and 83% of such revenue
in 1997 and 1996, respectively.
<PAGE>
Total costs and expenses were $18,356,000 in 1998, $15,310,000 in 1997 and
$12,142,000 in 1996. The increases in costs and expenses in 1998 and 1997 are
primarily the result of increases in research and development expense to
$15,498,000 in 1998 from $13,357,000 in 1997 and $10,075,000 in 1996. Research
and development expense includes charges of $1,100,000, $1,000,000 and
$1,500,000 for the years ended June 30, 1998, 1997 and 1996, respectively,
representing license fee payments pursuant to the Company's supply agreement
with Immunex. The increases in research and development expense reflect
increased product and clinical development activities for the AastromReplicell
Cell Production System (System). General and administrative expenses were
$2,858,000 in 1998, $1,953,000 in 1997 and $2,067,000 in 1996. General and
administrative expenses, which decreased slightly in 1997 compared to 1996, but
increased in 1998, reflect increased finance, legal and other administrative and
marketing expenses in support of the Company's product development and research
activities.
Interest income was $886,000 in 1998, $676,000 in 1997 and $678,000 in 1996. The
fluctuations in interest income are due primarily to corresponding changes in
the levels of cash, cash equivalents and short-term investments for such
periods. Interest expense was $12,000 in 1998, $32,000 in 1997 and $62,000 in
1996, reflecting decreasing amounts outstanding under capital leases during
these periods.
The Company's net loss was $17,233,000, or $1.57 per common share in 1998,
$14,288,000, or $1.27 per common share in 1997 and $9,917,000, or $1.07 per
common share in 1996. The computations of net loss per common share for the year
ended June 30, 1998 includes an adjustment for dividends paid on preferred stock
that was issued by the Company in December 1997 and reflects a one-time charge
of $3,439,000 related to the sale of the preferred stock. The one-time charge
and dividends affect only the computation of net loss per common share and are
not included in the net loss for the periods. The Company expects to report
substantial net losses until product sales commence.
The Company has not generated any profits to date and therefore has not paid any
federal income taxes since inception. At June 30, 1998, the Company's Federal
tax net operating loss and tax credit carryfowards were $57,002,000 and
$1,626,000, respectively, which will expire from 2004 through 2018, if not
utilized. The Company underwent an ownership change in October 1993, which has
resulted in a limitation under which the Company can utilize a portion of its
net operating loss carryforward amounting to $1,153,000 per year. As of June
1998, the portion of the Company's net operating loss that remains subject to
this limitation is $1,337,000 and therefore is not expected to ultimately effect
the Company's ability to utilize the benefit. In July 1998, the Company issued
shares of 1998 Series I Convertible Preferred Stock which resulted in an annual
limitation of $3,136,000, which applies to losses incurred between October 1993
and July 1998. The Company's ability to utilize its net operating loss and tax
credit carryforwards may become subject to further annual limitation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through public
and private sales of its equity securities, which, from inception through June
30, 1998, have totaled approximately $69,404,000 and, to a lesser degree,
through grant funding, payments received under research agreements and
collaborations, interest earned on cash, cash equivalents, and short-term
investments, and funding under equipment leasing agreements. These financing
sources have historically allowed the Company to maintain adequate levels of
cash and other liquid investments. Under the Company's primary equipment leasing
agreement, the lessor is granted a security interest in all of the Company's
property and assets.
The Company's combined cash, cash equivalents and short-term investments totaled
$11,212,000 at June 30, 1998, a decrease of $5,795,000 from June 30, 1997. The
primary uses of cash, cash equivalents and short-term investments during the
year ended June 30, 1998 included $15,459,000 to finance the Company's
operations and working capital requirements, $234,000 in capital equipment
additions and $124,000 in scheduled debt payments. During the years ended June
30, 1997 and 1998, the Company raised net proceeds of $19,885,000 and
$9,930,000, respectively, through the public sale of its equity securities. In
<PAGE>
addition, the Company completed the sale of $5,000,000 of its 1998 Series I
Convertible Preferred Stock in July 1998 and will issue an additional $3,000,000
of its 1998 Series II Convertible Preferred Stock upon meeting certain
conditions.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments and the cost of product
commercialization. The Company does not expect to generate a positive cash flow
from operations for at least the next several years due to the expected increase
in spending for research and development programs and the expected cost of
commercializing its product candidates. The Company intends to seek additional
funding through research and development agreements with suitable corporate
collaborators, grants and through public or private financing transactions. The
Company anticipates that its available cash resources and expected interest
income thereon, will be sufficient to finance the development and manufacture of
the AastromReplicell Cell Production System for use in clinical trials, expanded
clinical trials, other research and development and working capital and other
corporate requirements until mid 1999. This estimate is based on certain
assumptions which could be negatively impacted by the matters discussed under
this heading and under the caption "Business Risks" in the Company's Annual
Report on Form 10-K. The Company expects that its primary sources of capital for
the foreseeable future will be through collaborative arrangements and through
the public or private sale of its debt or equity securities. There can be no
assurance that such collaborative arrangements, or any public or private
financing, will be available on acceptable terms, if at all, or can be
sustained. Several factors will affect the Company's ability to raise additional
funding, including, but not limited to, market volatility of the Company's
Common Stock and economic conditions affecting the public markets generally or
some portion or all of the technology sector. If adequate funds are not
available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research and development programs, which may have a
material adverse effect on the Company's business. See "Business Risks--Future
Capital Needs; Uncertainty of Additional Funding" in the Company's 1998 Annual
Report on Form 10-K and Notes to Financial Statements included herein.
