<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1997
REGISTRATION NO. 333-31435
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OSIRIS THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8071 34-1728301
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of incorporation or Classification Code Number) Number)
organization)
</TABLE>
------------------------
2001 ALICEANNA STREET
BALTIMORE, MARYLAND 21231
(410) 522-5005
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
JAMES S. BURNS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OSIRIS THERAPEUTICS, INC.
2001 ALICEANNA STREET
BALTIMORE, MARYLAND 21231
(410) 522-5005
(Name, address, including zip code and telephone number, including area code, of
agent for service)
------------------------------
COPIES TO:
ALAN L. DYE, ESQ. GORDON M. BAVA, ESQ.
GEORGE P. BARSNESS, ESQ. ALLEN Z. SUSSMAN, ESQ.
HOGAN & HARTSON L.L.P. MANATT, PHELPS & PHILLIPS, LLP
555 THIRTEENTH STREET, N.W. 11355 WEST OLYMPIC BOULEVARD
WASHINGTON, DC 20004-1109 LOS ANGELES, CALIFORNIA 90064
(202) 637-5600 (310) 312-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PRELIMINARY PROSPECTUS , 1997
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO]
Common Stock
- ---------------------------------------------------------------
All of the 2,500,000 shares of Common Stock offered hereby are being sold by
Osiris Therapeutics, Inc. ("Osiris" or the "Company").
Prior to this offering (the "Offering"), there has not been a public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $11.00 and $13.00 per share. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price. Application has been made to have the Common
Stock quoted on The Nasdaq Stock Market's National Market under the symbol
"OSRS."
Of the 2,500,000 shares offered hereby, 250,000 will be offered to a stockholder
of the Company pursuant to a contractual pre-emptive right. See "Underwriting."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Per Common Share $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR INFORMATION REGARDING INDEMNIFICATION OF THE UNDERWRITERS, SEE
"UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $650,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
375,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. SEE "UNDERWRITING." IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
COMPANY WILL BE $ , $ AND $ , RESPECTIVELY.
The shares of Common Stock are being offered by the Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that certificates for the shares of Common Stock
offered hereby will be available for delivery on or about , 1997, at
the office of SBC Warburg Dillon Read Inc., New York, New York.
SBC WARBURG DILLON READ INC. HAMBRECHT & QUIST
<PAGE>
[ARTWORK OR SCHEMATIC DEPICTING THE MESENGENIC PROCESS]
SCHEMATIC DIAGRAM DEPICTING THE EVENTS WHICH THE COMPANY BELIEVES ARE INVOLVED
IN THE REGENERATION OF TISSUE. MESENCHYMAL STEM CELLS ("MSCS") FIRST UNDERGO
MULTIPLE DIVISIONS (PROLIFERATION), AFTER WHICH THEY PROCEED DOWN A PARTICULAR
TISSUE DEVELOPMENT PATHWAY (COMMITMENT), LEADING ULTIMATELY TO THE FORMATION OF
SPECIALIZED CELLS (DIFFERENTIATION) AND THE FABRICATION OF UNIQUE EXTRACELLULAR
MATRIX COMPONENTS (MATURATION) CHARACTERISTIC OF HEALTHY, MATURE CONNECTIVE
TISSUE.
[ARTWORK OR SCHEMATIC DEPICTING PROPOSED REGENERATIVE TISSUE THERAPY]
SCHEMATIC DIAGRAM DEPICTING THE PROCESS WHICH THE COMPANY BELIEVES WOULD BE
INVOLVED IN CLINICAL REGENERATIVE TISSUE THERAPY. A SMALL SAMPLE OF BONE MARROW
WOULD BE HARVESTED FROM THE PATIENT, AFTER WHICH MSCS WOULD BE ISOLATED,
PURIFIED AND CULTURE-EXPANDED (MULTIPLIED) UNDER CONTROLLED MANUFACTURING
CONDITIONS AND THEN EITHER REINFUSED DIRECTLY INTO THE PATIENT AS SUPPORTIVE
TREATMENT FOLLOWING CANCER CHEMOTHERAPY OR FORMULATED AS AN IMPLANT TO
REGENERATE CONNECTIVE TISSUE. THE COMPANY HAS NOT YET COMPLETED THE DEVELOPMENT
OF, OR RECEIVED FDA APPROVAL OF, ANY OF ITS POTENTIAL MSC-BASED PRODUCTS.
[ARTWORK OR SCHEMATIC DEPICTING MESENCHYMAL STEM CELL (MSC) PLATFORM TECHNOLOGY]
SCHEMATIC DIAGRAM DEPICTING THE MULTIPLE PRODUCT APPLICATIONS THAT MAY BE
DEVELOPED FROM THE COMPANY'S MSC PLATFORM TECHNOLOGY. THE COMPANY HAS NOT YET
COMPLETED THE DEVELOPMENT OF, OR RECEIVED FDA APPROVAL OF, ANY OF ITS POTENTIAL
MSC-BASED PRODUCTS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED HEREIN, THE
INFORMATION IN THIS PROSPECTUS: (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION; (II) GIVES EFFECT TO A 1-FOR-1.7 REVERSE STOCK SPLIT; AND
(III) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK INTO 5,510,002 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING.
SEE "GLOSSARY OF SCIENTIFIC TERMS" FOR DEFINITIONS OF CERTAIN TERMS USED HEREIN.
THE COMPANY
Osiris Therapeutics, Inc. ("Osiris" or the "Company") is engaged in the
research and development of therapeutic products for the regeneration of human
connective tissues (E.G., bone marrow stroma, bone, cartilage, muscle, tendon,
ligament and fat) through the use of mesenchymal stem cells ("MSCs") which the
Company believes to be the progenitor cells responsible for the formation of
such tissues. The Company believes that its proprietary MSC technology will
provide a broad platform for developing and commercializing cell therapy
products and biopharmaceuticals for the regeneration of connective tissues
damaged through injury, aging or degenerative disease.
Connective tissue disorders, including orthopaedic injuries and degenerative
diseases, rank first among all disorders in terms of frequency of visits to
physicians and second in terms of frequency of hospitalizations. In the field of
cancer treatment, damage to bone marrow typically occurs following high-dose
chemotherapy or radiation, which often destroys the patient's hematopoietic
(I.E., blood-forming) system and bone marrow stroma. The Company believes that
its tissue regeneration technology, if developed successfully, could improve the
treatment of connective tissue disorders by restoring the natural functioning of
the tissue, improving the quality of the repair and providing a better long-term
and cost-effective result compared to current therapies.
In the early embryo, the middle layer of cells (known as the mesoderm) and
certain portions of the outer cell layers give rise to groups of cells that
differentiate into bone marrow stroma, bone, cartilage, muscle, tendon,
ligament, fat and other connective tissues. Based upon laboratory and
preclinical research to date, the Company believes that the process of tissue
regeneration follows a sequence of events similar to that of embryonic tissue
formation and that throughout life, individuals maintain a reserve of
mesenchymal progenitor cells that are capable of differentiating into new
connective tissues. The Company refers to the progenitor cells that initiate
tissue formation as mesenchymal stem cells and the formation of these tissues as
"mesengenesis."
The Company believes that the field of tissue regeneration is moving toward
a new class of treatments involving cell therapy. The Company intends to
commercialize products that result in site-directed tissue regeneration based on
the use of MSCs. Such products would originate from a small sample of bone
marrow cells collected by needle aspiration from a patient using a local
anesthetic. The bone marrow aspirate would be transferred to the Company's
processing facilities and the MSCs would be isolated and culture-expanded. The
culture-expanded cells would then be returned to the patient for infusion or
implantation. The MSCs would be combined in some instances with a biodegradable
matrix or other delivery device capable of stabilizing the cells at the implant
site.
Osiris is focusing its initial product development efforts on the
regeneration of bone marrow stroma following high-dose cancer chemotherapy and
on the regeneration of bone in long bone and spinal defects. In addition, the
Company is collaborating with Novartis Pharma AG, one of the world's largest
pharmaceutical companies, and its U.S. affiliate, Novartis Pharmaceuticals
Corporation (collectively, "Novartis"), for the research and development of MSC
products for treating degenerative diseases such as osteoporosis and
osteoarthritis, for regenerating damaged cartilage and for certain potential
gene therapy applications using MSCs as target delivery cells.
The Company intends to selectively pursue strategic research, development
and marketing collaborations with pharmaceutical and medical device companies in
order to accelerate the introduction of MSC
3
<PAGE>
products. In June 1997, the Company entered into a multi-year collaboration with
Novartis under which Novartis Pharma AG purchased 692,059 shares of the
Company's Common Stock (representing 7.9% of the Company's outstanding Common
Stock) for $10,000,250, and Novartis Pharmaceuticals Corporation made an
up-front payment to the Company of $3,000,000. In connection with the
collaboration as currently contemplated, the Company also may receive from
Novartis Pharmaceuticals Corporation up to $143,000,000, consisting of up to
$50,000,000 of research and development support and up to $93,000,000 of
milestone payments. There can be no assurance, however, that the Company will
become entitled to the full amount of the research and development funding or
that any or all of the products currently contemplated for development will
achieve the specified milestones entitling the Company to any or all of the
milestone payments. In consideration for its funding, Novartis has received the
exclusive, worldwide license to use and sell certain MSC products to be
developed during the collaboration. In addition, Novartis has agreed to pay the
Company royalties based upon the net sales, if any, of such products. The
Company has retained the right to manufacture for sale in North America any MSC
products in the osteoporosis, osteoarthritis and cartilage injury fields. See
"Business--Collaborative Research and Licensing Agreements--Novartis Agreement."
The Company and its academic collaborators have isolated, purified and
culture-expanded MSCs from both humans and animals. Culture-expanded MSCs have
been transplanted to the site of an injured animal tissue to regenerate that
tissue in a number of preclinical models, thereby establishing the scientific
proof-of-principle and preclinical safety and efficacy of such technique. In
addition, an initial human clinical safety study of cancer patients in remission
using autologous (I.E., derived from a patient's own cells) MSCs has been
completed successfully. A second human clinical safety study in advanced breast
cancer patients, under an approved Investigational New Drug ("IND") application,
is currently underway at the University Hospitals of Cleveland, Ireland Cancer
Center.
The Company owns or has an exclusive license to five patents granted in the
United States relating to: (i) isolated human mesenchymal stem cells and
therapeutic compositions containing such cells; (ii) producing bone or cartilage
through the use of human mesenchymal stem cells; (iii) repairing connective
tissue damage through the use of human mesenchymal stem cells; (iv) isolated
human mesenchymal stem cells transfected with genetic material for potential use
in gene therapy; and (v) certain antibodies against human osteogenic cells and
the use thereof. The Company also owns or has licenses to over 40 United States
and foreign patent applications directed to MSC technology. The Company intends
to continue to use its scientific expertise to pursue additional patent filings
for new compositions, methods and uses of human mesenchymal stem cells and
related know-how to enhance the Company's leadership in MSC technology.
The Company was incorporated in Delaware on December 23, 1992. The Company
is currently in the development stage; its operations consist primarily of
research and development activities, and it has not completed the development of
or begun to record revenues from any of its potential products. The Company's
principal executive offices are located at 2001 Aliceanna Street, Baltimore,
Maryland, and its telephone number is (410) 522-5005.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 2,500,000 shares
Common Stock to be outstanding after this
Offering................................... 11,263,166 shares (1)
Use of proceeds.............................. Research and development, preclinical and
human clinical trials, capital expenditures,
working capital and general corporate
purposes.
Proposed Nasdaq National Market symbol....... OSRS
</TABLE>
- ------------------------
(1) Based on the number of outstanding shares of Common Stock as of September
30, 1997, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 5,510,002 shares of Common Stock upon the completion of
this Offering. Does not include: (i) 901,739 shares of Common Stock reserved
for issuance under the Company's Amended and Restated 1994 Incentive Stock
Plan and 1993 Stock Option Plan (the "Stock Plans"), pursuant to which plans
options to purchase a total of 462,904 shares are outstanding at a weighted
average exercise price of $1.80 per share; and (ii) 659,051 shares of Common
Stock issuable upon exercise of outstanding warrants to purchase Common and
Preferred Stock at a weighted average exercise price of $5.11 per share.
5
<PAGE>
SUMMARY FINANCIAL AND PRO FORMA DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FROM FROM
INCEPTION TO YEAR ENDED DECEMBER 31, INCEPTION TO SEPTEMBER 30,
DECEMBER 31, ------------------------------- DECEMBER 31, --------------------
1993 1994 1995 1996 1996 1996 1997
------------- --------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Collaborative research and grant
income........................ $ -- $ 33 $ -- $ 1,067 $ 1,100 $ 565 $ 5,756
Interest income................. 30 230 169 522 951 280 488
------------- --------- --------- --------- ------------- --------- ---------
Total revenues.............. 30 263 169 1,589 2,051 845 6,244
------------- --------- --------- --------- ------------- --------- ---------
Expenses:
Research and development........ 338 2,341 4,533 7,364 14,576 4,586 7,341
General and administrative...... 822 1,266 1,477 1,861 5,426 1,316 1,257
Interest expense................ 8 10 97 576 691 408 570
------------- --------- --------- --------- ------------- --------- ---------
Total expenses.............. 1,168 3,617 6,107 9,801 20,693 6,310 9,168
------------- --------- --------- --------- ------------- --------- ---------
Net loss.......................... $ (1,138) $ (3,354) $ (5,938) $ (8,212) $ (18,642) $ (5,465) $ (2,924)
------------- --------- --------- --------- ------------- --------- ---------
------------- --------- --------- --------- ------------- --------- ---------
Net loss per common share and
common share equivalents........ $ (.56) $ (1.32) $ (2.14) $ (2.93) $ (1.95) $ (.95)
Weighted average common shares and
common share equivalents
outstanding..................... 2,032 2,537 2,776 2,806 2,804 3,081
<CAPTION>
FROM
INCEPTION TO,
SEPTEMBER 30,
1997
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Collaborative research and grant
income........................ $ 6,856
Interest income................. 1,440
-------------
Total revenues.............. 8,296
-------------
Expenses:
Research and development........ 21,917
General and administrative...... 6,683
Interest expense................ 1,261
-------------
Total expenses.............. 29,861
-------------
Net loss.......................... $ (21,565)
-------------
-------------
Net loss per common share and
common share equivalents........
Weighted average common shares and
common share equivalents
outstanding.....................
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
-------------------- --------------------------
1995 1996 ACTUAL AS ADJUSTED (1)
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities available-for-sale........... $ 6,663 $ 9,350 $ 18,192 $ 45,442
Working capital.................................................... 5,664 7,711 12,631 39,881
Total assets....................................................... 9,425 18,778 28,765 56,015
Long-term debt and capital lease obligations, less current
portion.......................................................... 1,277 6,660 5,854 5,854
Deficit accumulated during the development stage................... (10,430) (18,642) (21,565) (21,565)
Total stockholders' equity......................................... 6,995 9,887 16,550 43,800
</TABLE>
- ------------------------
(1) Gives effect to: (i) the sale of 2,500,000 shares of Common Stock in the
Offering assuming an initial public offering price of $12.00 per share (the
mid-point of the range of the estimated initial public offering prices per
share) and the application of the net proceeds as described in "Use of
Proceeds" and (ii) the conversion of all outstanding shares of Preferred
Stock into 5,510,002 shares of Common Stock upon the completion of this
Offering.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS REGARDING THE COMPANY'S STRATEGIES, PLANS,
OBJECTIVES AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED OR DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
UNPROVEN TECHNOLOGY; EARLY STAGE OF DEVELOPMENT
Osiris Therapeutics, Inc. is engaged in the research and development of
therapeutic products for the regeneration of human connective tissues (E.G.,
bone marrow stroma, bone, cartilage, muscle, tendon, ligament and fat) through
the use of mesenchymal stem cells ("MSCs"), which the Company believes to be the
progenitor cells responsible for the formation of such tissues. The Company's
product candidates are designed to deliver MSCs to tissue defect sites requiring
regeneration of connective tissue. The effectiveness of the Company's technology
is untested in human clinical trials and is not well-known in or accepted
generally by the clinical medical community. The physiology of connective tissue
regeneration is highly complex and the biological processes involved are not
fully understood. Although research and preclinical data gathered by the Company
and its scientific founders and collaborators support the Company's approach,
there can be no assurance that MSCs give rise to all human connective tissues,
or that the Company's technology will be able to control consistently the
ability of MSCs to mature and differentiate into connective tissues following
isolation and expansion. Furthermore, there can be no assurance that MSCs or the
Company's product candidates can be implanted successfully at tissue defect
sites, that, once implanted, they will generate connective tissue at all, or
that such tissue will be of therapeutic benefit. Results attained in preclinical
studies and early human clinical trials of the Company's product candidates may
not be indicative of results that will be obtained in later human clinical
trials. The failure of the Company to establish the efficacy of its technology
or the ability to implant successfully its product candidates at tissue defect
sites would have a material adverse effect on the Company. See "Business--
Mesenchymal Stem Cell Technology," "--Cell Therapy Using Mesenchymal Stem
Cells," "--Gene Therapy" and "--Biopharmaceuticals."
UNCERTAINTY OF PRODUCT DEVELOPMENT
The Company has not completed the development of any products and does not
expect to have products to sell commercially for at least two years, if ever.
The Company's potential therapeutic products are in early stages of research and
development and will require substantial additional research and development
time and expense, as well as preclinical and clinical testing, prior to
commercialization, which may never occur. The Company's potential products for
regeneration of bone marrow stroma are currently in clinical and preclinical
studies, and the Company's product candidates for bone regeneration are
currently in preclinical trials. The Company's proposed cartilage and tendon
regeneration products are currently undergoing animal studies, and the Company's
biopharmaceutical, gene therapy, cardiac muscle and other soft tissue and
degenerative disorder product candidates are all in early research stages. There
can be no assurance that any of the Company's product candidates will be
developed successfully, perform in the manner anticipated or be commercially
viable. Development of the Company's products will depend on acquiring or
developing biodegradable matrix materials and delivery devices for use in its
products. There can be no assurance that such matrix materials and delivery
devices can be developed or obtained from third parties. There can also be no
assurance that the Company's proposed therapeutic products, if developed, will
prove to be safe and efficacious in human clinical trials, will receive the
necessary regulatory approvals, will be accepted by the clinical medical
community, will be commercially producible at prices acceptable to the medical
and insurance communities or will be of superior therapeutic benefit compared to
existing competitive products. Finally, there can be no assurance that
competitors will not hold proprietary rights which preclude the Company from
marketing its products, or that competitors do not or will not offer superior
products. The likelihood of the Company's future success must be considered in
light of these and other difficulties, expenses and delays frequently
encountered in connection with the
7
<PAGE>
development and commercialization of therapeutic products. See
"Business--Product Development Programs" and "--Government Regulation."
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES
The Company has incurred a net loss in each year since its inception,
including net losses of approximately $8,212,000 during 1996 and $2,924,000
during the nine months ended September 30, 1997. These losses have resulted in
an accumulated deficit of $21,565,000 at September 30, 1997. The Company expects
to incur substantial additional losses over at least the next several years,
which will likely increase as the Company expands its research and development
efforts. The Company has not generated any revenues from product sales to date.
Most of the Company's revenues have been generated from payments under
collaborative research agreements and research grants. The Company's ability to
generate significant revenue and become profitable in the future will depend in
large part on its receipt of additional research grants and its ability to enter
into additional collaborative agreements, obtain regulatory approvals on a
timely basis where necessary and, with its collaborators, successfully develop
and commercialize the Company's potential products. There can be no assurance
that the Company will ever generate significant revenues or become profitable
even if it is able to commercialize any of its products. The failure of the
Company to generate significant additional revenues and achieve profitability
could impair the Company's ability to sustain its operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
DEPENDENCE UPON COLLABORATIVE PARTNERS
A principal element of the Company's strategy is to enter into collaborative
arrangements with established multinational pharmaceutical and medical device
companies which will finance or otherwise assist in the development, marketing
and manufacture of products incorporating the Company's technology. The Company
expects to derive its revenues for the foreseeable future principally from
research and development fees, license fees, milestone payments and royalties
from collaborative partners such as Novartis. The Company's prospects,
therefore, will depend in large part upon its ability to attract and retain
collaborative partners and to develop technologies and products that meet the
requirements of prospective collaborative partners. In addition, the Company's
collaborative partners will generally have the right to abandon research
projects and terminate applicable agreements, including funding obligations,
prior to or upon the expiration of the agreed-upon research terms. There can be
no assurance that the Company will be successful in establishing future
collaborative arrangements on acceptable terms or at all, that current or future
collaborative partners will not terminate funding before completion of projects,
that the Company's existing or future collaborative arrangements will result in
successful product commercialization or that the Company will derive any
revenues from such arrangements. To the extent that the Company is not able to
maintain existing or establish new collaborative arrangements, it would require
substantial additional capital to undertake research, development and
commercialization activities on its own. See "Risk Factors--Need for Substantial
Additional Funds."