The Company is currently evaluating the impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems. The Company is substantially complete with its assessment
of potential year 2000 problems, and based upon available information, believes
that it is substantially year 2000 compliant and that the costs of correcting
year 2000 processing problems are not expected to have a material adverse impact
on the Company's financial position, results of operations or cash flows in
future periods. There can however be no assurance that all of the Company's
information systems will be year 2000 compliant or that the systems of other
companies and government agencies on which the Company relies will be converted
in a timely manner. Such failure could cause delays in the Company's ability to
process transactions or otherwise conduct business, resulting in material
financial risk.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which sets forth additional requirements for companies to report in the
financial statements Comprehensive Income in addition to Net Income. Upon
adoption of SFAS 130, the Company will present comprehensive income in its
financial statements for earlier periods. The Company currently expects that
adopting SFAS 130 for its previously issued financial statements will primarily
affect the treatment of preferred stock dividends and yields and the one-time
charge associated with the sale of its 5.5% Preferred Stock. The Company will
adopt SFAS 130 effective July 1, 1998 and has not yet determined the manner in
which comprehensive income will be presented.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
------
Report of Independent Accountants.................................. 2
Balance Sheets as of June 30, 1997 and 1998........................ 3
Statements of Operations for the years ended June 30, 1996, 1997
and 1998 and for the period from March 24, 1989 (Inception)
to June 30, 1998................................................. 4
Statements of Shareholders' Equity from March 24, 1989 (Inception)
to June 30, 1998................................................. 5
Statements of Cash Flows for the years ended June 30, 1996, 1997
and 1998 and for the period from March 24, 1989 (Inception) to
June 30, 1998.................................................... 6
Notes to Financial Statements...................................... 7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Aastrom Biosciences, Inc. (a
development stage company) at June 30, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, and for the period from March 24, 1989 (Inception) to June 30,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
August 7, 1998
2
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 1,943,000 $ 2,078,000
Short-term investments................................. 15,064,000 9,134,000
Receivables............................................ 229,000 167,000
Prepaid expenses....................................... 126,000 270,000
------------ ------------
Total current assets................................ 17,362,000 11,649,000
PROPERTY, NET............................................ 1,048,000 725,000
------------ ------------
Total assets........................................... $ 18,410,000 $ 12,374,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 1,508,000 1,313,000
Accrued employee expenses.............................. 130,000 150,000
Current portion of capital lease obligations........... 124,000 65,000
------------ ------------
Total current liabilities........................... 1,762,000 1,528,000
CAPITAL LEASE OBLIGATIONS................................ 65,000 -
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares authorized -
5,000,000; shares issued and outstanding - 0 and
2,200,000, respectively................................ - 9,930,000
Common Stock, no par value; shares authorized -
40,000,000; shares issued and outstanding - 13,275,208
and 13,639,817, respectively........................... 58,073,000 59,474,000
Deficit accumulated during the development stage......... (41,313,000) (58,897,000)
Shareholder notes receivable............................. (167,000) -
Stock purchase warrants.................................. - 335,000
Unrealized gains (losses) on investments................. (10,000) 4,000
------------ ------------
Total shareholders' equity............................. 16,583,000 10,846,000
------------ ------------
Total liabilities and shareholders' equity............ $ 18,410,000 $ 12,374,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
March 24, 1989
Year ended June 30, (Inception) to
------------------------------------------------- June 30,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Research and development agreements.................... $ 1,342,000 $ 230,000 $ 3,000 $ 2,020,000
Grants................................................. 267,000 148,000 246,000 2,389,000
------------ ------------ ------------ ------------
Total revenues........................................ 1,609,000 378,000 249,000 4,409,000
COSTS AND EXPENSES:
Research and development............................... 10,075,000 13,357,000 15,498,000 53,930,000
General and administrative............................. 2,067,000 1,953,000 2,858,000 11,900,000
------------ ------------ ------------ ------------
Total costs and expenses.............................. 12,142,000 15,310,000 18,356,000 65,830,000
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS.................................... (10,533,000) (14,932,000) (18,107,000) (61,421,000)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income........................................ 678,000 676,000 886,000 3,138,000
Interest expense....................................... (62,000) (32,000) (12,000) (263,000)
------------ ------------ ------------ ------------
Other income.......................................... 616,000 644,000 874,000 2,875,000
------------ ------------ ------------ ------------
NET LOSS................................................ $ (9,917,000) $(14,288,000) $(17,233,000) $(58,546,000)
============ ============ ============ ============
COMPUTATION OF NET LOSS APPLICABLE TO COMMON SHARES:
Net loss............................................... $ (9,917,000) $(14,288,000) $(17,233,000)
Dividends on preferred stock........................... - - (351,000)
Charge related to issuance of preferred stock.......... - - (3,439,000)
------------ ------------ ------------
Net loss applicable to Common Shares.................... $ (9,917,000) $(14,288,000) $(21,023,000)
============ ============ ============
NET LOSS PER COMMON SHARE (Basic and Diluted)........... $ (1.07) $ (1.27) $ (1.57)
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding.......................... 9,269,000 11,228,000 13,363,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
accumulated
Preferred Stock Common Stock during the
------------------------ ----------------------- development
Shares Amount Shares Amount stage
---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 24, 1989 (Inception)............... - $ - - $ - $ -
Non-cash issuance of Common Stock............... 454,545 -
Issuance of Series A Preferred Stock at $1.00
per share in August 1989....................... 1,500,000 1,500,000
Issuance of Series A Preferred Stock in March
1991 at $1.00 per share, net of issuance
costs of $5,000................................ 1,000,000 995,000
Issuance of Series B Preferred Stock in April
1992 at $2.00 per share, net of issuance
costs of $46,000............................... 3,030,000 6,014,000
Issuance of Common Stock for services........... 33,333 10,000
Issuance of Series C Preferred Stock in October
1993 at $1,000 per share, net of issuance
costs of $175,000.............................. 10,000 9,825,000
Exercise of stock options....................... 1,268,585 238,000
Issuance of Series D Preferred Stock in April
and May 1995 at $4.00 per share, net of
issuance costs of $81,000...................... 2,500,001 9,919,000
Retirement of Common Shares outstanding......... (25,000) (7,000)
Unrealized loss on investments..................