In varying degrees for each of its products, the Company will likely rely on
its collaborative partners to research, develop, conduct human clinical trials
on, obtain regulatory approvals for, manufacture, market and/or commercialize
its products. Such partners' diligence and dedication of resources in conducting
these activities will depend on, among other things, their own competitive,
marketing and strategic considerations, including the relative advantages of
competitive products. The failure of the Company's collaborative partners to
conduct their collaborative activities successfully and diligently would have a
material adverse effect on the Company. In addition, the Company anticipates
that most collaborative partners will receive exclusive or co-exclusive rights
to market products incorporating the Company's technology in a particular field
of use or a particular territory. The grant of such rights will limit the
Company's alternatives in commercializing certain of its products. Furthermore,
while the Company may enter into multiple concurrent collaborative arrangements
to pursue the development of therapeutic
8
<PAGE>
products in different disease areas, there can be no assurance that the Company
will be able to manage multiple collaborative arrangements or be able to develop
simultaneous products successfully. See "Risk Factors--Lack of Manufacturing,
Marketing or Sales Capabilities," "Business--Collaborative Research and
Licensing Agreements" and "Business--Government Regulation."
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS
The development and operation of the Company's business will require
substantial additional capital resources. The Company believes that its existing
capital resources and the net proceeds from this Offering will be sufficient to
fund its projected operating and capital expenditures through the next two
years, although there can be no assurance that the Company will not require, or
choose to raise, additional funds prior to the end of such period. In addition,
the Company's future capital requirements may vary materially based on many
factors, such as the progress of research and development programs, results of
human clinical trials, agreements with corporate collaborators, changes in
existing collaborative arrangements and establishment of future collaborative
arrangements, the costs of prosecuting and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
the costs of establishing manufacturing and marketing capacity, the cost of
acquiring additional technologies or businesses and other competitive and
regulatory factors. While the Company may be able to obtain additional funds
through research contracts, strategic collaborations, additional equity
offerings or other sources, there can be no assurance that such funds will be
available to the Company when required or on terms acceptable to the Company, if
at all. Future equity financings may result in significant dilution to existing
stockholders. In the event the Company is unable to raise additional funds, the
Company may be required to delay, reduce or eliminate certain of its research
and development programs or relinquish marketing, distribution, development,
manufacturing or other rights to the Company's products under development. Any
of such actions could have a material adverse effect on the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
LIMITED CLINICAL TRIAL EXPERIENCE
Although physician-sponsored human clinical studies involving MSC technology
have been conducted to date, neither the Company nor its collaborators have
sponsored directly any human clinical trials with respect to any of the
Company's product candidates. The clinical testing process is governed by
stringent regulation and is highly complex and time-consuming. While certain of
the Company's personnel have been involved in clinical testing in connection
with prior employment, there can be no assurance that the Company has or will
possess the necessary expertise to establish, conduct and organize the results
of human clinical trials in a manner compliant with regulatory requirements or
sufficient to establish the safety and efficacy of any product candidates. In
addition, the Company may not be able to procure the financing, study subjects
and other resources necessary to commence and sustain proper clinical testing
through the successful development of any product candidates. Further, there can
be no assurance that the Company's corporate collaborators will conduct human
trials successfully. Finally, there can be no assurance that the U.S. Food and
Drug Administration (the "FDA") or other regulatory authorities will agree with
the Company's interpretation of testing results or that such results will be
favorable to the development, commercialization, clinical acceptance or
reimbursement for any of the Company's potential products. The failure of the
Company or its collaborators to conduct human clinical trials successfully or of
the Company to capitalize on the results of human clinical trials for its
product candidates would have a material adverse effect on the Company.
LACK OF MANUFACTURING, MARKETING OR SALES CAPABILITIES
The Company has not established manufacturing, marketing or sales
capabilities. In the event the Company decides to establish such capabilities,
it will require substantial additional funds and personnel
9
<PAGE>
and, in the case of manufacturing resources, compliance with extensive
regulations applicable to such manufacturing facilities. The decision to develop
such capabilities will be based in part upon the availability of alternatives to
in-house manufacturing, marketing and sales activities, such as licensing
arrangements, partnerships and other collaborations with third parties. There
can be no assurance that the Company will be able to develop successfully its
own manufacturing, marketing and sales capabilities or alternatives thereto. In
addition, for certain applications of its MSC technology, the Company intends to
enter into collaborative development, manufacturing and marketing agreements,
which would grant limited exclusive or co-exclusive manufacturing or marketing
rights. There can be no assurance that the Company will be able to consummate
collaborative partner agreements on terms satisfactory to the Company, if at
all, or that the Company's collaborative partners will be successful in
manufacturing or marketing its products. The failure of the Company to develop
its own manufacturing, marketing and sales capabilities or to develop
alternative third-party arrangements could have a material adverse effect on the
Company.
UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The Company's research and development activities, preclinical studies,
human clinical trials and anticipated manufacturing and marketing of its
potential products are subject to extensive regulation by the FDA and other
regulatory authorities in the United States and abroad. In the United States,
the Company's product candidates are potentially subject to regulation as
cellular tissue-based or biological products under the Public Health Service
Act, as medical devices under the Federal Food, Drug and Cosmetic Act, or as
combination biological products/medical devices. Different regulatory
requirements may apply to the Company's product candidates depending on how they
are categorized by the FDA under these laws. The FDA is in the process of
developing its requirements with respect to cellular and tissue-based products
and recently proposed a framework for their regulation. Depending on whether
this proposal is finalized and the nature of the product candidates, the FDA may
require extensive multi-center human clinical trials prior to market approval.
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. Until the FDA issues definitive
regulations covering the Company's product candidates, the regulatory
requirements for approval of such product candidates will continue to be subject
to significant uncertainty.
The Company has not yet submitted any of its potential products to the FDA
or any other regulatory authority for approval. Before marketing, the products
developed by the Company will likely undergo an extensive regulatory approval
process. This process, which includes preclinical studies and human clinical
trials to establish safety and efficacy, takes many years and requires
substantial resources. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
FDA approval. In addition, the Company may experience delays or rejections based
upon changes in FDA policy and regulations during the period of product
development or the approval process. Similar delays may be encountered in
foreign countries. There can be no assurance that, even after the expenditure of
substantial time and financial resources, regulatory approval will be obtained
for any products developed by the Company. The failure of the Company to obtain
regulatory approval of any of its principal product candidates would have a
material adverse effect on the Company. Moreover, if regulatory approval of a
product is obtained, such approval may be subject to limitations on the
indicated uses for which the product may be marketed. Further, an approved
product, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections by the FDA, and 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, any
of which could have a material adverse effect on the Company. In addition to the
FDA, approval of regulatory authorities of foreign countries where the Company's
products may be marketed will be required, which may impose
10
<PAGE>
requirements more stringent than those of the FDA. Further, additional
government regulation may be established which could prevent or delay regulatory
approval of the Company's product candidates. See "Business--Government
Regulation."
UNCERTAIN AVAILABILITY OF HEALTH CARE REIMBURSEMENT
The Company's ability to successfully commercialize its product candidates
will depend in part on the extent to which the costs of such products and
related treatments will be reimbursed by government health administrative
authorities, private health insurers and other organizations, both in the United
States and other countries. Significant uncertainty exists as to the
reimbursement of newly approved health care products, and there can be no
assurance that adequate third-party insurance coverage will be available for the
Company to establish and maintain price levels sufficient to realize an
appropriate return on its investment in developing new therapies. Payors are
increasingly attempting to contain health care costs by limiting both coverage
and reimbursement for newly approved therapeutic products and, in some cases, by
refusing coverage entirely for development-stage products for certain disease
indications which have not yet received full marketing approval of the FDA.
Failure by payors to cover adequately and reimburse usage of the Company's
products could have a material adverse effect on the Company's ability to
generate revenues.
INTENSE COMPETITION
The Company is engaged in fields which are characterized by extensive
worldwide research efforts and intense competition by pharmaceutical companies,
medical device companies, specialized biotechnology companies and academic
institutions. The Company's future success will depend in large part on its
ability to maintain a competitive position within its areas of research and
development. The use of MSCs to regenerate bone marrow stroma, bone, cartilage
and soft tissues (E.G., tendon, ligament, muscle and fat) will compete with
existing therapies such as allograft bone, tendon, ligament and cartilage
tissue, synthetic bone tissue substitutes and metal/polymer prostheses. Most of
the Company's numerous competitors have substantially greater financial,
research and development, clinical, regulatory, production, marketing and sales
resources than the Company and are better equipped than the Company to develop,
market and manufacture competitive products. Several competitors have developed,
or have initiated active product development programs for the development of,
osteogenic tissue growth factors, cell transplantation and allograft tissues, as
well as synthetic soft and hard tissues. There can be no assurance that existing
or future therapies developed by others will not render the Company's potential
products obsolete or noncompetitive. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE
The Company conducts its research and development activities in an
environment of rapidly evolving biotechnology. The Company's MSC technology is
in its early stages of development. The Company's competitors and other entities
are pursuing related avenues of research and therapy which are likely to affect
the commercial viability of the Company's MSC technology and the course of the
Company's future research and development activities. There can be no assurance
that the Company will be able to remain abreast of the evolving knowledge,
research and technologies having significant implications for its own research
and development activities, and failure to do so could adversely affect the
Company's ability to develop and market commercially useful products.
UNCERTAINTY AND DIFFICULTY IN OBTAINING AND ENFORCING PATENTS AND PROPRIETARY
RIGHTS
The Company's success will depend in large part on its ability to obtain
patents on its products, obtain licenses to use third-party technologies,
protect its trade secrets and operate without infringing the proprietary rights
of others. The Company owns or has an exclusive license to five patents granted
in the United States relating to: (i) isolated human mesenchymal stem cells and
therapeutic compositions
11
<PAGE>
containing such cells; (ii) producing bone or cartilage through the use of human
mesenchymal stem cells; (iii) repairing connective tissue damage through the use
of human mesenchymal stem cells; (iv) isolated human mesenchymal stem cells
transfected with genetic material for potential use in gene therapy; and (v)
certain antibodies against human osteogenic cells and the use thereof. The
Company also owns or has licenses to over 40 United States and foreign patent
applications directed to MSC technology. The Company intends to continue to use
its scientific expertise to pursue and patent new developments with respect to
uses, compositions and factors related to mesenchymal stem cells to enhance the
Company's leadership in the MSC field. The protection afforded by the granted
United States patents with respect to isolated human mesenchymal stem cells and
transfected human mesenchymal stem cells, respectively, will not be obtained
outside the United States. Legal standards regarding the scope of claims and
validity of biotechnology patents are uncertain and evolving. There can be no
assurance that the Company's pending patent applications will be approved, that
any issued or pending patent will provide the Company with significant
competitive advantages, or that challenges will not be instituted against the
validity or enforceability of any patent owned by the Company. The cost of
litigation to uphold the validity and prevent infringement of a patent is
substantial. Furthermore, there can be no assurance that others will not
independently develop substantially equivalent technologies not covered by
patents to which the Company owns rights or obtain access to the Company's
know-how. In addition, the laws of certain countries may not adequately protect
the Company's intellectual property. Competitors of the Company may possess or
obtain patents on products or processes that are necessary or useful to the
development, use or manufacture of the Company's products. The Company is aware
of a granted United States patent owned by a subsidiary of Novartis which covers
the use of EX VIVO gene therapy in humans. If a license is not obtained under
such patent, the Company or any of its future collaborators may not be able to
exploit in the United States EX VIVO gene therapy with the Company's mesenchymal
stem cell technology. There can be no assurance that such a license will be
available on commercially acceptable terms, if at all. The Company is aware of a
start-up company, working in the area of mesenchymal stem cells, that has
asserted that the United States Patent Office has allowed claims directed to the
start-up companys' mesenchymal stem cell technology. There can be no assurance
that the Company's proposed technology will not infringe patents or proprietary
rights owned by others, with the result that others may bring infringement
claims against the Company and require the Company to license such proprietary
rights, which may not be available on commercially reasonable terms, if at all.
No assurance can be given that any such litigation, if instituted, will not have
a material adverse effect on the Company, including the imposition of monetary
penalties, diversion of management resources and injunction against continued
manufacture, use or sale of certain products or processes. Certain of the
Company's technology has resulted and will result from research funded by
agencies of the United States government. As a result of such funding the United
States 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, under certain
conditions, the government has the right to require the Company to grant third
parties licenses to such technology. Any of the foregoing events could have a
material adverse effect on the Company.
The Company also relies upon nonpatented proprietary know-how. There can be
no assurance that the Company can adequately protect its rights in such
nonpatented proprietary technology, or that others will not independently
develop substantially equivalent proprietary information or techniques or gain
access to the Company's proprietary know-how. While it is the Company's policy
to enter into confidentiality agreements with its officers, employees,
consultants, contractors, manufacturers, outside scientific collaborators and
other parties, there can be no assurance that such agreements will be honored or
found to be enforceable or that adequate remedies for the breach of such
agreements will be available. Furthermore, there can be no assurance that former
employers of the Company's present and future employees will not assert claims
that such employees improperly disclosed confidential or proprietary information
to the Company. Any such claims, with or without merit, can be time consuming
and expensive to defend, cause product development delays or require the Company
to enter into licensing agreements,
12
<PAGE>
which may not be available on favorable terms, if at all. See
"Business--Collaborative Research and Licensing Agreements" and "--Patents and
Intellectual Property."
POTENTIAL PRODUCT LIABILITY AND UNCERTAIN AVAILABILITY OF INSURANCE
The testing and use of human cell therapeutics and biopharmaceuticals entail
an inherent risk of adverse effects or medical complications to patients and, as
a result, product liability claims may be asserted against the Company. A
product liability claim or product recall could have a material adverse effect
on the Company. The Company currently has product liability insurance in the
aggregate amount of $2,000,000 per occurrence per year for the
physician-sponsored clinical trial currently underway at the University
Hospitals of Cleveland, Ireland Cancer Center ("University Hospitals" or "UHC").
There can be no assurance, however, that product liability insurance will
continue to be available to the Company in the future on acceptable terms, if at
all, or that the coverage will be adequate to protect the Company against
product liability claims. The Company has obtained indemnification from Novartis
relating to liabilities arising from the manufacture, sale or use of products by
Novartis in its collaboration with the Company. The Company also will attempt to
obtain indemnification from its collaborative partners against product liability
claims for products that are developed and commercialized by such partners.
However, there can be no assurance that such partners will honor any such
indemnification obligations to the Company or that such indemnification will be
adequate to offset any liability of the Company. In the event of a successful
claim against the Company, insufficient insurance or indemnification rights
could result in liability to the Company which could have a material adverse
effect on the Company.
DEPENDENCE ON KEY PERSONNEL
Because of the specialized nature of the Company's technology and its
contribution to the development of future products, the Company is highly
dependent upon existing personnel and on its ability to attract and retain
qualified executive officers and scientific personnel for research, clinical
studies and development activities conducted or sponsored by the Company. As a
development stage company, the Company currently is seeking to recruit
additional qualified scientific and technical personnel. There is intense
competition for qualified personnel in the Company's fields of research and
development, and there can be no assurance that the Company will be able to
continue to attract and retain the personnel necessary for the development and
commercialization of its product candidates. See "Management." The loss of, or
the failure to recruit, scientific, technical and managerial personnel could
have a material adverse effect on the Company. In addition, the Company relies
on its scientific advisory board and consultants to formulate research and
development strategy, all of whom have other professional commitments which
limit their availability to the Company.
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS
Upon completion of this Offering, the Company's executive officers and
directors and their affiliates will beneficially own up to 20.6% of the
Company's Common Stock (20.0% if the Underwriters' over-allotment option is
exercised in full). Accordingly, the Company's executive officers and directors
and their affiliates will be able to influence the election of directors and
corporate actions requiring stockholder approval. See "Principal Stockholders"
and "Certain Transactions." In addition, the Company is obligated under certain
circumstances to nominate a representative of Novartis for election to the Board
of Directors.
HANDLING OF HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals, human blood and tissue, biological waste and
various radioactive compounds. The risk of accidental contamination or injury
from these materials cannot be completely eliminated. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling
13
<PAGE>
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 or operations, 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. Any failure by the Company to control
the use, disposal, removal or storage of, to adequately restrict the discharge
of, or to assist in the cleanup of hazardous, infectious or toxic chemicals or
substances could subject the Company to significant liabilities, including joint
and several liability under certain statutes. The imposition of such liabilities
could have a material adverse effect on the Company.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Restated Certificate of Incorporation, as amended, and Bylaws,
as amended, as well as Delaware corporate law, contain certain provisions that
could have the effect of delaying, deferring or preventing a change in control
of the Company. These provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain of
such provisions allow the Company to issue, without stockholder approval,
Preferred Stock having rights senior to those of the Common Stock. Other
provisions impose various procedural and other requirements that could make it
difficult for stockholders to effect certain corporate actions. See "Description
of Capital Stock-- Delaware Law and Certain Charter, Bylaw and Other Provisions"
and "--Preferred Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The existing stockholders of the Company acquired their shares of Common
Stock at an average cost substantially below the offering price set forth on the
cover page of this Prospectus. Accordingly, investors in this Offering will
suffer an immediate and substantial dilution in the pro forma net tangible book
value of the Common Stock of $8.12 assuming an initial public offering price of
$12.00 per share (the mid-point of the range of estimated initial offering
prices per share). To the extent that outstanding options or warrants are
exercised, there will be further dilution to new investors. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
this Offering could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital in the future. Upon completion
of this Offering, the Company will have a total of 11,263,166 shares of Common
Stock outstanding, of which the 2,500,000 shares offered hereby will be freely
tradable without restriction under the Securities Act of 1933, as amended (the
"Securities Act") by persons other than "affiliates" of the Company, as defined
under the Securities Act. The remaining 8,763,166 shares of Common Stock
outstanding are "restricted securities" as that term is defined by Rule 144
promulgated under the Securities Act (the "Restricted Shares"). Of the
Restricted Shares, 7,773,860 shares will become eligible for sale in the public
market 90 days after completion of the Offering, subject in some cases to
certain volume restrictions and other conditions imposed under Rules 144 and
701. The remaining 989,306 shares will be eligible for sale upon the expiration
of their respective holding periods as set forth in Rule 144. Notwithstanding
these rights, however, 8,552,171 of the Restricted Shares are subject to lock-up
agreements and may not be sold for up to 180 days following the date of this
Prospectus. See "Underwriting" and "Shares Eligible for Future Sale."
Following the date of this Prospectus, the Company intends to register on
one or more registration statements on Form S-8 shares of Common Stock issuable
under the Stock Plans. Of the 1,176,471 shares issuable under the Stock Plans,
462,904 shares are subject to outstanding options as of September 30, 1997,
346,696 of which shares are subject to the above-referenced lock-up agreements.
Subject to the lock-up
14
<PAGE>
agreements, shares issued upon the exercise of such options will upon issuance
to employees pursuant to the Stock Plans immediately be eligible for sale in the
public market. In addition, the Company has issued warrants to purchase 659,051
shares of Common and Preferred Stock which are currently exercisable, of which
532,026 shares are subject to the lock-up agreements referenced above. See
"Management--Stock Option and Employee Benefit Plans," "Certain Transactions"
and "Shares Eligible for Future Sale."
The holders of approximately 2,701,465 shares of Common Stock, including
shares acquired upon exercise of certain outstanding warrants, are entitled to
certain registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. See
"Description of Capital Stock--Registration Rights Agreements" and "Shares
Eligible for Future Sale." In addition, if the Company is required to include in
a registration statement shares held by such persons pursuant to "piggyback"
registration rights, such sales could have a material adverse effect on the
Company's ability to raise capital.
NO DIVIDENDS
The Company has not paid cash dividends on its Common Stock and does not
expect to do so in the foreseeable future. See "Dividend Policy."
POSSIBLE LOSS OF NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1997, for federal income tax purposes, the Company had
generated net operating loss carryforwards of approximately $21,000,000, which
are scheduled to expire on various dates beginning from the year 2008 through
2011 if not utilized. However, there may be limitations on the annual
utilization of these net operating loss carryforwards as a result of certain
changes in the Company's ownership, including prior ownership changes, this
Offering and future issuances of securities of the Company. See Note 6 of Notes
to Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NO PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to this Offering there has been no public market for the Common Stock
and an active public market for the Common Stock may not develop or be
sustained. The initial public offering price will be determined through
negotiation between the Company and the Representatives of the Underwriters
based on several factors that may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The trading price 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 a wide variety of factors, including but not
limited to announcements of clinical results, research activities, technological
innovations or new products of the Company or its 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,
public concern regarding the safety, efficacy or other implications of the
Company's products or methodologies, general market conditions or the Company's
liquidity or ability to raise additional funds. In addition, the stock markets
have experienced extreme fluctuations in price and volume. This volatility has
significantly affected the market prices for securities of emerging
biotechnology companies for reasons frequently unrelated to or disproportionate
to the operating performances of such companies. These market fluctuations as
well as general fluctuations in the stock markets may adversely affect the
market price of the Common Stock.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
$27,250,000 ($31,435,000 if the Underwriters exercise their over-allotment
option in full), at an assumed initial public offering price of $12.00 per share
(the mid-point of the range of the estimated initial public offering prices per
share) and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company intends to use approximately $15,100,000 of the net proceeds to
fund product development activities, including preclinical and human clinical
trials; approximately $5,850,000 for research activities; approximately
$4,800,000 for MSC process development activities; and approximately $1,500,000
for capital expenditures, including the construction of a pilot manufacturing
facility and possible expansion of the Company's research and development
facilities during 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
remaining net proceeds will be used for working capital and other general
corporate purposes, including scheduled repayments of obligations under
equipment leases. The Company also expects from time to time to evaluate the
acquisition of products, technologies and businesses that complement the
Company's business, for which a portion of the net proceeds also may be used.
The Company does not have any agreements, arrangements or understandings with
respect to any such acquisitions and no portion of the net proceeds has been
allocated for any specific acquisition. Pending such uses, the net proceeds will
be invested in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
It is the present policy of the Company's Board of Directors to retain earnings,
if any, to finance the development of the Company's business. The payment of
dividends is within the discretion of the Company's Board of Directors, and will
depend upon, among other things, the Company's earnings, financial condition and
capital requirements, general business conditions and any restrictions in credit
agreements.
16
<PAGE>
DILUTION
The Company's pro forma net tangible book value at September 30, 1997 was
$16,490,122, or $1.88 per share. Pro forma net tangible book value per share
represents the Company's tangible net worth (net tangible assets less total
liabilities) divided by the number of shares of Common Stock outstanding as of
September 30, 1997, after giving effect to: (i) the 1-for-1.7 reverse stock
split; and (ii) the conversion of all outstanding shares of Preferred Stock into
Common Stock.
After giving effect to the sale of 2,500,000 shares of Common Stock in this
Offering at an assumed initial public offering price of $12.00 per share (the
mid-point of the range of the estimated initial public offering prices per
share) and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the pro forma net tangible book value
of the Company as of September 30, 1997 would have been $43,740,122, or $3.88
per share. This represents an immediate increase in pro forma net tangible book
value of $2.00 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $8.12 per share to purchasers of Common
Stock in this Offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 12.00
Pro forma net tangible book value per share as of September 30, 1997... $ 1.88
Increase per share attributable to new investors....................... 2.00
---------
Pro forma net tangible book value per share after this Offering.............. 3.88
---------
Dilution per share to new investors.......................................... $ 8.12
---------
---------
</TABLE>
The following table summarizes, as of September 30, 1997, on a pro forma
basis and after giving effect to the 1-for-1.7 reverse stock split and the
Offering, the differences between the existing stockholders and the new
investors with respect to the number of shares of Common Stock purchased, the
total consideration paid and the average price per share paid (based upon an
assumed initial public offering price of $12.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 8,763,166 78% $ 41,668,494 58% $ 4.75
New investors...................................... 2,500,000 22 30,000,000 42 $ 12.00
------------ --- ------------- ---
Total.......................................... 11,263,166 100% $ 71,668,494 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants.
At September 30, 1997, 901,739 shares of Common Stock were reserved for issuance
under the Stock Plans, pursuant to which options to purchase a total of 462,904
shares are outstanding at a weighted average exercise price of $1.80 per share,
and 659,051 shares of Common Stock are issuable upon exercise of outstanding
warrants to purchase Common and Preferred Stock at a weighted average exercise
price of $5.11 per share. In the event such options and warrants are exercised,
investors may experience further dilution. See "Management--Stock Option and
Employee Benefit Plans," "Description of Capital Stock--Warrants" and Notes 8
and 14 of Notes to Consolidated Financial Statements.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997: (i) on an actual basis adjusted for a 1-for-1.7 reverse
stock split; (ii) on a pro forma basis to give effect to the conversion into
5,510,002 shares of Common Stock of all outstanding shares of Preferred Stock
upon completion of this Offering; and (iii) on a pro forma as adjusted basis to
give effect to the sale by the Company of the 2,500,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $12.00 per share
(the mid-point of the range of the estimated initial public offering prices per
share) and the application of the net proceeds therefrom as described under "Use
of Proceeds." This table is qualified in its entirety by, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Debt:
Note payable.............................................................. $ 652 $ 652 $ 652
Obligations under capital leases.......................................... 6,325 6,325 6,325
---------- ----------- -----------
Total debt.......................................................... 6,977 6,977 6,977
---------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value, 20,000,000 shares authorized; 9,268,963
shares issued and outstanding, actual; no shares issued and outstanding,
pro forma as adjusted (1)............................................... 28,460 -- --
Common Stock, $.001 par value; 30,000,000 shares authorized; 3,253,164
shares issued and outstanding, actual; 8,763,166 shares issued and
outstanding, pro forma; 11,263,166 shares issued and outstanding, pro
forma as adjusted (1)................................................... 3 9 11
Additional paid-in capital.................................................. 10,040 38,494 65,742
Deferred compensation and loans to officers for the purchase of stock....... (388) (388) (388)
Deficit accumulated during the development stage............................ (21,565) (21,565) (21,565)
---------- ----------- -----------
Total stockholders' equity.............................................. 16,550 16,550 43,800
---------- ----------- -----------
Total capitalization................................................ $ 23,527 $ 23,527 $ 50,777
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------------
(1) Does not include: (i) 901,739 shares of Common Stock reserved for issuance
under the Stock Plans, pursuant to which options to purchase a total of
462,904 shares are outstanding at a weighted average exercise price of $1.80
per share and (ii) 659,051 shares of Common Stock issuable upon exercise of
outstanding warrants to purchase Common and Preferred Stock at a weighted
average exercise price of $5.11 per share. See "Management--Stock Option and
Employee Benefit Plans," "Description of Capital Stock--Warrants" and Notes
8 and 14 of Notes to Consolidated Financial Statements.
18
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected financial data of the Company. The
selected financial data as of December 31, 1995 and 1996 and for each of the
years ended December 31, 1994, 1995 and 1996 and for the period from inception
to December 31, 1996 have been derived from the Company's audited consolidated
financial statements included elsewhere in the Prospectus. The selected
financial data as of December 31, 1993 and 1994 and for the period from the
Company's inception to December 31, 1993 have been derived from the Company's
audited consolidated financial statements not included in the Prospectus. The
selected financial data as of September 30, 1997, for each of the nine-month
periods ended September 30, 1996 and 1997 and for the period from inception to
September 30, 1997 have been derived from the Company's unaudited consolidated
financial statements included elsewhere in the Prospectus. The Company's
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for this period. The data set
forth below are qualified by reference to, and should be read in conjunction
with, the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
FROM FROM ENDED SEPTEMBER 30, FROM
INCEPTION TO YEAR ENDED DECEMBER 31, INCEPTION TO INCEPTION TO
DECEMBER 31, ------------------------------- DECEMBER 31, -------------------- SEPTEMBER 30,
1993 1994 1995 1996 1996 1996 1997 1997
------------- --------- --------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Collaborative research and
grant income(1)............. $ -- $ 33 $ -- $ 1,067 $ 1,100 $ 565 $ 5,756 $ 6,856
Interest income............... 30 230 169 522 951 280 488 1,440
------------- --------- --------- --------- ------------- --------- --------- -------------
Total revenues.......... 30 263 169 1,589 2,051 845 6,244 8,296
------------- --------- --------- --------- ------------- --------- --------- -------------
Expenses:
Research and development...... 338 2,341 4,533 7,364 14,576 4,586 7,341 21,917
General and administrative.... 822 1,266 1,477 1,861 5,426 1,316 1,257 6,683
Interest expense.............. 8 10 97 576 691 408 570 1,261
------------- --------- --------- --------- ------------- --------- --------- -------------
Total expenses.......... 1,168 3,617 6,107 9,801 20,693 6,310 9,168 29,861
------------- --------- --------- --------- ------------- --------- --------- -------------
Net loss........................ $ (1,138) $ (3,354) $ (5,938) $ (8,212) $ (18,642) $ (5,465) $ (2,924) $ (21,565)
------------- --------- --------- --------- ------------- --------- --------- -------------
------------- --------- --------- --------- ------------- --------- --------- -------------
Net loss per common share and
common share equivalents...... $ (.56) $ (1.32) $ (2.14) $ (2.93) $ (1.95) $ (.95)
Weighted average common shares
and common share equivalents
outstanding................... 2,032 2,537 2,776 2,806 2,804 3,081
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1997
------------------------------------------ -------------
1993 1994 1995 1996 ACTUAL(2)
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities available-for-sale.............. $ 4,052 $ 4,797 $ 6,663 $ 9,350 $ 18,192
Working capital....................................................... 4,292 4,035 5,664 7,711 12,631
Total assets.......................................................... 4,679 5,988 9,425 18,778 28,765
Long-term debt and capital lease obligations, less current portion.... -- 184 1,277 6,660 5,854
Deficit accumulated during the development stage...................... (1,138) (4,492) (10,430) (18,642) (21,565)
Total stockholders' equity............................................ 4,432 5,019 6,995 9,887 16,550
</TABLE>
- ------------------------------
(1) Includes (i) $1,025,000 of revenue recognized pursuant to the Company's
research agreement with the U.S. Defense Advance Research Projects Agency
("DARPA") for the year ended December 31, 1996, and for the period from
inception to December 31, 1996, (ii) $975,000 of revenue recognized pursuant
to the Company's research agreement with DARPA and $4,581,000 of revenue
recognized pursuant to the Company's research and licensing agreement with
Novartis for the nine months ended September 30, 1997, and (iii) $2,000,000
of revenue recognized pursuant to the Company's research agreement with
DARPA and $4,581,000 of revenue recognized pursuant to the Company's
research and licensing agreement with Novartis for the period from inception
through September 30, 1997.
(2) Includes the issuance and sale by the Company of 692,059 shares of Common
Stock to Novartis in June 1997 for an aggregate purchase price of
$10,000,250.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION
CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES
THERETO AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE HEREIN.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS REGARDING THE COMPANY'S STRATEGIES, PLANS,
OBJECTIVES AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED OR DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS.
OVERVIEW
Since its inception, the Company has been in the development stage and has
engaged in research and product development, both on its own and in conjunction
with various collaborative partners. The Company expects that its revenue
sources for at least the next several years will continue to be limited to grant
revenues and research funding, milestone payments and licensing fees from
corporate collaborators. In certain circumstances, such as under the Company's
Research Collaboration and License Agreement with Novartis Pharmaceuticals
Corporation, a collaborator may conduct and fund product development and
regulatory approval activities for certain of the Company's product candidates.
The timing and amount of revenues, if any, will be subject to significant
fluctuations, based in part on the success of the Company's research activities,
the timing of the achievement of certain milestones and the extent to which
associated costs are reimbursed under grant or other arrangements. Research and
development expenses may fluctuate as various expenditures arise during the
several stages of the Company's research and clinical development programs and
are expected to increase as product development programs and applications
progress. As a result of these 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 results of operations for other periods.
The Company's material agreements that may provide future revenues include
its agreements with Novartis and the U.S. Defense Advanced Research Projects
Agency ("DARPA"). In June 1997, the Company entered into a multi-year
collaboration with Novartis, under which Novartis provided an initial up-front
payment of $3,000,000 to the Company and purchased 692,059 shares of the
Company's Common Stock (representing 7.9% of the Company's outstanding Common
Stock) for $10,000,250. In addition, Novartis agreed to fund, during the
five-year term of the collaboration, up to $50,000,000 of MSC research by the
Company and to fund all costs for clinical development, regulatory approvals,
manufacturing and marketing of the MSC products developed from the
collaboration. The Company could also receive milestone payments of up to
$93,000,000, contingent upon the achievement of specified regulatory milestones
in connection with the development of products pursuant to the Novartis
collaboration. There can be no assurance that the Company will become entitled
to the full amount of the research and development funding or any or all of the
milestone payments. As consideration for its funding, Novartis received
exclusive worldwide rights to use and sell certain MSC products in the
osteoporosis, osteoarthritis, cartilage injury and gene therapy fields developed
during the collaboration. Novartis agreed to pay the Company royalties based
upon the net sales, if any, of such products. See "Business--Collaborative
Research and Licensing Agreements--Novartis Agreement."
In June 1996, DARPA awarded a sole-source, multi-year research contract to
the Company for research into the use of MSCs as a strategic platform for
detection and treatment of biological and chemical agents. The DARPA agreement
provided $6 million in funding to the Company, consisting of $2 million per year
for three years (supplemented by cost-sharing contributions from the Company in
the form of equipment and indirect costs), which the Company will use to conduct
two projects focusing on
20
<PAGE>
(i) a novel delivery system for vaccines using MSCs, and (ii) a novel detection
system for toxic or biological agents using MSCs. The Company retained all
commercial rights to inventions resulting from its research under the DARPA
agreement. In May 1997, the Company received approval for the second year of
funding under the contract, having successfully completed the first year's
milestones. See "Business-- Collaborative Research and Licensing
Agreements--Defense Advanced Research Projects Agency Agreement."
Over the past several years, the Company's net loss has increased,
consistent with the growth in the scope and size of the Company's research and
development activities. In the near term, the Company plans to expand its
personnel in the areas of product development, research, clinical and regulatory
affairs and administration and if such expansion occurs, the Company's operating
expenses will continue to increase as a result. The Company has been
unprofitable since its inception and does not anticipate having net income in
the foreseeable future. Through September 30, 1997, the Company had an
accumulated deficit of $21,565,000. There can be no assurance that the Company
will be able to achieve profitability on a sustained basis, if at all.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
REVENUES. Total revenues were $6,244,000 in the nine months ended September
30, 1997 compared to $845,000 in the same period in 1996. The increase is
principally associated with payments received under the Novartis Agreement
entered into in June 1997 ($4,581,250) and the research contract with the DARPA
awarded in the second quarter of 1996 ($974,711). Interest income was $488,000
in the first nine months of 1997 compared to $280,000 in the first nine months
of 1996.
EXPENSES. Total expenses were $9,168,000 in the nine months ended September
30, 1997 and $6,310,000 in the nine months ended September 30, 1996. The
increase in costs and expenses is primarily the result of an increase in
research and development expense to $7,341,000 in the 1997 period from
$4,587,000 in 1996. The increase in research and development expense reflects an
increase in research, preclinical studies, clinical development and product
development activities. These principally include additional expenses associated
with staffing increases, related laboratory supplies, equipment rental and costs
associated with the Company's laboratory facilities. These expenses were
incurred in the Company's internal and externally funded research programs.
General and administrative expenses were $1,257,000 in the nine months ended
September 30, 1997 and $1,316,000 in the same period in 1996. The decrease in
general and administrative expenses in the first 9 months of 1997 reflects a
slight decrease in finance, legal and other administrative expenses, which are
expected to increase in support of the Company's increasing product development
and research activities. Interest expense was $570,000 in the nine-month period
in 1997 and $408,000 in the same period in 1996, reflecting varying amounts
outstanding under capital leases during the periods.
NET LOSS. The Company's net loss was $2,924,000 in the nine months ended
September 30, 1997 and $5,465,000 in the same period in 1996. The Company
expects to report substantial net losses for the foreseeable future.
FISCAL 1996, 1995 AND 1994
REVENUES. Total revenues were $1,589,000 in 1996, $169,000 in 1995 and
$263,000 in 1994. Collaborative research and grant revenues increased to
$1,067,000 in 1996 from $0 in 1995, which had decreased from $33,000 in 1994,
reflecting the timing of the receipt of payments under the research contract
with DARPA and grant awards and related research activities to the extent that
associated costs are reimbursed under the grants. Research and grant revenues
accounted for 67%, 0% and 13% of total revenues for the years ended December 31,
1996, 1995 and 1994, respectively, and are recorded on a milestone achievement
and cost-reimbursement basis. The amount and timing of revenue recognition under
the DARPA contract
21
<PAGE>
is dependent upon the achievement of specific research milestones defined in the
contract. Accordingly, revenue recognition may fluctuate based upon achievement
of these specific milestones as compared to cost-reimbursed revenue recognition
under other governmental grants. Interest income was $522,000 in 1996, $169,000
in 1995 and $230,000 in 1994. The increase in interest income in 1996 is due
primarily to corresponding increases in the levels of cash, cash equivalents and
short-term investments for such periods.
EXPENSES. Total expenses were $9,801,000 in 1996, $6,107,000 in 1995 and
$3,617,000 in 1994. The increase in costs and expenses is primarily the result
of an increase in research and development expense to $7,364,000 in 1996 from
$4,533,000 in 1995 and $2,341,000 in 1994. The increase in research and
development expense reflects an increase in research, preclinical studies,
clinical development and product development activities. These principally
include additional expenses associated with staffing increases, related
laboratory supplies, equipment rental and costs associated with the Company's
laboratory facilities. These expenses were incurred in the Company's internal
and externally funded research programs. General and administrative expenses
were $1,861,000 in 1996, $1,477,000 in 1995 and $1,266,000 in 1994. The increase
in general and administrative expenses in 1996 and 1995 reflects an increase in
finance, legal and other administrative expenses which are expected to continue
to increase in support of the Company's increasing product development and
research activities. Interest expense was $576,000 in 1996, $97,000 in 1995 and
$10,000 in 1994, reflecting varying amounts outstanding under capital leases
during the periods.
NET LOSS. The Company's net loss was $8,212,000 in 1996, $5,938,000 in 1995
and $3,354,000 in 1994. The Company expects to report substantial net losses for
the foreseeable future.
TAXATION
The Company has not generated any net income to date and therefore has not
paid any federal or state income taxes since inception. At December 31, 1996,
the Company had deferred tax assets totaling $7,345,000, consisting primarily of
net operating loss carryforwards and research tax credits that begin to expire
from 2008 through 2011, if not utilized. A full valuation allowance for deferred
tax assets has been provided. Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended. The completion of this Offering and prior ownership changes
are likely to limit the Company's ability to utilize federal income tax
carryforwards under Section 382. The annual limitation could result in
expiration of net operating losses and research and development credits before
their complete utilization.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private placements of securities. Net proceeds from such issuances since
inception through September 30, 1997 have totaled approximately $37,278,000. To
a lesser degree, the Company has financed its operations 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. Through September 30, 1997, the Company has received
$5,000,000 of research and development funding from Novartis, of which
$3,418,769 has been deferred in accordance with the Company's revenue
recognition policy. These financing sources have historically allowed the
Company to maintain adequate levels of cash and other liquid investments.
The Company's combined cash, cash equivalents and securities
available-for-sale totaled $18,192,000 at September 30, 1997. The primary uses
of cash, cash equivalents and securities available-for-sale during fiscal 1997
to date include $2,052,000 in property and equipment additions and $747,000 in
principal payments on capital lease obligations and bank borrowings. In addition
to the Novartis purchase of Common Stock in June 1997 for $10,000,250, during
fiscal 1996 the Company received $10,852,000 in net proceeds from sales of
Common Stock, Series D and Series E Convertible Preferred Stock. The Company
plans to continue its policy of investing excess funds in short-term,
investment-grade, interest-bearing instruments.
22
<PAGE>
In June 1997, the Company completed construction of a pilot manufacturing
facility in its Baltimore, Maryland headquarters. The Company plans to invest a
total of $1,500,000 during 1997 to construct and equip the pilot manufacturing
facility. These expenditures will be funded out of existing cash balances
maintained by the Company and potentially a portion of the proceeds from this
Offering. In addition, the Company anticipates that it will spend approximately
$750,000 in other capital expenditures during 1997 for its research and
development activities and is currently conducting a feasibility study for
expansion of its research and development facility to accommodate an increase in
staffing for Novartis funded research and Company funded product and process
development. The proposed expansion would include the exercise of an expansion
option in the Company's current lease agreement for an additional 50,000 square
feet. Pursuant to the lease agreement, the State of Maryland has a best efforts
commitment to finance or guarantee financing for up to $7,000,000 in tenant
improvements for this planned expansion. In addition, the Company has the option
to purchase the building under certain circumstances. To date, the Company has
not entered into any firm commitment for this expansion.
The Company's future cash requirements will depend on many factors,
including continued scientific progress in the Company's research and
development programs, the scope and results of human 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 costs of product commercialization. The Company does not
expect to generate a positive cash flow from operations for several years, if at
all, due to the expected increase in spending for research and development
programs and the expected cost of commercializing product candidates.
Total facility related future minimum lease payments as of December 31, 1996
were approximately $7,317,000, of which approximately $580,000 is due in fiscal
1997. Total equipment related future minimum lease payments as of December 31,
1996 were approximately $2,598,000, of which approximately $986,000 is due in
fiscal 1997. In October 1994, the Company entered into a sponsored Research
Agreement and extensions to consulting agreements with the founding scientists
with Case Western Reserve University that commits a total amount of $1,440,000
in research funding over a three-year period commencing in January 1995.
Approximately $120,000 will be paid in fiscal 1997. In addition, in July 1997
the Company entered into a sponsored Research Agreement with the Centro di
Biotecnologie Avanzate that commits a total amount of $1,000,000 in research
funding over a three-year period commencing in July 1997.
The Company anticipates that the net proceeds of this Offering, together
with the Company's available cash, cash equivalents and securities
available-for-sale, and expected interest income thereon, will be sufficient to
finance its research and development and other working capital requirements for
at least two years. The Company expects that its primary sources of capital for
the foreseeable future will be through collaborative arrangements and the public
or private sale of its equity securities. There can be no assurance that such
collaborative arrangements, or any public or private financing transactions,
will be available on acceptable terms, if at all, or can be sustained in the
future. 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 could have a material adverse effect on the Company.
See "Risk Factors--Dependence Upon Collaborative Partners" and "--Need for
Substantial Additional Funds" and Notes to Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128"), which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128 is
effective for financial statements ending after December 15, 1997. The Company
does not anticipate that the adoption of SFAS 128 will have a material effect on
its financial statements.