Net loss........................................ (17,108,000)
----------- ------------ ---------- ------------ ------------
BALANCE, JUNE 30, 1995............................ 8,040,001 28,253,000 1,731,463 241,000 (17,108,000)
Issuance of Series E Preferred Stock in January
1996 at $4.25 per share, net of issuance
costs of $35,000................................ 1,411,765 5,965,000
Exercise of stock options........................ 130,016 53,000
Issuance of Common Stock at $1.20 per share...... 25,000 30,000
Issuance of Stock Purchase Rights for cash in
September 1995 and March 1996...................
Repurchase of Series D Preferred Stock at $4.00
per share....................................... (62,500) (250,000)
Sale of Series D Preferred Stock at $4.00
per share....................................... 62,500 250,000
Principal payment received under shareholder
note receivable.................................
Unrealized gain on investments...................
Net loss......................................... (9,917,000)
----------- ------------ ---------- ------------ ------------
BALANCE, JUNE 30, 1996............................ 9,451,766 34,218,000 1,886,479 324,000 (27,025,000)
Exercise of stock options....................... 40,307 26,000
Issuance of Series E Preferred Stock at
$17.00 per share............................... 205,882 3,500,000
Issuance of Common Stock at $7.00 per share,
net of issuance costs of $2,865,000............ 3,250,000 19,885,000
Conversion of preferred stock................... (9,657,648) (37,718,000) 8,098,422 37,718,000
Compensation expense related to stock options
granted........................................ 120,000
Unrealized losses on investments................
Net loss........................................ (14,288,000)
----------- ------------ ---------- ------------ ------------
BALANCE, JUNE 30, 1997............................ - - 13,275,208 58,073,000 (41,313,000)
Exercise of stock options....................... 68,500 83,000
Issuance of 5.5% Convertible Preferred Stock at
$5.00 per share, net of issuance costs of
$1,070,000..................................... 2,200,000 9,930,000
Dividend paid on 5.5% Convertible Preferred
Stock.......................................... 72,940 351,000 (351,000)
Issuance of Common Stock........................ 255,340 1,144,000
Repurchase and retirement of Common Shares
outstanding.................................... (32,171) (240,000)
Compensation expense related to stock options
and warrants granted........................... 63,000
Unrealized gains on investments.................
Net loss........................................ (17,233,000)
----------- ------------ ---------- ------------ ------------
BALANCE, JUNE 30, 1998............................ 2,200,000 $ 9,930,000 13,639,817 $ 59,474,000 $(58,897,000)
=========== ============ ========== ============ ============
<CAPTION>
Stock Unrealized
Shareholder purchase gains/ Total
notes rights and (losses) on shareholders'
receivable warrants investments equity
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 24, 1989 (Inception)...............
$ - $ - $ - $ -
Non-cash issuance of Common Stock............... -
Issuance of Series A Preferred Stock at $1.00
per share in August 1989....................... 1,500,000
Issuance of Series A Preferred Stock in March
1991 at $1.00 per share, net of issuance
costs of $5,000................................ 995,000
Issuance of Series B Preferred Stock in April
1992 at $2.00 per share, net of issuance
costs of $46,000............................... 6,014,000
Issuance of Common Stock for services........... 10,000
Issuance of Series C Preferred Stock in October
1993 at $1,000 per share, net of issuance
costs of $175,000.............................. 9,825,000
Exercise of stock options....................... (198,000) 40,000
Issuance of Series D Preferred Stock in April
and May 1995 at $4.00 per share, net of
issuance costs of $81,000...................... 9,919,000
Retirement of Common Shares outstanding......... (7,000)
Unrealized loss on investments..................
Net loss........................................ (2,000) (2,000)
(17,108,000)
BALANCE, JUNE 30, 1995............................ ----------- ---------- ----------- ------------
(198,000) - (2,000) 11,186,000
Issuance of Series E Preferred Stock in January
1996 at $4.25 per share, net of issuance
costs of $35,000................................ 5,965,000
Exercise of stock options........................ 53,000
Issuance of Common Stock at $1.20 per share......
Issuance of Stock Purchase Rights for cash in 30,000
September 1995 and March 1996................... 3,500,000 3,500,000
Repurchase of Series D Preferred Stock at $4.00
per share....................................... (250,000)
Sale of Series D Preferred Stock at $4.00
per share....................................... 250,000
Principal payment received under shareholder
note receivable................................. 31,000 31,000
Unrealized gain on investments................... 2,000 2,000
Net loss......................................... (9,917,000)
----------- ---------- ----------- ------------
BALANCE, JUNE 30, 1996............................ (167,000) 3,500,000 - 10,850,000
Exercise of stock options....................... 26,000
Issuance of Series E Preferred Stock at
$17.00 per share............................... (3,500,000) -
Issuance of Common Stock at $7.00 per share,
net of issuance costs of $2,865,000............ 19,885,000
Conversion of preferred stock................... -
Compensation expense related to stock options
granted........................................ 120,000
Unrealized losses on investments................ (10,000) (10,000)
Net loss........................................ (14,288,000)
----------- ---------- ----------- ------------
BALANCE, JUNE 30, 1997............................ (167,000) - (10,000) 16,583,000
Exercise of stock options....................... 83,000
Issuance of 5.5% Convertible Preferred Stock at
$5.00 per share, net of issuance costs of
$1,070,000..................................... 9,930,000
Dividend paid on 5.5% Convertible Preferred
Stock.......................................... -
Issuance of Common Stock........................ 1,144,000
Repurchase and retirement of Common Shares
outstanding.................................... 167,000 (73,000)
Compensation expense related to stock options
and warrants granted........................... 335,000 398,000
Unrealized gains on investments................. 14,000 14,000
Net loss........................................ (17,233,000)
----------- ---------- ----------- ------------
BALANCE, JUNE 30, 1998............................ $ - $ 335,000 $ 4,000 $ 10,846,000
=========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 24, 1989
Year ended June 30, (Inception) to
----------------------------------------------- June 30,
1996 1997 1998 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................... $(9,917,000) $(14,288,000) $(17,233,000) $(58,546,000)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization.......... 536,000 564,000 557,000 2,388,000
Loss on property held for resale....... - - - 110,000
Amortization of discounts and
premiums on investments............... (110,000) (84,000) (180,000) (383,000)
Expense related to stock issued and
stock purchase rights granted......... - 120,000 1,498,000 1,628,000
Changes in assets and liabilities:
Receivables.......................... 18,000 (148,000) 38,000 (191,000)
Prepaid expenses..................... (332,000) 311,000 (144,000) (270,000)
Accounts payable and accrued
expenses............................ 864,000 316,000 (195,000) 1,313,000
Accrued employee expenses............ (33,000) 33,000 20,000 150,000
Deferred revenue..................... (103,000) (122,000) - -
----------- ------------ ------------ ------------
Net cash used for operating
activities............................ (9,077,000) (13,298,000) (15,639,000) (53,801,000)
----------- ------------ ------------ ------------
INVESTING ACTIVITIES:
Organizational costs........................ - - - (73,000)
Purchase of short-term investments.......... - (19,190,000) (12,326,000) (43,464,000)
Maturities of short-term investments........ 8,500,000 4,200,000 18,450,000 34,717,000
Capital purchases........................... (445,000) (424,000) (234,000) (2,376,000)
Proceeds from sale of property held for
resale..................................... - - - 400,000
----------- ------------ ------------ ------------
Net cash provided by (used for)
investing activities.................. 8,055,000 (15,414,000) 5,890,000 (10,796,000)
----------- ------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of preferred stock................. 5,965,000 - 9,930,000 44,148,000
Issuance of Common Stock.................... 83,000 19,911,000 127,000 20,154,000
Repurchase of Common Stock.................. - - (49,000) (49,000)
Payments received for stock purchase
rights..................................... 3,500,000 - - 3,500,000
Payments received under shareholder notes... 31,000 - - 31,000
Principal payments under capital lease
obligations................................ (270,000) (223,000) (124,000) (1,109,000)
----------- ------------ ------------ ------------
Net cash provided by financing
activities............................ 9,309,000 19,688,000 9,884,000 66,675,000
----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 8,287,000 (9,024,000) 135,000 2,078,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD.................................... 2,680,000 10,967,000 1,943,000 -
----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD....................................... $10,967,000 $ 1,943,000 $ 2,078,000 $ 2,078,000
=========== ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................... $ 62,000 $ 32,000 $ 12,000 $ 263,000
Additions to capital lease obligations...... - - - 1,174,000
</TABLE>
The accompanying notes are an integral part of those financial statements.
6
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aastrom Biosciences, Inc. (the Company) was incorporated in March 1989
(Inception) under the name Ann Arbor Stromal, Inc. The Company changed its name
in 1991 concurrent with the commencement of employee-based operations. The
Company is in the development stage with its principal business activities being
research and product development, conducted both on its own behalf and in
connection with various collaborative research and development agreements with
other companies, involving the development of processes and products for the ex
vivo production of human cells for use in cell and ex vivo gene therapy.
Successful future operations are subject to several technical and business
risks, including satisfactory product development, obtaining regulatory approval
and market acceptance for its products and the Company's continued ability to
maintain adequate levels of funding.
SIGNIFICANT REVENUE RELATIONSHIPS - One company accounted for 83% and 52% of
total revenues for the year ended June 30, 1996 and 1997, respectively. One
company accounted for 41% of total revenues for the period from Inception to
June 30, 1998. Grant revenues consist of grants sponsored by the U.S.
government.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS - Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
and less than one year. Short-term investments are classified as available-for-
sale, and are presented at market value, with unrealized gains and losses on
investments reflected as a component of shareholders' equity.