23
<PAGE>
BUSINESS
GENERAL
Osiris Therapeutics, Inc. ("Osiris" or the "Company") is engaged in the
research and development of therapeutic products for the regeneration of human
connective tissues (E.G., bone marrow stroma, bone, cartilage, muscle, tendon,
ligament and fat) through the use of mesenchymal stem cells ("MSCs") which the
Company believes to be the progenitor cells responsible for the formation of
such tissues. The Company believes that its proprietary MSC technology will
provide a broad platform for developing and commercializing cell therapy
products and biopharmaceuticals for the regeneration of connective tissues
damaged through injury, aging or degenerative disease.
Connective tissue disorders, including orthopaedic injuries and degenerative
diseases, rank first among all disorders in terms of frequency of visits to
physicians and second in terms of frequency of hospitalizations. In the field of
cancer treatment, damage to bone marrow typically occurs following high-dose
chemotherapy or radiation, which often destroys the patient's hematopoietic
(I.E., blood-forming) system and bone marrow stroma.
The Company and its academic collaborators have isolated, purified and
expanded MSCs from both humans and animals and transplanted the culture-expanded
MSCs to the site of injured animal tissue to regenerate that tissue in a number
of preclinical models, thereby establishing the scientific proof-of-principle
and preclinical safety and efficacy of such techniques. In addition, an initial
physician-sponsored human clinical safety study of cancer patients in remission
using autologous (I.E., derived from a patient's own cells) MSCs has been
completed successfully. A second physician-sponsored human clinical safety study
in advanced breast cancer patients, under an approved IND, is underway currently
at the University Hospitals of Cleveland, Ireland Cancer Center ("UHC").
The Company believes that its tissue regeneration technology, if developed
successfully, could improve the treatment of connective tissue disorders by
restoring the natural functioning of the tissue, improving the quality of the
repair, and by providing a better long-term and cost-effective result compared
to current therapies. For example, (i) regenerating bone marrow stroma following
high-dose cancer chemotherapy could reduce the need for costly platelet and
growth factor infusions, decrease the length, number and costs of hospital stays
and improve patient tolerance to higher or more frequent doses of cancer
chemotherapy; (ii) regenerating bone in spinal fusion and segmental defect
procedures could eliminate the need for harvesting normal bone tissue from the
patient or donors; and (iii) regenerating cartilage in defects that could
otherwise result in joint osteoarthritis could obviate the need for treating the
end-stage disease with a joint implant.
Osiris is focusing its initial product development efforts on the
regeneration of bone marrow stroma following high-dose cancer chemotherapy and
on the regeneration of bone in long bone and spinal defects. In addition, the
Company is collaborating with Novartis in the research and development of MSC
products for treating degenerative diseases such as osteoporosis and
osteoarthritis, for regenerating cartilage damaged by injury, and for certain
gene therapy applications using MSCs as delivery cells.
The Company intends to selectively pursue the establishment of strategic
research, development and marketing collaborations with pharmaceutical and
medical device companies to accelerate the introduction of MSC products. In June
1997, the Company entered into a multi-year collaboration with Novartis of
Basel, Switzerland, one of the world's largest pharmaceutical companies, which
was formed in December 1996 through the merger of Sandoz AG and Ciba-Geigy AG.
Under the Novartis collaboration, Novartis paid to the Company an initial
up-front payment of $3,000,000 and purchased 692,059 shares of the Company's
Common Stock (representing 7.9% of the Company's outstanding Common Stock) for
$10,000,250. In addition, Novartis has agreed to fund, during the five-year term
of the collaboration, up to $50,000,000 of MSC research by the Company and to
fund all costs for clinical development, regulatory approvals, manufacturing and
marketing of the MSC products developed from the collaboration. The
24
<PAGE>
Company also could receive milestone payments of up to $93,000,000, contingent
upon the achievement of specified regulatory milestones in connection with the
development of products pursuant to the Novartis collaboration. There can be no
assurance, however, that the Company will become entitled to the full
$50,000,000 of research and development funding or that any or all of the
products currently contemplated for development pursuant to the Novartis
Agreement will achieve the specified milestones entitling the Company to any or
all of the $93,000,000 of milestone payments. In consideration for its funding,
Novartis has received an exclusive, worldwide license to use and sell MSC
products to be developed during the collaboration. Novartis has agreed to pay
the Company royalties based upon the net sales, if any, of such products. The
Company has retained the right to manufacture for sale in North America any MSC
products in the osteoporosis, osteoarthritis and cartilage injury fields.
The Company owns or has an exclusive license to five patents granted in the
United States relating to: (i) isolated human mesenchymal stem cells and
therapeutic compositions containing such cells; (ii) producing bone or cartilage
through the use of human mesenchymal stem cells; (iii) repairing connective
tissue damage through the use of human mesenchymal stem cells; (iv) isolated
human mesenchymal stem cells transfected with genetic material for potential use
in gene therapy; and (v) certain antibodies against human osteogenic cells and
the use thereof. The Company also owns or has licenses to over forty United
States and foreign patent applications directed to MSC technology. The Company
intends to continue to use its scientific expertise to pursue addtional patent
filings for new compositions, methods and uses of human mesenchymal stem cells
and related know-how to enhance the Company's leadership in MSC technology.
PLATFORM TECHNOLOGY
The Company is developing its MSC technology as a broad, proprietary
platform capable of being applied to multiple products and disease indications.
The Company believes that tissue regeneration through MSC cell therapy may be
able to address multiple types of connective tissues with a common class of
therapies and prove effective for multiple types of damage to the same tissue,
such as damage arising from injury, aging or degenerative diseases (including
osteoporosis, osteoarthritis and age-related bone fractures). Advances in the
Company's research and development of MSC technology, including the results of
preclinical studies and clinical trials in various tissue disorders, may provide
support for future submissions to the FDA in other indications. Furthermore,
success in treating multiple tissue disorders may also provide the Company with
a valuable database for exploring new opportunities in cardiac tissue
regeneration, skin regeneration and reconstructive surgery. In the area of
biopharmaceuticals, the Company believes its MSC research may provide new drug
targets for the treatment of connective tissue disorders and cancer. The Company
believes that successful development of its MSC technology as a platform with
multiple applications would provide Osiris with a leading position in this
emerging market.
BUSINESS STRATEGY
The Company's goal is to sustain its leadership in MSC technology and to
achieve leadership in the emerging tissue regeneration therapy market. The
Company's strategy involves the following elements:
PURSUE PRODUCT COMMERCIALIZATION. The Company intends to actively pursue
opportunities to commercialize its MSC technology. One of the Company's initial
objectives is to complete the formulation and commence human clinical trials of
MSC products for the regeneration of bone marrow stroma and bone and, in
conjunction with Novartis, products for the treatment of osteoporosis and
osteoarthritis and the regeneration of articular cartilage. In addition, the
Company has initiated validation procedures for its newly constructed pilot
plant for the production of autologous MSCs for human clinical trials and plans
to seek FDA certification for the facility in early 1998.
ESTABLISH STRATEGIC CORPORATE COLLABORATIONS. The Company intends to
selectively pursue the establishment of corporate collaborations to accelerate
the introduction of MSC products. The Company has
25
<PAGE>
entered into a collaboration with Novartis in the areas of osteoporosis,
osteoarthritis, cartilage regeneration and selected aspects of MSC gene therapy.
The Company intends to pursue additional corporate collaborations for specific
areas of its MSC technology. This strategy would allow the Company to build and
sustain leadership in MSC technology, while utilizing the clinical expertise,
distribution infrastructure and financial resources of multiple strategic
partners. The Company intends to develop potential products to a late
preclinical or early clinical stage and then to collaborate with pharmaceutical
or medical device companies for the later stages of clinical development and
commercialization. The Company will, however, also consider developing certain
products on its own.
ENHANCE MSC RESEARCH LEADERSHIP. MSC technology was pioneered by the
Company and its scientific founders. The Company intends to continue focusing
its core research and development programs on the characterization and mechanism
of action for the growth, differentiation and maturation of MSCs, both IN VITRO
and IN VIVO. Increasing the Company's understanding of the role of mesenchymal
stem cells in tissue formation and interactions with surrounding tissue will be
important in tailoring MSC products to specific disorders. The Company also
intends to continue expanding its network of academic research and clinical
collaborators and advisors, both in support of its core MSC technology and in
related technologies. Through this network, located throughout the U.S. and
Europe, the Company intends to identify additional indications for MSC products
and to extend the research on existing applications.
SUSTAIN AND PROTECT INTELLECTUAL PROPERTY ADVANTAGE. The Company intends to
sustain and protect its intellectual property advantage in MSC technology by:
(i) accelerating the rate of new patent filings for its MSC technology; (ii)
licensing related technology from members of its academic and clinical network;
(iii) disseminating the Company's MSC technology to selected academic
researchers in exchange for licenses to new applications of such technology; and
(iv) vigorously protecting the Company's patents and know-how.
OPTIMIZE STRATEGIC AND FINANCIAL FLEXIBILITY. The Company intends to
optimize its strategic and financial flexibility by, among other things,
obtaining multi-year research, development and milestone funding from the
Company's corporate collaborators. The Company intends, where possible, to have
corporate collaborators fund a substantial portion of the expenses for product
development programs, most or all of the costs involved in multi-site human
clinical trials and all of the costs of regulatory submissions. In addition, the
Company plans to continue seeking non-equity grant support to fund new research
initiatives for its MSC technology. To date, the Company has been awarded U.S.
Government contracts and grants worth approximately $9,000,000 for MSC research.
These funds allow the Company to explore multiple MSC opportunities
simultaneously while reducing financial and operating risks.
MESENCHYMAL STEM CELL TECHNOLOGY
MESENGENESIS
In the early embryo, the middle layer of cells (known as the mesoderm) and
certain portions of the outer cell layers give rise to groups of cells that
differentiate into bone marrow stroma, bone, cartilage, muscle, tendon,
ligament, fat and other connective tissues. Based upon laboratory and
preclinical research to date, the Company believes that the process of tissue
regeneration follows a sequence of events similar to that of embryonic tissue
formation and that throughout life, individuals maintain a reserve of
mesenchymal progenitor cells that are capable of differentiating into new
connective tissues. The Company refers to the progenitor cells that initiate
tissue formation as mesenchymal stem cells and the formation of these tissues as
mesengenesis.
The schematic on the inside cover of this Prospectus illustrates the
sequence of events which the Company believes are involved in the formation of
connective tissues. MSCs proliferate (I.E., undergo multiple divisions) to
generate increased numbers of MSCs. Many of these expanded MSCs then undergo
26
<PAGE>
a commitment step and enter a particular lineage pathway (E.G., bone-forming,
cartilage-forming or tendon-forming), leading ultimately to the formation of
differentiated, tissue-specific cells.
Once committed to a specific pathway, the cells undergo distinctive
conformational changes during the process of lineage progression. Eventually,
the cells in each pathway undergo a differentiation process in which they no
longer divide, but rather fabricate unique components (E.G., extracellular
matrix, membrane receptors, bioactive factors) in a sequence of synthesis and
assembly steps comparable to that originally observed when the embryo first
develops specialized mesodermal tissues. The modulation of these synthesis and
assembly steps is often referred to as maturation, as the newly formed tissue
takes on its final form.
CELL THERAPY USING MESENCHYMAL STEM CELLS
The Company believes that the field of tissue regeneration is moving toward
a new class of treatments involving cell therapy. The Company intends to
commercialize products that result in site-directed tissue regeneration based on
the use of MSCs. Such products would originate from a small sample of bone
marrow cells collected by needle aspiration from a patient using a local
anesthetic. The bone marrow aspirate would be transferred to the Company's
processing facilities and the MSCs would be isolated and culture-expanded. The
culture-expanded cells would then be returned to the patient for infusion or
implantation. The MSCs would be combined in some instances with a biodegradable
matrix or other delivery device capable of stabilizing the cells at the implant
site.
Results of preclinical studies indicate that, by increasing the quantity of
MSCs at the defect site, the natural progression of mesengenesis will result in
the regeneration of tissue and the repair of tissue defects. As a result, the
Company intends to commercialize custom, autologous MSC infusions for treating
the destructive effects of cancer chemotherapy and radiation therapy and custom,
autologous MSC implants for orthopaedic tissue regeneration. The schematic on
the inside cover of this Prospectus illustrates the process which the Company
intends to utilize for clinical tissue regeneration.
GENE THERAPY
Gene therapy is a novel approach to the treatment of disease in which genes
are inserted into a patient's cells to induce these cells to produce therapeutic
proteins or to replace defective or missing genes. The Company believes that
MSCs may be useful clinically for gene therapy applications, including the IN
VIVO production of therapeutic drugs through their expression in connective
tissues. The Company has shown that therapeutic genes can be transferred into
MSCs in a highly efficient and reliable manner and can serve as a delivery
vehicle for gene therapy applications. MSCs could be useful particularly as
delivery cells for gene therapy based on the evidence that MSCs can: (i)
efficiently incorporate the gene into MSCs, which can then be expanded in
culture to produce a sufficient quantity of genetically-engineered cells for
therapeutic treatment; (ii) replicate as stem cells IN VIVO to provide
additional quantities of gene-modified cells; and (iii) retain gene expression
during cellular differentiation into the desired connective tissue.
The Company's business opportunity will depend, in part, upon the successful
development of individual gene therapy applications currently under development
by third parties such as Novartis. The Company's collaboration with Novartis is
limited to three specific genes, together with a right of first refusal to
additional genes specified on or before December 31, 1997. The Company currently
retains the ability to license rights to develop therapies for additional gene
targets outside of the scope of the Novartis collaboration.
BIOPHARMACEUTICALS
The Company believes that specific hematopoietic and mesengenic factors
exist that control and modulate mesengenesis. The isolation of these factors
could lead to biopharmaceuticals for regulating MSC proliferation and
stimulating their differentiation into new mesenchymal tissues. These
27
<PAGE>
biopharmaceuticals could be used alone or in conjunction with the Company's MSC
cell therapy applications. The development of these factors is complementary to
the development of the Company's MSC technology because such factors could,
among other things, enhance the production of MSCs during the culture-expansion
phase of MSC manufacturing. To date, the Company has identified eight novel
target molecules for possible biopharmaceutical development and has discovered
the presence on MSCs of four target molecules previously identified by other
groups, which are thought to play a direct role in MSC proliferation and
differentiation.
PRODUCT DEVELOPMENT PROGRAMS
The MSC platform technology is being developed by the Company and with
collaborative partners who provide funding, research and development and
commercialization expertise for multiple MSC product applications. The Company's
product development programs and the commercialization rights and development
status of such programs are summarized below:
<TABLE>
<CAPTION>
COMMERCIALIZATION
PRODUCT DEVELOPMENT PROGRAMS RIGHTS DEVELOPMENT STATUS (1)
- ---------------------------------------- -----------------------
<S> <C> <C>
CELL THERAPY
Treatment following cancer Company Phase I Clinical
chemotherapy Trials, Preclinical
Trials
Bone Regeneration:
Spinal fusion Company Preclinical Trials
Bone defects/Non-unions Company Preclinical Trials
Cartilage Regeneration Novartis(2) Animal Studies
Degenerative Disorders:
Osteoporosis Novartis(2) Animal Studies
Osteoarthritis Novartis(2) Research
Tendon Regeneration Company Animal Studies
Cardiac Muscle and Other Soft Tissue Company Research
GENE THERAPY
Vaccine delivery Company Research/Development
Three therapeutic genes Novartis Research
Other therapeutic genes Company Research
BIOPHARMACEUTICALS
Mesengenic Factors Company Research
Hematopoietic Factors Company Research
</TABLE>
- --------------------------
(1) Development Status refers to the following stages ranging from early
research through human clinical trials leading to market approval by the FDA
or other regulatory agencies.
(a) "Clinical Trials" refer to physician-sponsored human safety and efficacy
studies.
(b) "Preclinical Trials" refer to various animal studies which determine a
product's initial safety and efficacy in preparation for filing of IND
applications.
(c) "Animal Studies" refer to various animal models which are used to
demonstrate clinical proof-of-principle for a therapeutic approach or
procedure. The same animal studies may serve as the basis for an IND
application.
(d) "Development" refers to laboratory studies leading to a product
prototype which may be subsequently used in animal or preclinical
studies.
(e) "Research" refers to exploratory studies or to basic studies which may
lead ultimately to a product development effort.
(2) The Company has retained the right to manufacture for sale in North America
MSC products in the osteoporosis, osteoarthritis and cartilage injury
fields.
28
<PAGE>
CELL THERAPY
STROMA REGENERATION
Autologous bone marrow transplants and peripheral blood progenitor cell
transplants are used increasingly as supportive therapy for cancer patients who
have undergone high-dose chemotherapy, particularly for lymphoma, leukemia,
breast cancer and several other types of solid tumors. These transplants are
required because certain cancer drugs, radiation treatments and high-dose
chemotherapy regimens destroy hematopoietic and mesenchymal cells, which limits
the patient's ability to recover. Mesenchymal stem cells give rise to marrow
stromal cells, which produce the spongy stromal matrix that comprises the bone
marrow microenvironment. These marrow stromal cells contribute directly to blood
cell formation by producing the extracellular matrix in which blood cell
development takes place and by providing cytokines and other molecules that
direct or stimulate the production of mature blood cells.
MSCS FOR CANCER THERAPY. The Company's research is seeking to determine
whether MSC therapy is able to regenerate the bone marrow microenvironment and
restore normal marrow function. The benefits of MSC therapy may include
decreases in: (i) costly platelet and growth factor infusions following
transplantation; (ii) length and costs of hospital stay and the number of
readmissions; and (iii) fatalities associated with the use and readministration
of high-dose chemotherapy procedures. In addition, MSC cell therapy may also be
used to restore the marrow microenvironment in certain diseases characterized by
stromal failure, such as multiple myeloma, spontaneous cytopenias and aplastic
anemia.
DEVELOPMENT STATUS. The Company has completed four preclinical studies of
stromal cell regeneration at the Fred Hutchinson Cancer Research Center in
Seattle, Washington. These studies have shown that infusion of therapeutic doses
of MSCs is safe and does not result in adverse side effects. Preliminary data
from these studies also suggest a reduction in the time for hematopoietic cell
recovery, with fewer platelet infusions and without the use of growth factor
infusions during recovery. In addition, these preclinical studies indicate that
intravenously infused MSCs localize to the bone marrow, a critical proof-
of-concept for use in cancer therapy.
In a physician-sponsored clinical trial conducted at UHC, MSCs were isolated
and culture-expanded from a small starting sample of autologous bone marrow
collected from 15 volunteer cancer patients either at the time of bone marrow
harvest or during routine diagnostic bone marrow evaluation. As reported in the
December 1995 issue of BONE MARROW TRANSPLANTATION, reinfusions of 1,000,000,
10,000,000 and 50,000,000 autologous MSCs into groups of five patients at each
cell level in this dose-escalation safety study were well tolerated and did not
produce any significant adverse effects.
The Company has also provided a grant-in-aid to researchers at UHC to help
support a Phase I safety study using autologous MSCs infused into advanced
breast cancer patients following high-dose chemotherapy. The goal of this
clinical trial, which was initiated in October 1996, is to demonstrate the
safety of MSCs in a therapeutic setting in breast cancer patients receiving
co-administration of autologous hematopoietic progenitor cell infusions. The
therapeutic goal of this and future clinical studies is to improve the marrow
microenvironment, to facilitate engraftment of peripheral blood progenitor cells
and to enhance recovery of blood counts after ablative therapy.
The Company is evaluating the preclinical and clinical results to date and
formulating plans for a Phase I/II human clinical trial of MSC technology for
stroma regeneration. The Company plans to commence such Phase I/II human
clinical trials for stroma regeneration in 1998.
MARKET OPPORTUNITY. Nearly 30,000 bone marrow transplants are performed
annually worldwide involving hematopoietic reconstitution following chemotherapy
or radiation of solid tumors and other bone marrow disorders. With improved
clinical outcomes for solid tumor treatment and increased third-party coverage,
the Company believes that the opportunity for the use of hematopoietic and
mesenchymal stem cell therapy could more than triple to over 100,000 transplants
annually by 2001. In the breast cancer
29
<PAGE>
setting specifically, there are approximately 190,000 new cases in the U.S. per
year, of which 25-30% involve metastatic spread, which may benefit from
intensified chemotherapy and MSC stromal regeneration therapy. In addition, the
Company believes that oncologists will increasingly use high-dose chemotherapy
with bone marrow transplants for ovarian, testicular and other solid tumors, as
well as for leukemia and lymphoma.
The Company estimates that as many as 300,000 patients could benefit from
combination high-dose chemotherapy and stem cell reinfusion protocols using both
hematopoietic progenitor and mesenchymal stem cell therapy. However, there can
be no assurances that any safe and efficacious MSC product for stroma
regeneration will be developed or receive regulatory approval. Successful
development of the Company's MSC product for stroma regeneration will require
additional research and development, including clinical testing, and will be
subject to the Company's ability to finance such activities. See "Risk
Factors--Uncertainty of Product Development" and "--Need for Substantial
Additional Funds."