DIVERSITY OF CREDIT RISK - The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant realized losses
on its cash equivalents or short-term investments.
PROPERTY - Property is recorded at cost and depreciated or amortized using the
straight-line method over the estimated useful life of the asset (primarily five
years), or the remaining lease term, if shorter, with respect to leasehold
improvements and certain capital lease assets.
REVENUE RECOGNITION - Revenue from grants and research agreements is recognized
on a cost reimbursement basis consistent with the performance requirements of
the related agreement.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are expensed as
incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $1,294,000, $154,000 and $3,000 for the
years ended June 30, 1996, 1997 and 1998, respectively, and $1,645,000 for the
period from Inception to June 30, 1998.
STOCK COMPENSATION - The Company adopted the disclosure provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) as of July 1, 1996. As permitted by SFAS 123, the
Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related interpretations
and does not recognize compensation expense for its employee stock-based
compensation plans as allowed by SFAS 123.
7
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES - The Company recognizes deferred tax assets and liabilities for
the differences between the carrying amounts and the tax basis of assets and
liabilities, as well as net operating loss and tax credit carryforwards.
Additionally, the Company establishes a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
NET LOSS PER COMMON SHARE - Net loss per common share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares are not included in the per share
calculation where the effect of their inclusion would be anti-dilutive. Due to
the automatic conversion of all previously outstanding preferred stock into
Common Stock upon the completion of the initial public offering, such preferred
stock is assumed to have been converted into Common Stock at the time of
issuance.
The computations of net loss per common share for the year ended June 30, 1998
reflects a one-time charge of $3,439,000 related to the sale of 5.5% Convertible
Preferred Stock (5.5% Preferred Stock) in December 1997 and includes an
adjustment for dividends paid on the 5.5% Preferred Stock. The one-time charge
and dividends affect only the computation of net loss per common share and are
not included in the computation of net loss for the periods.
During March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
amended the standards for computing earnings per share previously set forth in
Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15). SFAS
128, which was adopted by the Company for all periods ending on or after
December 31, 1997, did not have a material effect on the computation of the
Company's historical net loss per common share amounts. In February 1998, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 98 (SAB
98), which modifies the methods used in computing net loss per common share as
previously set forth in SFAS 128. As set forth in SAB 98, the Company has
retroactively applied SAB 98 for all periods presented in the accompanying
financial statements. Application of this retroactive adjustment resulted in
an increase in the net loss per common share of $.09 and $.01 for the years
ended June 30, 1996 and 1997, respectively.
USE OF ESTIMATES - The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to financial statements. Actual results could
differ from those estimates.
FINANCIAL INSTRUMENTS - The Company evaluates the fair value of those assets and
liabilities identified as financial instruments and estimates that the fair
value of such financial instruments generally approximates the carrying value in
the accompanying financial statements. Fair values have been determined through
information obtained from market sources and management estimates.
LONG-LIVED ASSETS - The Company evaluates the impairment of long-lived assets
and long-lived assets to be disposed of whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable. No significant impairment losses have been identified by the
Company for any of the periods presented in the accompanying financial
statements.
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), which sets forth additional requirements for
companies to report in the financial statements Comprehensive Income in addition
to Net Income. Upon adoption of SFAS 130, the Company will present
comprehensive income in its financial statements for earlier periods. The
Company currently expects that adopting SFAS 130 for its previously issued
financial statements will primarily affect the treatment of preferred stock
dividends and yields and the one-time charge associated with the sale of its
5.5% Preferred Stock. The Company will adopt SFAS 130 effective July 1, 1998
and has not yet determined the manner in which comprehensive income will be
presented.
8
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SHORT-TERM INVESTMENTS
All short-term investments are available-for-sale and have maturities of one
year or less and are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1997:
U.S. Government Securities..................... $13,574,000 $ 1,000 $ (11,000) $13,564,000
Commercial Paper............................... 1,500,000 - - 1,500,000
----------- ----------- ---------- -----------
$15,074,000 $ 1,000 $ (11,000) $15,064,000
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
June 30, 1998:
U.S. Government Securities.................... $ 7,157,000 $ 4,000 $ - $ 7,161,000
Commercial Paper.............................. 1,973,000 - - 1,973,000
----------- ----------- ---------- -----------
$ 9,130,000 $ 4,000 $ - $ 9,134,000
=========== =========== ========== ===========
</TABLE>
3. PROPERTY
Property consists of the following:
June 30,
-------------------------
1997 1998
----------- -----------
Machinery and equipment............ $ 1,425,000 $ 1,473,000
Office equipment................... 733,000 903,000
Leasehold improvements............. 605,000 621,000
----------- -----------
2,763,000 2,997,000
Less accumulated depreciation
and amortization.................. (1,715,000) (2,272,000)
----------- -----------
$ 1,048,000 $ 725,000
=========== ===========
Equipment under capital leases totaled $558,000 and $240,000 at June 30, 1997
and 1998, respectively, with related accumulated amortization of $333,000 and
$159,000, respectively.
4. Shareholders' Equity
Initial Public Offering - In February 1997, the Company completed an
underwritten initial public offering of 3,000,000 shares of its Common Stock at
an offering price of $7.00 per share. In March 1997, the underwriters elected
to purchase an additional 250,000 shares of Common Stock pursuant to the
underwriters' over-allotment option at a price of $7.00 per share. Proceeds
from the offering, net of underwriters' commissions and expenses, were
$19,885,000.