BONE REGENERATION
Many bone fracture patients suffer difficult or prolonged healing
situations, such as non-unions, delayed unions, malunions and age-related
fractures. While internal fixation, external fixation and bone growth
stimulation devices comprise the principal products which currently assist in
the repair of complex fractures, many of these high-risk fractures require bone
grafts or other extensive surgical intervention. Currently, bone graft
procedures using either a patient's own bone ("autograft") or donor-derived bone
("allograft") are performed in connection with the surgical procedures to repair
non-unions, delayed unions, spinal fusions and tumor resections of long bone.
The Company believes that allograft bone transplants now account for over
one-half of the bone graft market, having replaced the exclusive use of bone
autografts obtained by surgical excision of patients' normal tissue. Despite the
reduction of operative risks, chronic pain and deformity associated with
autografts, bone allografts often do not integrate fully with surrounding normal
tissue, are not completely penetrated by host blood vessels and may not be
tolerated immunologically in some patients.
Segmental bone defects often arise when sections of long bones are removed
surgically as a result of metastatic bone cancer, osteosarcoma (I.E., primary
bone cancer) or multiple myeloma (I.E., bone marrow cancer). If malignant, both
the involved and adjacent tissues are typically resected, generally leaving a
large segmental bone defect which will not regenerate and which cannot generally
be reconstructed.
Spinal fusions are performed to treat degenerative diseases, deformities and
spinal conditions created by traumatic injuries. Degenerative diseases typically
occur in mature adults and result in immobility, pinched nerves and associated
pain for the patient. Deformities, unless treated at a young age, prevent proper
growth of the spine and can be life threatening if allowed to progress.
Currently, spinal implants are used to facilitate the fusion of two or more
vertebrae in the spine.
MSCS FOR BONE REGENERATION. MSCs are advantageous because they can directly
form the cells and matrix of mature bone tissue (I.E., osteogenic). By adding an
optimal number of MSCs to the repair site in an appropriate formulation, the
Company believes that it will be able to accelerate the proliferation of MSCs,
the differentiation of MSCs into bone-forming cells and the vascularization of
bone tissue. The MSC product will likely consist of autologous MSCs formulated
with FDA-approved biodegradable matrix materials. The Company believes that MSC
cell therapy will result in: (i) an improvement in the rate and quality of bone
regeneration; (ii) elimination of painful autograft procedures; (iii) a delay,
reduction or elimination of costly second-site tissue harvests; (iv) a cost
reduction and decrease in the amount of time spent by physicians performing
autograft procedures; and (v) a higher rate of healing in multi-level spinal
fusions.
DEVELOPMENT STATUS. Results from the Company's research studies have
established that culture-expanded MSCs can rapidly fill a porous matrix with
bone. These results suggest that MSCs could be
30
<PAGE>
useful in an autologous grafting technique for spinal fusion, reconstruction of
long bone after tumor excision, joint reconstruction, prosthesis fixation and
repair of age-related fractures.
The Company is continuing to build on its research experience with further
studies in preclinical models involving the regeneration of bone following
surgical resection and spinal fusion. The Company has shown that MSCs have been
able to regenerate bone in large femoral defects in small animal models, and the
Company is collaborating with Tufts University to demonstrate this effect in
larger animal models. In addition, the Company is sponsoring a collaborative
study at the Cleveland Clinic Foundation, and will commence projects at other
academic institutions, to study spinal fusion in large animal models. Initial
results in both indications show that MSCs can regenerate new bone directly into
large bone defects. In addition, the Company has demonstrated in
immune-deficient animal models that human MSCs can regenerate a large bone
defect, a critical proof-of-principle for the use of human MSCs in regenerating
bone.
The Company is testing a number of formulations of MSCs and matrix materials
for bone regeneration in preclinical models, evaluating the preclinical results
to date and formulating plans for a Phase I/II human clinical trial of MSC
technology for bone regeneration. The Company plans to initiate human clinical
trials of the MSC technology in bone regeneration in 1999.
MARKET OPPORTUNITY. The Company believes that there is a significant
commercial opportunity for MSC technology to regenerate bone in orthopaedic
procedures. The number of procedures for which the Company believes MSC bone
regeneration products could be used exceeds 1.1 million in the United States.
These procedures include non-healing fractures (170,000), spinal fusions
(202,000), maxillofacial reconstructions (219,000), prosthetic fixations
(541,000) and gap fillings (31,000).
In addition, the Company estimates that there are approximately 1.3 million
age-related fractures each year in the U.S. Of these, approximately one-third
are hip fractures, one-third are vertebral fractures and the remaining are wrist
and upper arm fractures. The Company believes that age-related fractures
represent a substantial market for bone regeneration products utilizing MSC cell
therapy. However, there can be no assurances that any safe and efficacious MSC
product for bone regeneration will be developed or receive regulatory approval.
Successful development of the Company's MSC products for bone regeneration will
require additional research and development, including clinical testing, and
will be subject to the Company's ability to finance such activities. See "Risk
Factors--Uncertainty of Product Development" and "--Need for Substantial
Additional Funds."
CARTILAGE REGENERATION
Joint cartilage is designed to absorb the repeated shock of compressive and
mechanical stress on the surface of articulating joints. Articular cartilage
damage generally occurs as a result of a sports injury, traumatic injury or
osteoarthritic degeneration. Despite various attempts to regenerate cartilage
using collagen implants and cartilage tissue transplants, there is currently no
reliable or proven treatment to regenerate damaged cartilage.
MSC THERAPY FOR CARTILAGE REGENERATION. The Company's research and
development is directed toward developing products for articular cartilage
regeneration using autologous human MSCs, which can form both cartilage and
bone. The Company believes that MSCs will be able to differentiate into
cartilage-forming and bone-forming cells and regenerate tissue in full-thickness
osteochondral (I.E., articular cartilage and underlying bone) defects with the
appropriate formulation for stabilizing the implant in the cartilage defect
during the regeneration process. Unlike MSC therapy, current chondrocyte
therapies cannot repair osteochondral defects, nor are they indicated for the
treatment of osteoarthritic lesions. The Company believes that an MSC product
for cartilage regeneration could: (i) decrease the long-term risk of developing
osteoarthritis; (ii) increase the repair rate for certain surgical procedures;
and (iii) potentially restore naturally functioning cartilage. In addition, the
Company has entered into a corporate collaboration with Novartis to develop MSC
cell therapy products for the regeneration of surface and full-thickness
cartilage defects. See "Business--Collaborative Research and Licensing
Agreements--Novartis Agreement."
31
<PAGE>
DEVELOPMENT STATUS. The Company and its collaborators have conducted
preclinical studies using transplanted MSCs that have resulted in the
regeneration of articular cartilage which appeared to be equivalent to normal
joint cartilage as determined by microscopy and immuno-histochemistry.
Preclinical studies to date have been conducted principally in small animal
models. In addition, the Company has made substantial advances in understanding
the structure of natural cartilage extracellular matrix. Collectively, these
results have helped the Company establish formulations, surgical techniques and
demonstration of feasibility to permit pivotal preclinical studies commencing in
1998.
MARKET OPPORTUNITY. The Company believes that a substantial market
opportunity exists for MSC products for cartilage regeneration. In 1995, there
were approximately 570,000 recreational and sports-associated cartilage injuries
in the United States. Nearly half of these injuries were treated surgically,
including meniscectomies to repair knee cartilage between joint articulating
surfaces. However, there can be no assurances that any safe and efficacious MSC
product for cartilage regeneration will be developed or receive regulatory
approval. Successful development of the Company's MSC products for cartilage
regeneration will require additional research and development, including
clinical testing, and will be subject to the Company's ability to maintain and
operate successfully under its collaborative agreement with Novartis. See "Risk
Factors--Uncertainty of Product Development."
DEGENERATIVE DISORDERS
OSTEOPOROSIS. Osteoporosis is a progressive disease characterized by loss
of bone mass and subsequent risk of brittle bone fractures, resulting mainly
from the decrease in naturally occurring estrogen levels in postmenopausal
women. Hormone replacement therapy and antiresorption products that decrease the
rate of bone loss are currently the most effective methods for preventing or
treating osteoporosis. However, the Company believes that approximately 10-20%
of postmenopausal women do not tolerate these products or may not respond to
conventional osteoporosis treatments. The Company believes that MSCs may be
useful in treating patients by directly regenerating bone lost during
osteoporosis. The goal is to reverse osteoporosis by forming bone directly from
MSCs (I.E., osteogenesis).
OSTEOARTHRITIS. Osteoarthritis is the final, end-stage of cartilage and
joint failure. Hip and knee osteoarthritis are the two most common forms of
joint cartilage degeneration. Osteoarthritis can be a primary degenerative
process or result from childhood joint disorders. More frequently,
osteoarthritis develops following adult joint injury, infection, metabolic
disorder or abnormal bone formation. Many acute injuries of articular joint
cartilage treated by current methods result in osteoarthritic lesions within a
5-10 year period. The Company believes that MSCs may be useful in regenerating
osteoarthritic lesions of joint cartilage by forming new cartilage and the
underlying bone at the defect site. The goal of the Company's research program
in osteoarthritis is to stabilize or reverse the arthritic process using
cartilage-forming MSCs (I.E., chondrogenesis).
DEVELOPMENT STATUS. The Company is sponsoring research studies involving
infusions of MSCs in animal models of osteoporosis. Preliminary results suggest
an osteogenic effect of MSCs. In osteoarthritis, research is focusing on the
formulation of MSCs for introduction into the arthritic joint. MSC
osteoarthritis products are likely to develop from formulations used for acute
cartilage defects. In collaboration with Novartis, the Company is conducting
further research on systemic infusions or local implants of MSCs with the goal
of reversing bone loss in osteoporosis and reforming joint cartilage in
osteoarthritis.
MARKET OPPORTUNITY. According to the National Osteoporosis Foundation,
osteoporosis affects as many as 24 million postmenopausal women in the U.S., and
the Company believes that more than twice that number are affected throughout
Europe and Asia. Osteoporosis accounts for approximately 1.3 million bone
fractures per year in the U.S. with as many as two to three times that number
throughout other developed countries. Osteoarthritis is one of the most common
chronic connective tissue disorders, affecting nearly 16 million patients in the
United States. Each year, 1.1 million patients are admitted to U.S. hospitals
for osteoarthritis treatment. In addition, there are more than 500,000 total hip
and knee
32
<PAGE>
replacements and as many as 250,000 non-weight bearing joint replacements
performed in the U.S. each year, principally the result of degenerative
arthritis.
However, there can be no assurance that any safe and efficacious MSC product
for degenerative disorders will be developed or receive regulatory approval.
Successful development of the Company's MSC products for degenerative disorders
will require additional research and development, including clinical testing,
and will be subject to the Company's ability to maintain and operate
successfully under its collaborative agreement with Novartis. See "Risk
Factors--Uncertainty of Product Development."
TENDON REGENERATION
No products currently exist to regenerate torn tendons and ligaments.
Various materials have been tested by others, but these materials generally
produce inadequate results, such as poor compatibility, tissue rejection,
ligament breakage or irritating debris. Even autologous grafts are not without
problems, including graft weakness, extensive time to revascularize, progressive
joint laxity and muscle weakness above the graft site.
DEVELOPMENT STATUS. The Company believes that MSC products for tendon
regeneration can speed the healing rate of torn tissue and potentially provide a
treatment for large gap tendon ruptures. The Company has demonstrated that MSCs
are able to regenerate a torn tendon in a critical size tendon defect in small
animal models. Results from the Company's tendon regeneration studies
demonstrate that MSCs can regenerate severed tendons to approximately two-thirds
the strength of normal tissue within as little as four weeks. The Company plans
to continue these studies utilizing a proprietary MSC tendon fixation device for
which the Company has a pending patent application. The tendon fixation device
would serve to stabilize the tendon defect and provide a support for the MSC
products. In March 1997, the Company was awarded a $750,000 Phase II Small
Business Innovation Research ("SBIR") grant to develop further the potential of
MSCs for tendon regeneration.
MSC PRODUCTS FOR TENDON REGENERATION. There are currently over 150,000
surgical procedures annually involving the repair of tendons and rotator cuffs.
However, there can be no assurance that any safe and efficacious MSC product for
tendon regeneration will be developed or receive regulatory approval. Successful
development of the Company's MSC products for tendon regeneration will require
additional research and development, including clinical testing, and will be
subject to the Company's ability to finance such activities. See "Risk
Factors--Uncertainty of Product Development" and "--Need for Substantial
Additional Funds."
CARDIAC MUSCLE AND OTHER SOFT TISSUE
The Company believes that a substantial opportunity exists for the
regeneration of cardiac (heart) muscle damaged by ischemic (I.E., tissue death)
heart disease from congestive heart failure ("CHF") or by other cardiac
diseases. Heart disease is a leading cause of death and disability in the United
States, with more than 1,000,000 CHF patients who will die within two years
following their diagnosis. The market for MSC regeneration of cardiac muscle is
estimated by the Company at 300,000 patients in the United States, and over
1,000,000 patients worldwide. The Company believes that cardiac tissue
regeneration represents an important application for its MSC technology because:
(i) prior studies have shown that MSCs are capable of differentiating into
muscle cells; (ii) recent research by other groups have demonstrated the
potential for implanted tissue to integrate into cardiac muscle; and (iii) a
significant economic benefit exists for treating heart muscle otherwise
incapable of regenerating itself. In October 1997, the Company was awarded a
grant in the amount of $2,000,000 from the U.S. Department of Commerce, National
Institute for Standards and Technology ("NIST") to pursue research into cardiac
muscle regeneration using MSC technology.
The Company also intends to pursue research and development of fat tissue
regeneration with a view toward MSC products for plastic and reconstructive
surgery using a patient's own fat-generating MSCs.
33
<PAGE>
The Company believes that improved contours and implant retention would result
from soft tissue implants or injections that combine MSCs with an appropriate
collagen matrix. The Company believes that approximately 100,000 craniofacial
and breast augmentation patients could be candidates for plastic or
reconstructive treatment involving MSC products each year in the United States.
The Company intends to seek research grants and corporate collaborators to
co-develop MSC products for both cardiac muscle and fat tissue regeneration.
However, there can be no assurance that the Company will be awarded any grants,
that the funding will be adequate, that corporate collaborations can be
developed, or that research results will be suitable to commercialize any MSC
products for cardiac muscle regeneration or plastic and reconstructive surgery.
See "Risk Factors--Uncertainty of Product Development" and "--Need for
Additional Substantial Funds."
GENE THERAPY
Gene therapy is a therapeutic approach with the potential to alter the
course of certain genetic diseases and to deliver useful drugs within the body.
Gene therapies are generally designed to introduce a missing normal gene into
otherwise defective human tissue, or to introduce a novel biopharmaceutical into
the body via a gene not present. The therapeutic gene of interest is inserted
into a suitable vector that can be used to transport and integrate the gene into
the DNA of the target cell. The gene then produces the newly coded protein
within the target cell. The Company believes that MSCs may be useful clinically
for gene therapy to correct inborn or acquired tissue disorders or for the IN
VIVO production of therapeutic drugs through their expression in tissues derived
from genetically modified MSCs.
MSCS FOR GENE THERAPY. The Company believes that the ability to incorporate
into MSCs a desired DNA sequence through a vector represents a significant
enabling technology for gene therapy. The ability to use a self-renewing stem
cell that can be culture-expanded and provides continuing gene expression IN
VIVO has eluded gene therapy companies. The Company has demonstrated that MSCs
can be isolated and culture-expanded directly IN VITRO, maintain their stem cell
state and express inserted genes at high frequency IN VIVO. Furthermore,
mesenchymal tissues are replaced at a slower rate than hematopoietic cells,
permitting potentially longer term gene expression.
DEVELOPMENT STATUS. The Company has demonstrated that MSCs can be
transduced at high efficiency and that MSCs containing the added DNA (I.E.,
transduced cells) can be further expanded to high levels of purity in culture.
The Company was issued a U.S. patent covering transduced MSCs for use in gene
therapy. The Company intends to focus further research activities on improving
the efficiency of its core gene transduction technology. In addition, research
will be directed toward the expression of other genes IN VIVO. The Company has
entered into a collaboration with Novartis to pursue these studies in three
target genes. See "Business--Collaborative and Licensing Agreements--Novartis
Agreement."
MSC PRODUCTS FOR GENE THERAPY. There are no gene therapy products on the
market, although a number are undergoing human clinical trials. Significant
research is being conducted currently in the field of gene therapy and therapies
may be developed for the treatment of inflammatory and autoimmune diseases,
neurodegenerative diseases, cardio-pulmonary diseases and other diseases
resulting from a missing or defective gene. However, there can be no assurance
that the Company will be able to develop safe and efficacious applications of
MSC products for gene therapy. Successful development of the Company's MSC
products for gene therapy will require substantial additional research and
development, including clinical testing, and will be subject to the Company's
ability to operate successfully under its collaborative agreement with Novartis,
enter into additional collaborations and finance such activities on its own
where necessary. See "Risk Factors--Uncertainty of Product Development" and
"--Need for Substantial Additional Funds."
34
<PAGE>
BIOPHARMACEUTICALS
MESENGENIC FACTORS
The Company is conducting research into mesengenic growth and
differentiation factors, focusing on molecules that regulate MSC growth and
stimulatory factors for lineage commitment. Osiris has commenced research to
identify the growth factors and stimulatory factors that are required for the
self-renewal, proliferation and differentiation of MSCs. To date, the Company
has identified a number of mesengenic factors which are unique or novel to MSCs.
If successful in identifying and purifying these factors, the Company intends to
pursue further development of these factors as biopharmaceuticals which affect
the proliferation and differentiation of MSCs. These factors could be used alone
or in conjunction with cell therapy products containing MSCs. The Company
intends to pursue commercialization of mesengenic biopharmaceuticals through one
or more corporate collaborators.
HEMATOPOIETIC FACTORS
Mesenchymal stem cells and hematopoietic stem cells are distinct and unique
progenitors, each of which can give rise to complex, multicellular pathways that
ultimately produce cells and tissues which have completely different structures
and functions. Both stem cells appear to be in close cell-to-cell contact and
are believed to be the source of yet unidentified growth factors, principally
those made by MSCs, which are partly responsible for regulating the formation of
mature blood cells. The interaction of the two stem cells in the bone marrow
represents a major new field of cell transplant medicine and immune system
biology. The Company believes that the interaction between MSCs and HSCs in bone
marrow could lead to a new class of biopharmaceuticals that are based on the
expression of unique cross-signaling molecules between MSCs and HSCs.
The Company is using its knowledge of mesenchymal and hematopoietic stem
cells to detect molecules that regulate HSC proliferation and differentiation
into mature blood cells. The Company has initiated research on mesengenic
factors that affect the signaling pathways associated with hematopoietic stem
cells in order to develop novel biopharmaceuticals for the treatment of cancer,
blood and immune disorders. The Company intends to pursue commercialization of
hematopoietic biopharmaceuticals through one or more corporate collaborators.
However, there can be no assurance that any safe and efficacious mesenchymal
or hematopoietic biopharmaceuticals will be developed by the Company or receive
regulatory approval. Successful development of the Company's mesenchymal and
hematopoietic biopharmaceuticals will require substantial additional research
and development, including clinical testing, and will be subject to the
Company's ability to enter into and operate successfully under future
collaborative agreements and finance such activities on its own, where
necessary. See "Risk Factors--Uncertainty of Product Development" and "--Need
for Substantial Additional Funds."
COLLABORATIVE RESEARCH AND LICENSING AGREEMENTS
Where consistent with its business strategy, the Company intends to enter
into collaborations or to license product and marketing rights to selected
strategic collaborators to capitalize on the research, production, development,
regulatory and marketing capabilities of these organizations. The Company's
principal collaborative research, license and technology agreements are set
forth below.
NOVARTIS AGREEMENT
In June 1997, the Company entered into a Research and Licensing Agreement
with Novartis Pharmaceuticals Corporation (the "Novartis Agreement") for the
development of MSC products for osteoporosis, osteoarthritis, cartilage injury
and selected gene therapy applications. Pursuant to the Novartis Agreement, the
Company is entitled, subject to certain conditions, to receive up to $50,000,000
35
<PAGE>
during the five-year period of the agreement for research and development
funding of the Company's osteoporosis, osteoarthritis, cartilage and certain
portions of its gene therapy research programs. The Company also could receive
milestone payments of up to $93,000,000, contingent upon the achievement of
specified regulatory milestones in connection with the development of products
pursuant to the Novartis Agreement. There can be no assurance, however, that the
Company will become entitled to the full $50,000,000 of research and development
funding or that any of the products currently contemplated for development
pursuant to the Novartis Agreement will achieve the specified milestones
entitling the Company to any of the milestone payments. In connection with
entering into the Novartis Agreement, Novartis Pharmaceuticals Corporation also
paid the Company an initial up-front payment of $3,000,000 and Novartis Pharma
AG purchased 692,059 shares of Common Stock (representing 7.9% of the Company's
outstanding Common Stock) for $10,000,250.
In return, Novartis Pharmaceuticals Corporation received exclusive worldwide
rights to use and sell certain MSC products in the osteoporosis, osteoarthritis,
cartilage injury and gene therapy fields developed during the collaboration.