PREFERRED STOCK - In connection with the Company's initial public offering, all
9,657,648 shares of then outstanding preferred stock were automatically
converted into 8,098,422 shares of Common Stock.
In December 1997, the Company completed a directed placement of 2,200,000 shares
of its 5.5% Preferred Stock at a price of $5.00 per share. Proceeds from the
offering, net of placement agent commissions and expenses, were $9,930,000. The
9
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5.5% Preferred Stock is convertible into shares of Common Stock at a conversion
price of $4.99 per share, subject to certain anti-dilution adjustments, and is
convertible at the option of the holder at any time. The 5.5% Preferred Stock
will automatically convert into Common Stock if at any time after December 2,
1999, the price of the Company's Common Stock is greater than $10 per share for
20 consecutive trading days, or upon the occurrence of certain other events.
The 5.5% Preferred Stock accrues a dividend at an annual rate of 5.5%, which is
declared and paid by the Company on a quarterly basis, and has a liquidation
preference of $5.00 per share, plus accrued but unpaid dividends. The Company
has the option to pay dividends on the 5.5% Preferred Stock in the form of a
cash payment or by the issuance of shares of Common Stock. If the Company
elects to pay the dividend in Common Stock, such shares are valued at an average
daily trading price of the Common Stock prior to the quarterly record date.
In July 1998, the Company completed the sale of $5,000,000 of its 1998 Series I
Convertible Preferred Stock, yielding 5.5% per annum (1998 Preferred Stock). The
conversion price of the 1998 Preferred Stock is based on the market price of the
Company's common stock during a pricing period preceding conversion, up to a
maximum conversion price of $4.81 per share and automatically converts in July
2001 or earlier upon certain events. The 1998 Preferred Stock has a preference
in liquidation equal to $5,000,000 plus a 5.5% yield, prorated for the period
since issuance. With limited exceptions, during the nine-month period ending in
April 1999, the 1998 Preferred Stock is convertible only after the market price
of the Company's common stock equals or exceeds $4.81 per share. Additionally,
Aastrom and the investor have agreed to a second closing for an additional
$3,000,000, under similar terms, if certain requirements are met, including
trading volume of the Company's Common Stock at a price per share above $6 per
share.
No cash dividends have ever been declared or paid; however, as of June 30, 1998,
the Company has issued 72,940 shares of Common Stock valued at $351,000 in
payment of the dividends on the 5.5% Preferred Stock.
COBE LABORATORIES, INC. STOCK PURCHASE RIGHTS - In connection with the purchase
of the Series C Convertible Preferred Stock by Cobe Laboratories, Inc. (Cobe) in
October 1993, Cobe received a preemptive right to purchase a pro-rata portion of
any newly issued shares of stock by the Company in order to maintain its then
current percentage ownership interest. Any such purchase of newly issued shares
shall be at the net price to the Company after deducting underwriters' discounts
and commissions, if any.
Cobe has an option to purchase additional shares from the Company equal to 30%
of the total number of shares outstanding assuming exercise of the option. Such
option, which is exercisable until February 2000, must be exercised in full with
the purchase price of the shares equal to 120% of the public market trading
price as determined by the 30-day average market price preceding the date of
exercise of the option.
The Company has granted Cobe a right of first negotiation in the event the
Company receives any proposal concerning, or otherwise decides to pursue, a
merger, consolidation or other transaction in which all or a majority of the
Company's equity securities or substantially all of the Company's assets, or any
material portion of the assets of the Company used by the Company in performing
its obligation under the Distribution Agreement (Note 6), would be acquired by a
third party outside of the ordinary course of business.
STOCK OPTION PLANS - The Company has various stock option plans which provide
for the issuance of nonqualified and incentive stock options to acquire up to
2,986,594 shares of Common Stock. Such options may be granted by the Company's
Board of Directors to certain of the Company's founders, employees, directors
and consultants. The exercise price of incentive stock options shall not be
less than the fair market value of the shares on the date of grant. In the case
of individuals who are also holders of 10% or more of the outstanding shares of
Common Stock, the exercise price of incentive stock options shall not be less
than 110% of the fair market value of the shares on the date of grant. The
exercise price of non-qualified stock options shall not be less than 85% of the
fair market value on the date of grant. Options granted under these plans
expire no later than ten years from the date of grant and generally become
exercisable ratably over a four-year period following the date of grant.
10
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For certain options granted, the Company recognizes compensation expense for the
difference between the deemed value for accounting purposes and the option
exercise price on the date of grant. During the years ended June 30, 1997 and
1998, compensation expense totaling $120,000 and $63,000 respectively has been
charged with respect to these options. Additional future compensation expense
with respect to the issuance of such options totals $55,000 and will be
recognized through December 2001.
As permitted by SFAS 123, the Company continues to apply APB 25 and related
interpretations in accounting for its stock option plans and does not recognize
compensation expense for its employee stock-based compensation plans as
prescribed in SFAS 123. If the Company had elected to recognize compensation
expense based upon the fair value at the grant dates for stock option awards
granted in 1996, 1997 and 1998, in accordance with SFAS No. 123, the pro forma
net loss and net loss per share would be as follows.
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Net loss applicable
to Common Shares:
As reported $9,917,000 $14,288,000 $21,023,000
Pro forma 9,942,000 14,793,000 21,832,000
Net loss per common share:
As reported $ (1.07) $ (1.27) $ (1.57)
Pro forma (1.07) (1.32) (1.63)
</TABLE>
The fair value of options was estimated at the date of grant using the Black-
Scholes option pricing model with the following assumptions; no dividend yields,
40% volatility, risk free interest rates ranging from 5.2% to 6.8% and expected
option lives of three to five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the use of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock based compensation plans.
11
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes option activity under the Company's stock option
plans:
<TABLE>
<CAPTION>
Weighted Average Options
Options Options Available Exercise Price Exercisable
Outstanding For Grant Per Share At Period End
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
March 24, 1989 (Inception)
Options authorized........ - 2,036,594
Options granted........... 1,782,444 (1,782,444) $ .34
Options exercised......... (1,268,585) - $ .19
Options canceled.......... (164,194) 164,194 $ .54
---------- ----------
Balance, June 30, 1995...... 349,665 418,344 $ .78 108,492
Options authorized........ - 800,000
Options granted........... 155,337 (155,337) $1.44
Options exercised......... (130,016) - $ .41
Options canceled.......... (44,690) 44,690 $ .85
---------- ----------
Balance, June 30, 1996...... 330,296 1,107,697 $1.20 101,021
Options authorized........ - 150,000
Options granted........... 785,200 (785,200) $6.78
Options exercised......... (40,307) - $ .65
Options canceled.......... (16,818) 16,818 $1.83
---------- ----------
Balance, June 30, 1997...... 1,058,371 489,315 $5.36 483,376
Options granted........... 372,520 (372,520) $5.17
Options exercised......... (68,500) - $1.21
Options canceled.......... (199,873) 199,873 $5.79
---------- ----------
Balance, June 30, 1998...... 1,162,518 316,668 $5.12 593,930
========== ==========
</TABLE>
OUTSIDE DIRECTORS' STOCK OPTION PLAN - The Company has an outside directors'
stock option plan which provides for the issuance of options to purchase up to
150,000 shares of Common Stock to outside directors. Under this plan, non-
qualified options to purchase 5,000 shares of Common Stock are granted to each
outside director on the day of the Annual Shareholders' meeting. These options
generally vest over a one-year period and expire ten years after the date of
grant. As of June 30, 1998, options to purchase 45,000 shares of Common Stock
at prices ranging from $5.25 to $7.00 per share are outstanding under this plan,
of which options to purchase 33,751 shares of Common Stock are exercisable.
The following table summarizes information about stock-based compensation plans
outstanding as of June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Exercise
Range of Number of Remaining Average Price of
Exercise Options Contractual Exercise Number Exercisable
Prices Outstanding Life-years Price Exercisable Options
- ------------- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .30 - $1.20 165,480 6.9 $1.13 118,898 $1.10
$3.20 - $4.75 258,205 8.7 $4.30 25,126 $3.35
$5.25 - $7.13 738,833 8.2 $6.84 449,906 $6.96
--------- -------
1,162,518 593,930
========= =======
</TABLE>
12
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value of options granted during the year ended June
30, 1998 was $2.28 per share.
EMPLOYEE STOCK PURCHASE PLAN - The Company has an employee stock purchase plan
under which eligible employees can purchase Common Stock, at a discount to the
market price, through payroll deductions up to 10% of the employees base
compensation, subject to certain limitations, during sequential 24-month
offering periods. Each offering period is divided into four consecutive six-
month purchase periods beginning on March 1 and September 1 of each year. Unless
otherwise provided by the Board of Directors prior to the commencement of an
offering period, the price at which stock is purchased under the plan for such
offering period is equal to 85% of the lesser of the fair market value of the
Common Stock on the first day of such offering period or the last day of the
purchase period of such offering period. During the year ended June 30, 1998,
13,900 shares of Common Stock were issued under this plan.
STOCK PURCHASE WARRANTS - The Company has issued warrants to purchase 69,444
shares of Common Stock which expire on October 15, 2000. These warrants may be
exercised, in whole or in part, at a price equal to the lesser of (a) $12.00 per
share, which price increases by $3.00 per share on February 3, 1999 and 2000; or
(b) 85% of the fair market value of the Company's Common Stock at the time of
exercise. In addition, the Company has issued warrants to purchase 200,000
shares of Common Stock at $7.24 per share which expire no later than October
2002. Compensation expense of $335,000 related to these warrants is reflected
in the accompanying financial statements for the year ended June 30, 1998.
COMMON SHARES RESERVED - As of June 30, 1998, the Company has reserved shares of
Common Stock for future issuance as follows:
<TABLE>
<S> <C> <C>
Issuance under stock option plans:
1992 Incentive and Non-Qualified Stock Option Plan..... 1,329,186
1995 Outside Director Stock Option Plan................ 150,000
---------
1,479,186
Issuance under 1996 Employee Stock Purchase Plan.......... 236,100
Exercise of Stock Purchase Warrants....................... 269,444
Conversion of 5.5% Preferred Stock........................ 2,204,408
---------
4,189,138
=========
</TABLE>
5. INCOME TAXES
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................. $ 14,150,000 $ 19,950,000
Tax credits and other............................ 1,162,000 1,911,000
------------ ------------
Gross deferred tax assets........................ 15,312,000 21,861,000
Deferred tax assets valuation allowance.......... (15,312,000) (21,861,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
Due to the historical losses incurred by the Company, a full valuation allowance
for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset future
income taxes.