Novartis Pharmaceuticals Corporation is required to pay the Company royalties
based upon net sales, if any, for such products. The Company has retained
exclusive rights to manufacture MSC products for sale in North America in the
osteoporosis, osteoarthritis and cartilage injury fields at cost plus a
percentage profit, subject to certain conditions.
Under the Novartis Agreement, in addition to the up-front payment, the
equity investment and the research and milestone payments noted above, Novartis
Pharmaceuticals Corporation is responsible for funding the cost of all clinical
development, regulatory submissions, marketing and sales and manufacturing
(excluding North America) of MSC products, if any, developed pursuant to the
collaboration. As a result, the Company is dependent upon Novartis
Pharmaceuticals Corporation to seek regulatory approvals for, to conduct trials
for and to determine the ultimate commercialization of the MSC products subject
to the collaboration.
DEFENSE ADVANCED RESEARCH PROJECTS AGENCY AGREEMENT
In June 1996, the U.S. Defense Advanced Research Projects Agency ("DARPA"),
awarded a sole-source, multi-year research contract to the Company for research
into the use of human MSCs as a strategic platform for detection and treatment
of biological and chemical agents. The $6,000,000 in funding provided under the
DARPA Agreement, consisting of $2,000,000 per year for three years (supplemented
by cost-sharing contributions from the Company in the form of equipment and
indirect costs), is being used to conduct two projects focusing on: (i) a novel
delivery system for vaccines using MSCs; and (ii) a novel detection system for
toxic or biological agents using MSCs. The Company retains all commercial rights
to inventions which result from its research under the DARPA agreement. In May
1997, the Company received approval for the second year of funding under the
contract, having successfully completed the first year's milestones.
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY COOPERATIVE AGREEMENT
In October 1997, NIST awarded the Company a single recipient cooperative
agreement (the "NIST Agreement") for research into the use of human MSCs to
regenerate cardiac muscle tissue. The $2,000,000 in funding provided under the
NIST Agreement, consisting of $666,666 per year for three years (supplemented by
cost-sharing contributions from the Company in the form of direct and indirect
costs), is being used to conduct research focusing on the differentiation of
MSCs into cardiac tissue in the body and restoration of function to damaged
heart tissue. The Company retains all commercial rights to inventions which
result from its research under the NIST Agreement.
36
<PAGE>
SMALL BUSINESS INNOVATION RESEARCH GRANTS
In March 1997, the Company was awarded a $750,000 Phase II SBIR grant for a
two-year continuation of research into tendon regeneration. The Company intends
to match the funding received under this grant in order to accelerate its
product development efforts in tendon regeneration. Under the SBIR program, the
Company retains the rights to commercialize technology developed with the SBIR
funding, subject to certain limitations. Previously, the Company was awarded two
Phase I research grants under the SBIR Program for research on the use of MSC
therapy in tendon regeneration and facial joint repair.
ACADEMIC COLLABORATIONS
CASE WESTERN RESERVE UNIVERSITY. In February 1995, the Company entered into
a three-year, $1,440,000 agreement with Case Western Reserve University ("CWRU")
for research in the laboratories of the Company's scientific founders. The CWRU
research agreement is focused on research in four areas of the Company's
long-term product interest, namely: (i) the regeneration of bone which has been
depleted by osteoporosis; (ii) the regeneration of joint cartilage which has
degenerated through osteoarthritis; (iii) the regeneration of meniscal knee
cartilage to prevent subsequent osteoarthritis; and (iv) the identification and
synthesis of a bioactive factor(s) which support the IN VIVO proliferation of
MSCs. Rights to discoveries and patentable inventions resulting from the CWRU
research agreement are licensed exclusively to the Company. Under the Technology
Transfer and License Agreement with CWRU (the "CWRU License Agreement"), the
Company purchased the rights to its first three issued patents and, subject to
rights retained by the U.S. Government and research rights retained by CWRU, the
Company has an exclusive, worldwide license to all additional MSC patents
relating thereto developed by Drs. Caplan and Haynesworth or persons working
under their direction at CWRU. The License Agreement provides for royalty-free
ownership under the first three patents and requires the Company to pay
royalties on revenues related to technology covered by subsequent CWRU patents,
with royalty payments commencing on the third anniversary of the date on which
such products are first sold.
THE JOHNS HOPKINS UNIVERSITY. In December 1994, Gryphon Pharmaceuticals,
Inc. ("Gryphon") entered into a Research and License Agreement with The Johns
Hopkins University (the "JHU Agreement") under which Gryphon agreed to sponsor
for up to five years the hematopoietic stem cell research of Drs. Curt I. Civin
and Donald Small. Research under the JHU Agreement is focused specifically on
identifying unique cell signaling molecules that regulate the self-renewal,
commitment and differentiation of hematopoietic stem cells and their progenitor
cells. Dr. Civin is the original discoverer of the CD34 antibody that is used
commercially to separate hematopoietic stem cells and their progenitor cells
from mature blood cells and platelets during bone marrow transplantation.
Gryphon is a majority-owned subsidiary of the Company and was formed to
research, develop and ultimately commercialize HSC growth factors,
differentiation molecules and the biopharmaceuticals based on the Civin/Small
technology. Gryphon will provide $2,200,000 in research funding to the
Civin/Small laboratories over five years. Under a Share and Warrant Purchase
Agreement dated December 23, 1994, the Company agreed to provide Gryphon
$1,200,000 over a three-year period ending July 1, 1997, as well as a $1,000,000
loan over the following two-year period, for use towards this research funding.
In exchange for this research funding, Gryphon will receive worldwide exclusive
commercial rights to hematopoietic stem and progenitor cell discoveries under
the JHU Agreement. Gryphon has granted the Company an exclusive license to
mesenchymal stem cell discoveries under a separate License Agreement dated
December 23, 1994.
Gryphon is expected to conduct the majority of its research and development
activities through its own staff and facilities and those of The Johns Hopkins
School of Medicine. Gryphon intends to pursue, as part of its primary
commercialization strategy, research and development agreements with
biotechnology companies and with major international pharmaceutical companies to
substantially broaden and accelerate development of its hematopoietic stem cell
technology. It is anticipated that Gryphon will require
37
<PAGE>
substantial additional funds to conduct its planned operations prior to the
time, if ever, that Gryphon realizes revenues from such agreements, product
sales or royalties on product sales. There can be no assurance that Gryphon will
be able to obtain additional funds through such means or any other means. If
additional funds are raised by issuing equity securities, the Company's
ownership interest in Gryphon will be diluted and the Company may no longer own
a majority of Gryphon's outstanding voting stock.
CENTRO DI BIOTECNOLOGIE AVANZATE, GENOA, ITALY. In July 1997, the Company
entered into a three-year, $1,000,000 agreement with the Centro di Biotecnologie
Avanzate for research in the laboratories of Dr. Ranieri Cancedda (the "CBA
Agreement"). The CBA Agreement is focused on research in three areas of the
Company's long-term product interest, namely: (i) regeneration of bone marrow
stroma and other elements of bone marrow following chemotherapy; (ii)
regeneration of bone which has been depleted by cancer chemotherapy or
osteoporosis; and (iii) regeneration of damaged skeletal and connective tissue
in orthopaedic applications. Rights to discoveries and patentable inventions
resulting from the CBA Agreement will be licensed exclusively to the Company.
FRED HUTCHINSON CANCER RESEARCH CENTER. The Company is sponsoring
preclinical studies for stromal cell reconstitution at the Fred Hutchinson
Cancer Research Center in Seattle, Washington. The goal of these studies is to
determine the ability of MSCs to enhance hematopoietic reconstitution and marrow
engraftment following cancer chemotherapy or radiation ablation therapy. See
"Business--Stroma Regeneration--Development Status" for details on the content
and results of this research collaboration.
IRELAND CANCER CENTER AT UNIVERSITY HOSPITALS OF CLEVELAND. Osiris has
provided a grant-in-aid in support of an investigator-sponsored clinical trial
using human MSCs derived from the bone marrow of patients receiving ablative
chemotherapy treatment for advanced breast cancer. The trial is primarily a
safety study to identify any toxicities associated with infusion of MSCs and to
determine whether the combination of MSCs and peripheral blood stem/progenitor
cells accelerates engraftment and blood-formation relative to historical
controls.
TUFTS UNIVERSITY AND THE CLEVELAND CLINIC FOUNDATION. The Company is
sponsoring preclinical studies at Tufts University to determine the efficacy of
MSCs for the regeneration of segmental bone defects and acute cartilage
injuries. The Company is sponsoring preclinical studies at the Cleveland Clinic
Foundation to determine the efficacy of MSCs for the regeneration of bone in a
spinal fusion indication.
PATENTS AND INTELLECTUAL PROPERTY
The Company seeks to protect its technology through normal trade secret
protection and, where appropriate, U.S. and foreign patent filings. The Company
owns or has an exclusive license to five patents granted in the United States
relating to: (i) isolated human mesenchymal stem cells and therapeutic
compositions containing such cells; (ii) producing bone or cartilage through the
use of human mesenchymal stem cells; (iii) repairing connective tissue damage
through the use of human mesenchymal stem cells; (iv) isolated human mesenchymal
stem cells transfected with genetic material for potential use in gene therapy;
(v) certain antibodies against human osteogenic cells and the use thereof. The
Company also owns or has licenses to over forty United States and foreign patent
applications directed to MSC technology.
The Company intends to continue to use its scientific expertise to pursue
and patent new developments with respect to uses, compositions and factors
related to MSCs to enhance the Company's leadership in the MSC field. However,
the protection afforded by the granted United States patents with respect to the
composition of human MSCs and transduced human MSCs, respectively, will not be
obtained outside the United States. In addition, the Company is aware of a
granted United States patent owned by a subsidiary of Novartis which covers the
use of EX VIVO gene therapy in humans. If a license is not obtained under such
patent, the Company or any of its future collaborators may not be able to
exploit in the United States EX VIVO gene therapy with the Company's MSC
technology. There can be no assurance
38
<PAGE>
that such a license will be available on commercially acceptable terms, if at
all. Also, certain of the Company's technology has resulted and will result from
research funded by agencies of the United States government. As a result of such
funding, the United States government has certain rights in the technology
developed with the funding. These rights include a non-exclusive, paid-up,
world-wide license under such inventions for any governmental purpose. In
addition, under certain conditions, the government has the right to require the
Company to grant to third parties licenses of such technology. Any of the
foregoing limitations on the Company's proprietary rights with respect to its
MSC technology could have a material adverse effect on the Company.
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 officers, employees, consultants, contractors,
manufacturers, outside scientific collaborators and sponsored researchers and
other advisors to execute confidentiality agreements. 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 data.
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. See "Risk Factors--Patents
and Proprietary Rights."
COMPETITION
The Company is developing products that compete with existing products and
may compete with products being developed by other companies. Competition in the
development of human therapeutics is particularly intense and includes many
large pharmaceutical and medical device companies, biopharmaceutical companies,
specialized biotechnology firms, universities and other research institutions.
Some of these competitors have extensive financial, marketing and human
resources which give them a significant competitive advantage. Pharmaceutical
companies have extensive experience in conducting human clinical trials, in
obtaining regulatory approval to market products and in large-scale
manufacturing. Other biopharmaceutical companies also have more resources and
experience in these areas than the Company. A number of pharmaceutical companies
have entered or expanded their presence in biotechnology by collaborating with
these companies.
The technology underlying the development of human therapeutic products is
expected to continue to undergo rapid and significant advancement and change. In
the future, the Company's technological and commercial success will be based on
its ability to develop proprietary positions in key scientific areas and
efficiently evaluate potential product opportunities.
The Company's products may compete directly with various morphogenic
proteins (I.E., growth factors) being developed by certain companies for the
repair of musculoskeletal tissue. Genetics Institute, Inc., Chiron Corporation,
Genentech, Inc., Creative BioMolecules, Inc. and Amgen Inc. are developing
recombinant morphogenic proteins for enhancing or augmenting the repair of
musculoskeletal defects. In addition, the Company believes that a number of
pharmaceutical companies, such as Bristol-Myers Squibb Company, Merck & Co.,
Inc., Rhone-Poulenc Rorer Inc., Eli Lilly & Company and SmithKline Beecham Plc,
are developing other recombinant human proteins (primarily growth factors) for
use in the repair of musculoskeletal defects.
39
<PAGE>
Other products and therapies that may compete with the Company's MSC
products include various bone fill or bone replacement products such as
demineralized bone matrix, hydroxyapatite and tricalcium phosphate ceramics.
Certain companies, such as Osteotech, Inc., CryoLife, Inc. and LifeCell
Corporation, are processing allograft musculoskeletal tissues and derivative
products for the repair of tissue defects. While these products have proven to
be effective in treating certain musculoskeletal injuries, their widespread use
may be limited by availability of cadaver donor tissue. Other companies utilize
electrical or ultrasonic stimulation devices to augment the repair of
fractures-at-risk and bone non-unions.
In the area of soft tissue repair, companies such as Advanced Tissue
Sciences, Inc., Integra LifeSciences Corporation, Genzyme Corporation (Genzyme
Tissue Repair Division) and Organogenesis Inc. are pursuing projects to develop
products for cartilage repair, with or without the inclusion of cultured
chondrocytes. The Company believes that these approaches will not be as
effective as MSC products because, unlike MSCs, they may not form the proper
extracellular matrix characteristic of normal tissue formed from stem cells.
A number of biotechnology and pharmaceutical companies are pursuing the
development of recombinant growth factors and hormones for the treatment of
osteoporosis. These companies include Chiron Corporation, Amgen Inc., Creative
BioMolecules, Inc., Genetics Institute, Inc. and others. Other major
pharmaceutical companies have developed or are pursuing the development of
traditional drugs for the prevention of osteoporosis. The Company believes that
it is the only company seeking to develop an autologous cell-based osteoporosis
treatment for the regeneration of bone to reverse the course of bone loss.
In addition to competing with pharmaceutical and biotechnology companies,
the Company's products and technologies will also compete with those developed
by academic institutions, governmental agencies and other public organizations
conducting research that may discover new therapies, seek patent protection or
establish collaborative arrangements for product research.
The Company believes that in addition to patent position, efficacy and
price, the timing of a product's introduction may be a major factor in
determining eventual commercial success and profitability. Early entry may have
important advantages in gaining product acceptance and market share.
Accordingly, the relative speed with which the Company can complete preclinical
and clinical testing, obtain regulatory approvals and supply commercial
quantities of the product is expected to have an important impact on the
Company's competitive position, both in the United States and international
markets. Other companies may succeed in developing similar products that are
introduced earlier, are more effective or are produced and marketed more
effectively. There can be no assurance that research and development by others
will not render any of the Company's products obsolete or noncompetitive. See
"Risk Factors--Rapid Technological Change; Competition."
SALES AND MARKETING
The Company's strategy is to market products through large pharmaceutical,
medical device or biotechnology companies. Implementation will depend in large
part on the market potential of any products the Company develops as well as on
the Company's financial resources. Novartis has the worldwide right to market
future products, if any, resulting from the collaboration with the Company with
respect to osteoporosis, osteoarthritis, cartilage repair and selected gene
therapy applications. The Company does not expect to have a direct sales
capability for at least the next several years. For the foreseeable future, the
Company plans to focus its activities on the research, development and
manufacturing of multiple products from its broad MSC technology platform.
40
<PAGE>
MANUFACTURING
The Company has completed construction of a 1,300 square foot pilot
manufacturing plant at its facility in Baltimore, Maryland, for use in its
planned human clinical trials for MSC products. The Company is pursuing the
validation and certification of the facility by the FDA for use as a clinical
cell processing facility in early 1998. As such, the facility will be subjected
to regulation by the FDA under current and planned Good Manufacturing Practices
("GMP") procedures for the operation of a cell processing facility. There can be
no assurance that the facility will be validated or approved for the manufacture
of MSC products for clinical use. In addition, the Company will be required to
develop a production scale processing facility for the manufacture of products,
if any are developed, for its MSC technologies. The inability to finance,
validate or manufacture any MSC product could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Risk Factors--Lack of Manufacturing, Marketing or Sales
Capabilities."
GOVERNMENT REGULATION
Biological products, medical devices, combination products and human tissue
products, including the Company's products under development, are subject to
extensive and rigorous regulation by the federal government, principally the
FDA, and by state and local governments. If these products are marketed outside
the U.S., they also are subject to export requirements and to regulation by
foreign governments. The applicable regulatory clearance process, which must be
completed prior to the commercialization of a product, is lengthy and expensive.
There can be no assurance that the Company or its collaborative partners will be
able to obtain necessary regulatory approvals on a timely basis, if at all, for
any of the Company's products under development. Delays in or failure to receive
such approvals, the loss of previously received approvals, or failure to comply
with existing or future regulatory requirements could have a material adverse
effect on the Company.
The FDA requirements for the Company's products under development will vary
depending upon whether the product is regulated as a biological product, medical
device, combination product or cellular or tissue-based product. Because the
Company is still at the early stages of product development and because certain
FDA policies with regard to tissue products are still evolving, it is not
possible to determine which statutory and regulatory requirements will apply to
any products eventually developed by the Company. It is not possible at the
present time to predict either the timeframe for completion of various
regulatory initiatives which could affect the Company's future products, or the
ultimate effect that they could have, if any, on the products under development
by the Company.
Furthermore, it is uncertain if and when the Company or its corporate
collaborators will submit any applications, if required, for any of its cell
therapy products and biopharmaceuticals under development for any indications.
There can be no assurance that any studies will be completed or, if completed,
will demonstrate that the products are safe and effective for their intended
uses, or that approval, if required, will be granted by the FDA or other
comparable international agency on a timely basis, or at all, for any of these
products for any studied indications. Failure of the Company or its corporate
collaborators to obtain any required marketing approval of any of its products
would have a material adverse effect on the Company.
FDA PROPOSED REGULATION OF HUMAN CELLULAR AND TISSUE-BASED PRODUCTS
In March 1997, the FDA proposed a comprehensive framework for the regulation
of human cellular and tissue-based products ("FDA's Proposed Approach to
Regulation of Cellular and Tissue-Based Products"). Although this announcement
represents the FDA's current view in this area of regulation, it is only at the
proposed stage and there is no assurance that this is the framework the agency
ultimately will adopt. If this proposal is implemented, it may apply to some of
the Company's cell therapy products and
41
<PAGE>
biopharmaceuticals. The products for which it does not apply will be regulated
under the FDA's biological product, medical device and combination product laws
and regulations.
The FDA's Proposed Approach to Regulation of Cellular and Tissue-Based
Products would subject human cell and tissue products to a tiered approach to
regulation. The level of regulation will depend on the level of risk posed by
the product. Under this proposed scheme, disease screening, testing and
manufacturing under "Good Tissue Practices" ("GTPs") would be recommended for
tissue that is processed only through minimal manipulation. Minimally processed
structural tissue (E.G., ligaments, bones, cartilage, tendons) used for its
normal function and having no non-tissue parts would be subject to GTPs, but
would not require a premarket approval submission to the FDA. Metabolic tissue
(I.E., tissue that affects the function of the entire body) that has been
manipulated, or is used for other than its normal function, or has nontissue
parts, would be subject to more comprehensive processing controls than GTPs, and
premarket approval by the FDA would be required. Given the nature of the
Company's products, premarket approval is likely to be required for the
Company's cell therapy products and biopharmaceuticals under development. If
premarket approval is required, the standard for effectiveness would be
consistent with that required for comparable medical devices and biological
product approvals.
Certain of the Company's cell therapy products under development utilize
autologous MSCs taken from a patient and isolated, purified and expanded IN
VITRO using the Company's proprietary process. After expansion, the cells are
transplanted back to the same patient to regenerate injured or defective tissue.
The FDA currently considers the isolation, purification and expansion processes
as more than minimal manipulation and is likely to require that a Biologic
License Application ("BLA") under the FDA's biological product regulations be
filed for MSC products. See "--Regulation of Biological Products."
ORPHAN PRODUCT STATUS
The Company may seek orphan product designation for certain cell therapy
products intended for low incidence (fewer than 200,000 patients) indications.
Before a product can receive marketing exclusivity associated with orphan
product status, it must receive orphan product designation. If a product
receives such designation and it is the first FDA-approved application for the
specified indication, the applicant would receive seven years of marketing
exclusivity. The Company or its collaborative partners ultimately may not seek
orphan product designation. Further, if such designation is sought, the FDA may
not grant it. Moreover, other companies also may receive orphan designation and
obtain FDA marketing approval first. If this occurs and another company receives
seven-year marketing exclusivity for the same product, the Company and its
collaborative partners would not be permitted to market its product in the U.S.
during the exclusivity period. If the FDA regulates the product as a cell,
tissue or medical device rather than as a biological, the product would not be
eligible for orphan drug designation, approval or exclusivity.
REGULATION OF BIOLOGICAL PRODUCTS
Some of the Company's cell therapy products and biopharmaceuticals may be
subject to the biological product regulations. During their clinical
development, biological products are regulated pursuant to IND requirements.
Product development and approval takes a number of years, involves the
expenditure of substantial resources and is uncertain. Many biological products
that appear promising ultimately do not reach the market because they cannot
meet FDA or other regulatory requirements. In addition, there can be no
assurance that the current regulatory framework will not change through
regulatory, legislative or judicial actions or that additional regulation will
not arise during the Company's product development that may affect approval,
delay the submission or review of an application, if required, or require
additional expenditures by the Company.