13
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1998, the Company's Federal tax net operating loss and tax credit
carryfowards were $57,002,000 and $1,626,000, respectively, which will expire
from 2004 through 2018, if not utilized. The Company underwent an ownership
change in October 1993, which has resulted in a limitation under which the
Company can utilize a portion of its net operating loss carryforward amounting
to $1,153,000 per year. As of June 1998, the portion of the Company's net
operating loss that remains subject to this limitation is $1,337,000 and
therefore is not expected to ultimately effect the Company's ability to utilize
the benefit. In July 1998, the Company issued shares of 1998 Series I
Convertible Preferred Stock which resulted in an annual limitation of
$3,136,000, which applies to losses incurred between October 1993 and July 1998.
The Company's ability to utilize its net operating loss and tax credit
carryforwards may become subject to further annual limitation.
6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS:
UNIVERSITY OF MICHIGAN - In August 1989, the Company entered into a research
agreement with the University of Michigan (the University). Under the terms of
this research agreement, as amended, the Company agreed to reimburse the
University for certain research costs through the date of its expiration in
December 1994. Payments made to the University under the aforementioned
agreements totaled $2,521,000 for the period from Inception to June 30, 1998,
which amount is included in research and development expense in the accompanying
Statements of Operations. As part of this relationship, the Company issued to
the University 454,545 shares of Common Stock in August 1989. No value has been
assigned to these shares in the accompanying financial statements. In March
1992, and as provided for under the research agreement, the Company entered into
a license agreement for the technology developed under the research agreement.
The license agreement, as amended, provides for a royalty to be paid to the
University equal to 2% of net sales of products containing the licensed
technology sold by the Company.
COBE BCT, INC. - In connection with the issuance of the Series C Preferred Stock
to Cobe in October 1993, the Company and Cobe BCT, Inc. (Cobe BCT), an affiliate
of Cobe, entered into an agreement which grants to Cobe BCT exclusive worldwide
distribution and marketing rights to the AastromReplicell/(TM)/ Cell Production
System for stem cell therapy applications (Distribution Agreement). The term of
the Distribution Agreement is ten years, with an option, exercisable by Cobe
BCT, to extend the term for an additional ten years. Cobe has the right to
terminate its Distribution Agreement with the Company with twelve months' notice
upon a change of control of the Company, other than to Cobe, or if Cobe
determines that commercialization of the AastromReplicell/(TM)/ System for stem
cell therapy on or prior to December 31, 1998 is unlikely. Pursuant to the
Distribution Agreement, Cobe BCT will perform worldwide marketing and
distribution activities of the AastromReplicell/(TM)/ System for use in stem
cell therapy and will receive a share of the resulting net sales, as defined,
ranging from 38% to 42%, subject to certain negotiated discounts and volume-
based adjustments.
MANUFACTURE, SUPPLY AND OTHER AGREEMENTS - The Company has entered into various
agreements relating to the manufacture of its products and supply of certain
components. Pursuant to one such license agreement, the Company and the
licensor amended the agreement to provide for the issuance of $1,100,000 in
Common Stock by the Company as payment for an annual renewal fee of $1,000,000
due in March 1998 under the agreement.
In October 1997, the Company entered into a Strategic Planning Consulting
Services and Collaboration Agreement (the "Consulting Agreement"), pursuant to
which the Company will receive consultation on potential strategic alliances.
The Consulting Agreement, which can be terminated by either party following
periods of up to 30 days following notice, provides for payments by the Company
based upon the timing and amount of proceeds received under certain strategic
alliances. In addition, the Company will issue warrants to purchase additional
shares of Common Stock, depending upon the achievement of certain milestones.
In September 1995, the Company entered into a research and development
collaboration which was completed in September 1996. Under this collaboration,
the Company received $3,500,000 in equity payments and recognized $1,538,000 in
research revenue.
7. COMMITMENTS
14
<PAGE>
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company leases its facility under an operating lease which expires in
August 2000. The Company has the option to renew the lease for an additional
period of up to five years and has certain expansion options.
Future minimum payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Operating
Leases
----------
<S> <C>
Year Ending June 30,
------------------
1999.......................... $ 476,000
2000.......................... 494,000
2001.......................... 92,000
----------
Total minimum lease payments.. $1,062,000
==========
</TABLE>
Rent expense for the years ended June 30, 1996, 1997 and 1998, was $338,000,
$456,000 and $487,000, respectively, and $1,774,000 for the period from
Inception to June 30, 1998.
8. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan that became effective in January 1994. The plan
allows participating employees to contribute up to 15% of their salary, subject
to annual limits and minimum qualifications. The Board may, at its sole
discretion, approve Company contributions. Through June 30, 1998, the Company
has made no contributions to the plan.
15
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-25021) of Aastrom Biosciences, Inc. of our report
dated August 7, 1998 appearing on page 9 of the Annual Report to Shareholders
which is incorporated in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Bloomfield Hills, Michigan
September 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,078,000
<SECURITIES> 9,134,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,649,000
<PP&E> 2,997,000
<DEPRECIATION> 2,272,000
<TOTAL-ASSETS> 12,374,000
<CURRENT-LIABILITIES> 1,528,000
<BONDS> 0
0
9,930,000
<COMMON> 59,474,000
<OTHER-SE> (58,558,000)
<TOTAL-LIABILITY-AND-EQUITY> 12,374,000
<SALES> 0
<TOTAL-REVENUES> 249,000
<CGS> 0
<TOTAL-COSTS> 18,356,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> (17,233,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,233,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,233,000)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