The activities required before a new biological product may be approved for
marketing in the U.S. primarily begin with preclinical testing, which includes
laboratory evaluation and animal studies to assess
42
<PAGE>
the potential safety and efficacy of the product as formulated. Results of
preclinical studies are summarized in an IND application to the FDA. Human
clinical trials may begin 30 days following submission of an IND application,
unless the FDA requires additional time to review the application.
Clinical testing involves the administration of the biological product to
healthy human volunteers or to patients under the supervision of a qualified
principal investigator, usually a physician, pursuant to an FDA-reviewed
protocol. Each clinical study is conducted under the auspices of an
institutional review board ("IRB") at each of the institutions at which the
study will be conducted. A clinical plan, or "protocol," accompanied by the
approval of an IRB, must be submitted to the FDA prior to commencement of each
clinical trial. Human clinical trials are conducted typically in three
sequential phases. Phase I trials consist of, primarily, testing the product's
safety in a small number of patients or healthy volunteers. In Phase II, the
safety and efficacy of the product is evaluated in a patient population. Phase
III trials typically involve additional testing for safety and clinical efficacy
in an expanded population at geographically dispersed sites. The FDA may order
the temporary or permanent discontinuance of a preclinical or clinical trial at
any time for a variety of reasons, particularly if safety concerns exist.
A company seeking FDA approval to market a biological product must file a
BLA. In addition to reports of the preclinical and human clinical trials
conducted under the FDA-approved IND application, the BLA includes evidence of
the product's safety, purity, potency and efficacy, as well as manufacturing,
product identification and other information. Submission of a BLA does not
assure FDA approval for marketing. The application review process generally
takes one to three years to complete, although reviews of drugs and biological
products for life-threatening diseases may be accelerated or expedited. However,
the process may take substantially longer.
The FDA requires at least one and often two properly conducted, adequate and
well-controlled clinical studies demonstrating efficacy with sufficient levels
of statistical assurance. However, additional information may be required.
Notwithstanding the submission of such data, the FDA ultimately may decide that
the BLA does not satisfy the regulatory criteria for approval and not approve
the application. The FDA may impose post-approval obligations, such as
additional clinical tests following BLA approval to confirm safety and efficacy
(Phase IV human clinical trials). The FDA may, in some circumstances, also
impose restrictions on the use of the biological product that may be difficult
and expensive to administer. Further, the FDA requires reporting of certain
safety and other information that becomes known to a manufacturer of an approved
biological product. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems occur after the product
reaches the market.
Prior to approving an application, the FDA will inspect the prospective
manufacturer to ensure that the manufacturer conforms to the FDA's current GMP
regulations. To comply with the GMP regulations, manufacturers must expend time,
money and effort in product recordkeeping and quality control to assure that the
product meets applicable specifications and other requirements. The FDA
periodically inspects manufacturing facilities in the U.S. and abroad in order
to assure compliance with applicable GMP requirements. Failure of the Company to
comply with the FDA's GMP regulations or other FDA regulatory requirements could
have a significant adverse effect on the Company.
After a product is approved for a given indication in a BLA, subsequent new
indications or dosage levels for the same product are reviewed by the FDA via
the filing and approval of a BLA supplement. The BLA supplement is more focused
than the BLA and deals primarily with safety and effectiveness data related to
the new indication or dosage. The Company will be required to comply with
certain post-approval obligations, such as compliance with GMPs.
REGULATION OF COMBINATION PRODUCTS
Some of the cell therapy products which the Company intends to develop may
be regulated as combination biological product/medical devices. The cellular
therapy products, which the Company anticipates will include both MSCs and
biomatrices, may be considered combination biological/medical
43
<PAGE>
devices. If a product is a combination product, in most instances a single
application will be filed with the FDA and one center at the FDA (E.G., the
Center for Biologics Evaluation and Research) will have primary jurisdiction
over the application. The application may contain both a medical device
premarket approval ("PMA") application and a BLA. Accordingly, both sets of
applicable regulations to the product (E.G., the biological products laws and
regulations and, as described in detail below, the medical device laws and
regulations) may be applied to the combination product.
REGULATION OF MEDICAL DEVICES
If a product contains a device as part of a combination product, the Company
and/or its collaborative partners will need to obtain premarket clearance or PMA
for the device component from the FDA under the medical device authorities of
the FDC Act. In general, companies are required to obtain clearance of a
premarket notification ("510(k) notification") submission or approval of a PMA
application from the FDA before it begins to market a medical device in the
United States.
If a medical device manufacturer or distributor can establish that a device
is "substantially equivalent" to a legally marketed predicate device, the
manufacturer or distributor may seek clearance from the FDA to market the device
by filing a 510(k) notification. If a manufacturer of a medical device cannot
establish that a proposed device is substantially equivalent to a legally
marketed predicate device, the manufacturer must seek PMA of the proposed device
from the FDA through the submission of a PMA application. A PMA application,
like a BLA, must be supported by extensive data, including preclinical and
clinical trial data, to demonstrate the safety and effectiveness of the device.
If human clinical trials of a device are required and the device presents a
"significant risk," the manufacturer of the device must file an investigational
device exemption ("IDE") application prior to commencing human clinical trials.
Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will "file" the application. Once the submission is filed, the FDA begins a
review of the PMA application. The FDA has 180 days to review a PMA application,
although the reviews of such applications more often occur over a significantly
protracted time period of two years or more from the date of filing.
During the review of a PMA application, an advisory committee likely will be
convened to review and evaluate the application. Although the committee's
recommendation is not binding on the agency, the vote likely will influence the
agency's decision. In addition, prior to approval, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA quality system
regulations for medical devices. If granted, the PMA may include significant
limitations on the indicated uses for which the product may be marketed, and the
agency may require post-marketing studies of the device. The FDA also requires
reporting of certain safety and other information that becomes known to the
manufacturer.
FOREIGN REQUIREMENTS
Whether or not FDA approval has been obtained, approval of a product by the
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing of the product in those countries. The approval
process varies from country to country and the time required may be longer or
shorter than that required for FDA approval. The export of unapproved products
also is subject to FDA regulation.
OTHER REGULATIONS
The Company is subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. In addition, advertising and promotional materials
relating to biological products and medical devices are, in certain instances,
subject to regulation by the Federal Trade Commission or the FDA. There can be
no assurance that the Company will not be required to incur
44
<PAGE>
significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not have a materially adverse effect upon the
Company's ability to do business.
PERSONNEL
The Company currently has 92 full-time employees and one part-time employee,
of which 83 are engaged in research and development activities (34 with M.D.,
Ph.D. or D.V.M. degrees) and the remainder in general and administrative
functions. The Company plans to hire additional research and administrative
personnel by the end of 1997, in part to meet the contractual requirements of
the Novartis, DARPA, NIST and SBIR research agreements. None of the Company's
employees are covered by collective bargaining agreements and management
considers relations with its employees to be good.
FACILITIES
The Company entered into a Sublease Agreement with the Maryland Economic
Development Corporation to lease its principal offices and laboratories in the
Fells Point area of Baltimore's Inner Harbor. Under terms of the Sublease
Agreement, the State of Maryland provided grants, guaranteed renovation loans
and bond financing of approximately $4,700,000 to construct 30,000 square feet
of office and wet lab facilities. The Company has the right to lease 50,000
square feet or more of expansion space and to purchase the building
(approximately 185,000 square feet) under certain circumstances. The State of
Maryland has committed its best efforts to arrange additional expansion
financing for the Company of up to $7,000,000.
In June 1997, the Company completed construction of a pilot processing
facility to provide MSC isolation, culturing and processing services to support
the Company's plans for human clinical studies for bone marrow stroma
reconstitution and other clinical studies over the next several years. The
Company has initiated validation procedures for its newly constructed pilot
plant for the production of autologous MSCs for human clinical trials and plans
to seek FDA certification for the facility in early 1998. This facility, located
within the Company's principal laboratory and office facility, will have the
ability to handle multiple clinical trials and has a capacity of approximately
300 patients per year, which the Company expects will increase with improvements
in MSC culture-expansion techniques.
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.
45
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, KEY EMPLOYEES AND CONSULTANTS
The following table sets forth certain information regarding the Company's
directors, executive officers, key employees and consultants:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --------- --------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Max E. Link, Ph.D. (1)(2)(3)................ 57 Chairman of the Board
James S. Burns (1).......................... 50 President, Chief Executive Officer and
Director
Daniel R. Marshak, Ph.D..................... 40 Senior Vice President, Research and
Development and Chief Technology Officer
Michael J. Demchuk, Jr...................... 42 Vice President & Chief Financial Officer and
Secretary
David J. Fink, Ph.D......................... 54 Vice President, International Technology
Development
Stephen L. Gordon, Ph.D..................... 53 Vice President, Advanced Technology
Development
Annemarie B. Moseley, Ph.D., M.D. .......... 42 Vice President, Clinical & Regulatory
Affairs
Jack L. Bowman(2)........................... 64 Director
Peter Friedli (1)(2)(3)..................... 43 Director and Consultant
Mark Novitch, M.D........................... 65 Director
OTHER KEY EMPLOYEES AND CONSULTANTS
Stewart Craig, Ph.D......................... 36 Vice President, Product & Process
Development
Ernst B. Hunziker, M.D...................... 49 Executive Director, Orthopaedic Research
Scott P. Bruder, M.D., Ph.D................. 35 Director, Bone Regeneration
W. Brooke Jones............................. 46 Director, Quality Compliance
Kenneth R. Moseley.......................... 41 Director, Patents & Licensing
Mark A. Thiede, Ph.D........................ 42 Director, Cancer & Metabolic Bone Disease
Randell G. Young, D.V.M..................... 39 Associate Director, Tendon Regeneration &
Preclinical Studies
Frank P. Barry, Ph.D........................ 40 Associate Director, Cartilage Regeneration &
Analytical Biochemistry
Joseph D. Mosca, Ph.D....................... 44 Associate Director, Immunology & Gene
Therapy
Mark F. Pittenger, Ph.D..................... 41 Associate Director, Muscle Regeneration &
Cell Biology
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
46
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
MAX E. LINK, PH.D., has been Chairman of the Board since December 1994. Dr.
Link has extensive experience in pharmaceutical and biotechnology management,
with particular emphasis on the creation of major transplant and immune therapy
businesses based on stem cells, immunosuppressants for organ and tissue
transplants and monoclonal antibodies. From 1993 to 1994, he was the Chief
Executive Officer of Corange, Limited/Boehringer Mannheim (U.K.), a diversified,
multinational health care company with major market positions in
biopharmaceuticals, therapeutics, clinical diagnostics and orthopaedic devices.
From 1987 to 1993, Dr. Link was the Chief Executive Officer and subsequently the
Chairman of Sandoz Pharma Ltd., based in Basel, Switzerland, a worldwide
developer and marketer of pharmaceuticals, particularly transplant
pharmaceuticals. Prior thereto, Dr. Link was President and Chief Executive
Officer of Sandoz, Inc., the U.S. subsidiary of Sandoz AG. Dr. Link currently
serves on the Boards of Directors of Procept, Inc., Protein Design Labs, Inc.,
Human Genome Sciences, Inc., Cell Therapeutics, Inc., Cheung Laboratories, Inc.
and CytRx Corporation. Dr. Link received his Ph.D. in Economics from St. Gallen
University in Switzerland.
JAMES S. BURNS is a founder of the Company and has served as President and
Chief Executive Officer since its inception in December 1992. Mr. Burns has
extensive experience in founding, managing and funding new companies based on
biomedical science. Prior to founding the Company, he was the Vice Chairman of
HealthCare Investment Corporation and was a founding general partner of
HealthCare Ventures, L.P., venture capital funds specializing in forming new
health care product and service companies. Previously, Mr. Burns was Group
President of Becton Dickinson and Company, responsible for biotechnology and
emerging health care businesses. He also served as Vice President and Partner
for Technology Management Services at Booz Allen & Hamilton, Inc., a
multinational management consulting firm. He earned his B.S. and M.S. degrees in
Biological Sciences from the University of Illinois and an M.B.A. from DePaul
University.
DANIEL R. MARSHAK, PH.D., has served as the Company's Senior Vice President,
Research and Development and Chief Technology Officer since October 1994. From
April 1986 until October 1994, Dr. Marshak was Senior Staff Investigator at the
Cold Spring Harbor Laboratory, Cold Spring Harbor, New York. He also served as
Assistant Professor, Department of Physiology & Biophysics, School of Medicine,
State University of New York at Stony Brook and Assistant Professor, Departments
of Biochemistry & Cell Biology, Graduate School, State University of New York.
Dr. Marshak has extensive research experience in the isolation, purification,
cloning and characterization of cells and signal transduction molecules involved
in cancer and neurological disorders. Dr. Marshak received his B.S. from Harvard
University and his Ph.D. from the Rockefeller University.
MICHAEL J. DEMCHUK, JR., has served as the Company's Vice President & Chief
Financial Officer and Secretary since November 1996. Mr. Demchuk has extensive
experience in the financial and administrative management of emerging life
science and health care service companies. From February 1995 until October
1996, Mr. Demchuk was Vice-President--Acquisitions for Integrated Health
Services, Inc., a national post-acute health care services provider. From
September 1992 until January 1995, he served as Vice President and Chief
Financial Officer for Gliatech, Inc., a company engaged in the development of
products for the prevention of surgical adhesions and central nervous system
disorders. He has also served as the Vice President and Chief Financial Officer
for Nova Pharmaceutical Corporation, a bio-pharmaceutical research and
development company focused on drugs for treating inflammatory and neurological
disorders. Mr. Demchuk is a certified public accountant and received his B.S. in
Business Administration from the University of Maryland.
DAVID J. FINK, PH.D., has served as Vice President, International Technology
Development since June 1997 having previously served as the Vice President of
Osiris Research, Inc. since December 1994 and as Director, Biomatrix
Development, since January 1993. He is also Adjunct Assistant Professor in the
Department of Biology at Case Western Reserve University. Dr. Fink has served as
President of Bio-
47
<PAGE>
Integration Incorporated and was previously President of CollaTek, Inc. which
developed a novel processing technology for manufacturing medical implant
devices from biopolymers. Dr. Fink was previously a research manager at the
Battelle Columbus Division where he managed or participated in over 100 research
projects. Dr. Fink received his Ph.D. in Chemical Engineering from the
University of Michigan.
STEPHEN L. GORDON, PH.D., has served as Vice President for Advanced
Technology Development since July 1995, responsible for academic collaborations,
seeking external support of specific research projects and managing grant
research programs at the Company. From 1979 until 1995, Dr. Gordon served as the
Chief, Musculoskeletal Diseases Branch, of the National Institute of Arthritis
and Musculoskeletal and Skin Diseases. He managed, planned, developed and
evaluated a large grant portfolio in orthopaedic and related research. Dr.
Gordon received his B.S., M.S. and Ph.D. from Drexel University.
ANNEMARIE B. MOSELEY, PH.D., M.D., has served as Vice President, Clinical &
Regulatory Affairs since November 1997. From May 1996 until September 1997, Dr.
Moseley served as Director of Clinical Gene Therapy and Data Management at
SyStemix, Inc., where she was responsible for clinical development of HIV stem
cell gene therapy. From October 1994 until August 1995, Dr. Moseley served as
Sr. Vice President of Clinical Development for Titan Pharmaceuticals, Inc., and
Sr. Vice President of Product Development for Ingenex, Inc., a subsidiary of
Titan. Her responsibilities included the clinical and regulatory management of
programs in cellular and gene therapy products for cancer and infectious
diseases. From September 1992 until October 1994, Dr. Moseley served as Vice
President, Clinical Research and as Director of Transplantation and Gene Therapy
at Applied Immune Sciences, Inc., where she was responsible for clinical
development of programs in cancer, infectious disease and gene therapy. Dr.
Moseley received her Ph.D. from Utah State University and an M.D. from Baylor
College of Medicine, where she completed a residency in internal medicine, a
clinical investigator program in immunology, and a clinical stem cell gene
therapy fellowship in medical and molecular genetics.
JACK L. BOWMAN has been a Director since June 1997. Mr. Bowman has extensive
prior experience as a senior executive in multinational health care companies,
with particular emphasis on ethical and OTC pharmaceuticals, clinical
diagnostics and medical devices. From 1987 to 1994, he was Group Chairman of
Johnson & Johnson, responsible for much of its global pharmaceutical, diagnostic
and OTC businesses. From 1980 to 1987, Mr. Bowman served as Executive Vice
President of American Cyanamid and as President of its Lederle Laboratories
Division. Prior thereto, he served as the Executive Vice President,
Pharmaceutical Division of the Ciba-Geigy Corporation. Mr. Bowman is a Director
of NeoRx Corporation, Cell Therapeutics, Inc., CytRx Corporation, Targeted
Genetics Corporation and Cellegy Pharmaceuticals, Inc. Mr. Bowman received his
B.A. in Education and is a graduate of the Stanford University Senior Executive
and Financial Management Programs.
PETER FRIEDLI, a director of the Company since January 1996, has been a
principal of the investment banking firm Friedli Corporate Finance, Inc. since
1986. He worked in the field of international management consulting for service
and industrial companies in Europe and the United States from 1978 until 1986.
He has over a decade of experience as an independent investment manager in
corporate finance and has successfully managed various venture investment
companies in the United States. Mr. Friedli is actively involved in the
management of several public and private companies and serves on the Boards of
Directors of five of those private companies.
MARK NOVITCH, M.D., a director of the Company since September 1993, retired
in December 1993 as Vice Chairman of The Upjohn Company, where he was
responsible for pharmaceutical control, regulatory affairs, strategy and
planning, business development, legal, government affairs and public relations.
Dr. Novitch also previously served as Executive Vice President and as Senior
Vice President, Science Administration at The Upjohn Company. Prior thereto, Dr.
Novitch served as Acting Commissioner and as Deputy Commissioner of the FDA. He
has also served as Associate Commissioner for Health Affairs and as a Federal
Executive Fellow at the Brookings Institution. Presently, Dr. Novitch serves as
Adjunct Professor of Health Care Sciences at George Washington University. Dr.
Novitch was the recipient of the
48
<PAGE>
FDA Award of Merit and the Presidential Meritorious Executive Award. Dr. Novitch
serves on the Boards of Directors of Alteon, Inc., Calypte Biomedical
Corporation, Guidant Corporation, Kos Pharmaceuticals, Inc. and Neurogen
Corporation. He received an A.B. from Yale University and an M.D. from New York
Medical College.
OTHER KEY EMPLOYEES AND CONSULTANTS
STEWART CRAIG, PH.D., is Vice President, Product & Process Development.
Prior to joining Osiris, from June 1995 to June 1996 Dr. Craig served as Vice
President, Product & Process Development and Quality Compliance and from January
1994 to June 1995 as Director of Protein Chemistry at Systemix Inc., a
hematopoietic stem cell therapy company. At SyStemix, Dr. Craig was responsible
for managing the development of methods, devices and controls for the isolation,
analysis and EX VIVO manipulation of hematopoietic stem cells for clinical
application. From 1987 through 1993, Dr. Craig served in various research and
development positions at British Biotech Pharmaceuticals Ltd., Oxford, England,
working on design, purification and characterization of various recombinant
cytokine, growth factor and thrombolytic protein molecules. Dr. Craig received
his B.Sc. in Biochemistry and Ph.D. in Physical Biochemistry from the University
of Newcastle Upon Tyne, UK.
ERNST B. HUNZIKER, M.D., has been Executive Director, Orthopaedic Research,
responsible for the Company's research programs in cartilage regeneration, bone
regeneration and osteoarthritis since July 1997. He is also a member of the
osteoporosis and tendon program teams. Since 1989, Dr. Hunziker has served as
Professor of Biomechanics and Director of the M. E. Muller Institute for
Biomechanics at the University of Bern, Switzerland. Dr. Hunziker is the author
of many studies covering the structure, function and repair of cartilage and
bone. He is the Co-Chairman of the Swiss Connective Tissue Society and serves on
the Editorial Boards of the Journal of Bone and Joint Surgery (U.S.) and the
Journal of Histochemistry and Cell Biology. Dr. Hunziker received his M.D.
degree from the University of Bern.
SCOTT P. BRUDER, M.D., PH.D., has been Senior Research Scientist with the
Company since February 1994 and has served as Director, Bone Regeneration,
responsible for establishing cell biology and biochemical assay methods for the
isolation and purification of mesenchymal stem cells, as well as the Company's
research efforts in bone regeneration products since February 1997. Dr. Bruder
is also Adjunct Assistant Professor in the Department of Orthopaedics at CWRU.
He completed a medical internship and was pursuing an ophthalmology residency
prior to joining Osiris. Dr. Bruder received his M.D. and Ph.D. degrees from
CWRU.
W. BROOKE JONES has served as Director, Quality Assurance since July 1997,
responsible for quality assurance and quality control for MSC product and
process development. From April 1994 until June 1997, Mr. Jones served as
Director, Quality Assurance and Validation at Systemix, Inc. where he was
responsible for the development and execution of the GMP validation plan for
cell and gene therapy manufacturing facilities in the United States and France.
From March 1993 until April 1994, Mr. Jones served as Director, Regulatory
Affairs and Quality for Creative Biomolecules, Inc. and from October 1991 until
March 1993 as Corporate Director, Quality Assurance/Quality Control and
Regulatory Affairs for Verax Corporation. Mr. Jones received his B.A. from
George Mason University and has over twenty years of experience in the field of
regulatory and quality control.
KENNETH R. MOSELEY has served as Director, Patents & Licensing since
November 1997. From June 1996 until October 1997, Mr. Moseley served as Director
of Intellectual Property at SyStemix, Inc. From September 1992 until June 1996,
Mr. Moseley was Director of Intellectual Property at Applied Immune Sciences,
Inc., a cell therapy division of Rhone-Poulenc Rorer Gencell. Mr. Moseley
received his B.S. and J.D. degrees from the University of Houston and his B.A.
from Rice University. He is a registered patent attorney and is a member of the
California and Texas Bars.
MARK A. THIEDE, PH.D., has been a Senior Research Scientist with the Company
since October 1994 and is presently Director, Cancer & Metabolic Bone Disease,
responsible for the development of MSC
49
<PAGE>
products used in bone marrow stroma regeneration and osteoporosis. Dr. Thiede
also leads the Company's program to identify mesengenotrophic agents produced by
hematopoietic cells. From 1991 until joining the Company, Dr. Thiede was a
Senior Research Scientist with the Osteoporosis Group at Pfizer Central Research
where he designed and implemented preclinical IN VIVO studies which provided
molecular profiles of promising drug discovery candidates. Prior thereto, Dr.
Thiede completed a postdoctoral fellowship with the Osteoporosis and Bone
Biology Group at Merck Sharp and Dohme Research Laboratories and remained on
thereafter as a Senior Research Biochemist. Dr. Thiede received his Ph.D. in
Molecular Biology from the University of Connecticut Health Center.
RANDELL G. YOUNG, D.V.M., has been a Senior Research Scientist since
November 1993 and has served as Associate Director, Tendon Regeneration &
Preclinical Studies since July 1997. Dr. Young previously served as a Senior
Research Associate in the Skeletal Research Center at CWRU from 1991 to November
1993, where he was responsible for designing and implementing the various animal
protocols used to test the role of mesenchymal stem cell transplants for
cartilage, tendon, ligament, bone and muscle disorders. Dr. Young is also a
principal veterinary surgeon involved in collaborative research programs with
the Department of Orthopaedics at the University Hospitals of Cleveland. He
received his D.V.M. degree from Ohio State University.
FRANK P. BARRY, PH.D., has served as a Senior Research Scientist since
October 1994 and has served since July 1997 as Associate Director, Cartilage
Regeneration & Analytical Biochemistry, responsible for the development of
biomatrix materials for use in mesenchymal stem cell implants, with particular
emphasis on cartilage regeneration. From 1992 until joining the Company, Dr.
Barry was a Research Fellow at Shriners Hospital for Crippled Children, Tampa,
Florida, and Assistant Professor in Biochemistry and Molecular Biology at the
University of South Florida College of Medicine. Prior thereto, he was a College
Lecturer in Biochemistry at the National University of Ireland, preceded by
research studies at the Kennedy Institute of Rheumatology in London, England.
Dr. Barry received his Ph.D. from the National University of Ireland.
JOSEPH D. MOSCA, PH.D., has served as Senior Research Scientist since
January 1996 and has served since July 1997 as Associate Director, Immunology &
Gene Therapy, responsible for human mesenchymal stem cell surface expression,
MSC interactions with hematopoietic progenitor cells as related to the use of
the MSC as an antigen presenting cell. Before joining Osiris, Dr. Mosca spent
seven years as Principal Investigator at the Henry M. Jackson Foundation.
Previous to that, Dr. Mosca was an Assistant Professor at The Johns Hopkins
Oncology Center. Dr. Mosca has extensive research experience in interferon
research, herpes virology, gene therapy at both the stromal and hematopoietic
level, human immunodeficiency virus type-1 expression and inhibition, in
addition to stimulation of T cells through the CD28 receptor. Dr. Mosca received
his Ph.D. in Biochemistry from Temple University Medical Center in Philadelphia,
and did his post-doctoral work at The Johns Hopkins University.
MARK F. PITTENGER, PH.D., has served as Senior Research Scientist since
October 1994 and has served since September 1997 as Associate Director, Muscle
Regeneration and Cell Biology, responsible for cell characterization and the
development of in vitro assays using mesenchymal stem cells as therapeutic
agents for tissue regeneration. From March 1989 until joining the Company, Dr.
Pittenger was a Staff Associate at Cold Spring Harbor Laboratory in New York.
Dr. Pittenger received his Ph.D. in Biological Chemistry from The Johns Hopkins
University School of Medicine.
SCIENTIFIC ADVISORY BOARD AND CONSULTANTS
Osiris has established a Scientific Advisory Board ("SAB") consisting of
scientists and clinicians in the fields of cartilage regeneration, implantable
biomaterials, orthopaedic surgery, osteoarthritis, cell biology, tissue
biochemistry, cell cycle and differentiation, soft tissue medicine and molecular
biology. The SAB and the Company's consultants evaluate projects and
collaborations proposed by the Company's management, evaluate the Company's
research programs, advise the Company with respect to MSC technology and
50
<PAGE>
related matters, and recommend personnel and academic and industry
collaborations. The SAB members and consultants are as follows:
<TABLE>
<CAPTION>
NAME POSITION/AFFILIATION AREA OF EXPERTISE
- --------------------------------- ------------------------------------- ----------------------------
<S> <C> <C>
Victor M. Goldberg, M.D.......... Professor & Chairman, Orthopaedic Surgery and
Department of Orthopaedics Bio-Orthopaedics
Case Western Reserve University
David L. Butler, Ph.D. .......... Professor of Engineering Orthopaedic Soft Tissue
Mechanics and Biomedical Engineering Biomechanics
University of Cincinnati
Arnold I. Caplan, Ph.D. ......... Director of Skeletal Research Center Developmental Biology and
Professor of Biology, Biophysics and MSC Research
Physiology
Case Western Reserve University
Curt I. Civin, M.D. ............. Director and King Fahd Stem Cell Regulation,
Professor of Pediatric Oncology Cancer & Transplantation
The Johns Hopkins University
Stanton L. Gerson, M.D. ......... Professor and Director Bone Marrow Stroma
Division of Hematology-Oncology and Gene Therapy
Case Western Reserve University
Dick K. Heinegard, M.D., Ph.D. .. Professor of Physiological Chemistry Cartilage Proteins and
University of Lund, Sweden Biochemistry
Daniel R. Marshak, Ph.D. ........ Senior Vice President, Cell and Molecular Biology,
Research & Development Protein Chemistry and
Osiris Therapeutics, Inc. Cell Cycle Regulation
Randolph C. Steer, M.D., Ph.D.... Pharmaceutical Consultant Preclinical/Clinical
Studies;
Scientific/Regulatory
Affairs
</TABLE>
VICTOR M. GOLDBERG, M.D., a founder of the Company, is Professor & Chairman,
Department of Orthopaedics, Case Western Reserve University. He is also Director
of the University Musculoskeletal Institute at the University Hospitals of
Cleveland, one of the largest multidisciplinary academic clinical centers in the
U.S. specializing in the entire range of bone, muscle, joint and spine
disorders. Dr. Goldberg's research activity over the past two decades has
involved the basic mechanisms of cartilage degeneration and repair,
osteoarthritis progression, allograft bone and cartilage transplants. He has
served as a member of the National Musculoskeletal NIH Study Section, the
National Arthritis Advisory Board and as President of the Orthopaedic Research
Society. Dr. Goldberg has twice received the Kappa Delta Award for Research
Excellence in Orthopaedic Surgery from the American of Orthopaedic Surgeons.
DAVID L. BUTLER, PH.D., is Professor of Engineering Mechanics and Biomedical
Engineering, University of Cincinnati. Dr. Butler's research over the past
twenty years has focused on the biomechanics of soft tissue, particularly,
tendon, ligament and cartilage tissues. Dr. Butler has authored or co-authored
over 150 publications dealing with the repair or replacement of tendon and
ligaments after injury. He is a Founding Fellow of the American Institute of
Medical and Biological Engineering. Dr. Butler is the recipient of numerous
honors for his work in orthopaedic biomechanics, including the Kappa Delta Award
from the American Academy of Orthopaedic Surgeons, the Cabaud Award from the
American Orthopaedic Society
51
<PAGE>
of Sports Medicine and the Gustus L. Larson Memorial Award from the American
Society of Mechanical Engineers.
ARNOLD I. CAPLAN, PH.D., a founder of the Company, is Professor, Department
of Biology; Professor of General Medical Sciences; Professor of Biophysics and
Physiology; and Director of the Skeletal Research Center at Case Western Reserve
University. For more than 20 years, Dr. Caplan has led the field of tissue
embryogenesis, resulting in the identification and isolation of human
mesenchymal stem cells in 1988. Dr. Caplan has been responsible for over $15
million in research grants focusing on the cellular mechanisms underlying the
regeneration of bone, ligament, tendon and cartilage. Dr. Caplan is a recipient
of the Elizabeth Winston Lanier/Kappa Delta Award given by the American Academy
of Orthopaedic Surgeons for his pioneering work in MSCs.
CURT I. CIVIN, M.D., is the Director and King Fahd Professor of Pediatric
Oncology, The Johns Hopkins University and Medical Institutions. Dr. Civin has
extensive research experience in hematopoietic stem cell biology, as well as in
leukemia biology and monoclonal antibodies. His discovery of the CD34 monoclonal
antibody pioneered hematopoietic stem cell purification for research and
clinical stem cell transplants used in the treatment of cancer and selected
inherited disorders and in gene therapy. Dr. Civin's current research focuses on
the discovery and functional investigation of stem cell molecules involved in
the developmental regulation of the hematopoietic and immune systems. His
clinical practice is concentrated on the care of childhood cancers, with special
focus on leukemia and bone marrow transplantation. Dr. Civin has served on
numerous extramural research committees and corporate boards, and is the
recipient of key honors such as Scholar of the Leukemia Society of America.
STANTON L. GERSON, M.D., is Professor of Medicine, Director of the Division
of Hematology-Oncology, Department of Medicine, Case Western Reserve University
School of Medicine. Dr. Gerson has had extensive research and clinical
experience in the treatment of leukemias/lymphomas and the protection of normal
cells during treatment. He is also a principal investigator on the use of MSCs
during bone marrow transplantation and their use as gene therapy for the
treatment of single gene tissue disorders. Dr. Gerson is a member of the
National Cancer Institute Gene Therapy Programs Review Committee and the
National Cancer Institute Special Review Committee.
DICK K. HEINEGARD, M.D., PH.D., is Chairman and Professor, Department of
Medical and Physiological Chemistry at Lund University. Dr. Heinegard's
extensive research has focused on the identification, purification and
characterization of proteoglycans and matrix proteins from bone and cartilage,
working toward determining the role of various matrix constituents in bone and
cartilage matrix assembly/ disassembly. Of particular interest are several bone
proteins which mediate bone resorption and turnover. Dr. Heinegard was the 1989
recipient of the Hilda and Alfred Erikssons prize for "contributions to the
understanding of disease" by the Swedish Royal Academy of Sciences.
DANIEL R. MARSHAK, PH.D., is described under "Executive Officers, Directors,
Key Employees and Consultants" above.
RANDOLPH C. STEER, M.D., PH.D., is a leading independent regulatory
consultant with a broad background in the commercial development of drugs,
biologics and medical devices. He serves as senior advisor to numerous
pharmaceutical and biotechnology companies and has played a key role in the
strategic planning and launch of products in multiple therapeutic areas,
including oncology, gastroenterology, hepatology, cardiology, hematology and
infectious diseases. From 1985 to 1989, he served as Chairman, and from
1988-1989, as President and Chief Executive Officer of ATC International, a
multinational pharmaceutical regulatory, marketing and publishing company. Prior
thereto, he served as a Medical Director at CIBA-GEIGY Pharmaceuticals following
a position in the Research and Development Division of Marion Laboratories. Dr.
Steer received his M.D. from the Mayo Medical School and his Ph.D. from the
University of Minnesota, where he also completed residency and subspecialty
training in laboratory medicine and chemical pathology.
52
<PAGE>
BOARD DESIGNATION RIGHT OF NOVARTIS
In connection with the Company's sale of 692,059 shares of Common Stock to
Novartis, the Company agreed to use reasonable best efforts to cause, at the
request of Novartis, the election to the Board of Directors a nominee of
Novartis deemed reasonably acceptable by the Board of Directors. Novartis' right
to nominate a representative to the Board of Directors expires upon the earlier
of the termination of the Novartis Agreement or the first date following June
16, 2000 on which Novartis owns less than 4% of the Company's outstanding shares
of Common Stock. In lieu of designating a nominee to the Board of Directors,
Novartis may designate a representative, reasonably acceptable to the Company,
who shall be permitted to attend meetings of the Board of Directors as an
observer. To date, Novartis has not elected to designate a representative to
serve on the Company's Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Executive Committee which has the
powers and authority of the full Board of Directors on all matters, except as
those limited by law. Dr. Link, Mr. Friedli and Mr. Burns are the members of the
Executive Committee. The Company has also established a Compensation Committee
which is responsible for determining compensation for the Company's executive
officers and administering the Stock Plan. Dr. Link and Mr. Friedli are the
members of the Compensation Committee. The Company has also established an Audit
Committee of non-employee directors which is responsible for making
recommendations concerning the engagement of independent public accountants,
reviewing the plans and results of the audit engagement with the independent
public accountants, reviewing the independence of the independent public
accountants, considering the range of audit and non-audit fees and reviewing the
adequacy of the Company's internal accounting controls. Dr. Link and Mr. Friedli
are the members of the Audit Committee.
TERM AND COMPENSATION OF DIRECTORS
Each of the Company's directors is elected at the Company's annual meeting
of stockholders (except for those designated by the Board to fill newly created
directorships) and holds office until his or her successor is duly elected and
qualified.
Directors of the Company do not receive cash for their services. However,
directors who are not employees of the Company receive an initial grant of
options under the Stock Plan to purchase 11,029 shares of Common Stock vesting
over a three-year period and receive grants of 294 shares of Common Stock for
each Board meeting that they attend. An aggregate of 11,765 shares of Common
Stock have been granted to date to the directors pursuant to such arrangements.
No other non-cash compensation was paid to directors of the Company in their
capacities as directors during 1996. For a discussion of certain consulting
arrangements between the Company and Dr. Link and Mr. Friedli, respectively, see
"-- Compensation Committee Interlocks and Insider Participation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Link and Mr. Friedli served as members of the Company's Compensation
Committee during 1996. In November 1994, the Company and Dr. Link entered into a
consulting agreement (the "Link Agreement") pursuant to which the Company agreed
to retain Dr. Link to provide business and financial advisory services for a
three-year term and to serve as the Company's Chairman of the Board. Under the
terms of the Link Agreement, Dr. Link purchased 47,059 shares of Common Stock
for a purchase price of $0.58 per share and purchased 52,550 shares of the
Company's Series D Convertible Preferred Stock (the "Series D Preferred Stock")
at $2.55 per share. Of such shares of Common Stock, 5,882 were issued without
vesting restrictions and the remaining vest over three years and upon the
satisfaction of certain performance milestones. The Company expects that all
outstanding shares of Series D Preferred Stock will convert into Common Stock
upon completion of the Offering.
53
<PAGE>
In November 1995, the Company and Friedli Corporate Finance AG ("Friedli
AG") entered into a Consulting Agreement (the "Friedli AG Agreement") pursuant
to which the Company agreed to retain Friedli AG to provide business and
financial advisory services for a seven-year term. In consideration of the
services provided by Friedli AG, the Company pays a fee of $4,000 per month and
will also pay for certain expenses of Friedli AG, up to $15,000 per year. In
addition, pursuant to the Friedli AG Agreement, the Company granted to Friedli
AG (i) a pre-emptive right to purchase up to 10% of the shares offered by the
Company in its initial public offering at the price to the public of such
offering and (ii) a right of first refusal of any new equity or debt financing.
Accordingly, 250,000 shares (and 10% of any shares purchased upon exercise of
the Underwriters' over-allotment option) of Common Stock will be offered to
Friedli AG in this Offering. See "Underwriting." Mr. Friedli and certain related
entities also have purchased securities in various private placements by the
Company since 1993.
The Company retained Friedli AG, with which Mr. Friedli was previously
affiliated, to act as its European Placement Agent in connection with its
private placements of Series D Preferred Stock and Series E Convertible
Preferred Stock (the "Series E Preferred Stock"). In connection with the 1995
private placement of its Series D Preferred Stock, the Company sold to Friedli
AG, for nominal consideration, warrants to purchase from the Company 133,310
shares of Common Stock at an exercise price of $5.10 per share pursuant to the
Series D European Placement Agency Agreement. A total of 89,381 warrants will be
exercisable until December 1, 2002, and 43,929 will be exercisable until January
1, 2003. In addition, the following entities affiliated with Mr. Friedli
purchased shares in the offering: Pine, Inc., 120,000 shares; Joyce Ltd., 20,000
shares; Nikatech, Inc, 333,340 shares; and U.S. Ventech, Inc., 170,000 shares.
For the nature of the affiliation between Mr. Friedli and each of these
entities, see "Principal Stockholders."
In connection with the 1996 private placement of Series E Preferred Stock,
the Company sold to Friedli AG, for nominal consideration, warrants to purchase
from the Company 50,985 shares of Common Stock at an exercise price of $7.65 per
share pursuant to the Series E European Placement Agency Agreement. Such
warrants will be exercisable until January 1, 2003. In addition, the following
entities affiliated with Mr. Friedli purchased shares in the offering: Spring
Technology, Inc., 166,000 shares; and US Ventech, Inc. 80,000 shares. For the
nature of the affiliation between Mr. Friedli and these entities see "Principal
Stockholders."
EXECUTIVE COMPENSATION
The following table summarizes the 1996 compensation paid to or earned by
the Company's Chief Executive Officer and the only other executive officer whose
salary and bonus for services rendered in all capacities to the Company during
1996 exceeded $100,000 (the "Named Executive Officers").
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION AWARDS
--------------------------------------------------- -----------------
OTHER ANNUAL ALL OTHER SECURITIES UNDER-
NAME AND PRINCIPAL POSITION(S) SALARY ($) COMPENSATION ($) COMPENSATION ($) (1) LYING OPTIONS (#)
- ----------------------------------------- ---------- ---------------- --------------------- -----------------
<S> <C> <C> <C> <C>
James S. Burns........................... $ 250,000 -- $ 3,264 --
President and Chief
Executive Officer
Daniel R. Marshak, Ph.D.................. 161,343 $ 18,500(2) 1,535 14,706
Senior Vice President,
Research and Development
</TABLE>
- ------------------------
(1) These amounts represent the premium for life insurance policies which the
Company maintains on Mr. Burns and Dr. Marshak for the benefit of their
designees.
(2) This amount represents the forgiveness of $12,500 of a $50,000 loan to Dr.
Marshak for the relocation of his residence pursuant to his employment
agreement and an automobile allowance of $500 per month.
1996 OPTION GRANTS
The following table contains information about stock option grants to the
Named Executive Officers in 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
PERCENTAGE OF TOTAL FOR OPTION
NUMBER OF OPTIONS GRANTED TERM (3)
SECURITIES UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ------------------------------ ----------------------- ----------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James S. Burns................ -- -- -- -- -- --
Daniel R. Marshak, Ph.D....... 14,706(1) 8% $ 1.36(2) 3/8/2006 $ 12,578 $ 31,875
</TABLE>
- ------------------------
(1) The option vested 20% immediately and the remaining 80% vest in four equal
annual installments beginning on March 8, 1997.
(2) The exercise price of the option is equal to the fair market value of the
underlying shares of Common Stock on the date of grant, as determined by the
Board of Directors.
(3) The 5% and 10% assumed rates of appreciation are established by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
55
<PAGE>
OPTION EXERCISES AND YEAR-END VALUES
The following table provides information about the exercise of options by
the Named Executive Officers during 1996 and the number and value of options
held by the Named Executive Officers at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS AT
UNDERLYING UNEXERCISED FISCAL
OPTIONS AT FISCAL YEAR END
SHARES YEAR END (1)
ACQUIRED ON VALUE -------------------------- -----------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------- ----------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
James S. Burns............................. -- -- -- -- --
Daniel R. Marshak, Ph.D.................... -- -- 5,882 8,824 $ 10,000
<CAPTION>
NAME UNEXERCISABLE
- ------------------------------------------- -------------
<S> <C>
James S. Burns............................. --
Daniel R. Marshak, Ph.D.................... $ 15,000
</TABLE>
- ------------------------
(1) The option value represents the fair market value of the underlying
securities on December 31, 1996 minus the aggregate exercise price of the
option. For purposes of this calculation, a fair market value of $3.06 per
share was used, the fair market value of the securities on December 31, 1996
as determined by the Board of Directors.
EMPLOYMENT AGREEMENTS
On March 11, 1993, the Company and James S. Burns entered into an Employment
Agreement (the "Burns Agreement") pursuant to which the Company agreed to employ
Mr. Burns as the President and Chief Executive Officer of the Company for a
period of three years, beginning on January 1, 1993, subject to renewal for
two-year periods unless otherwise terminated. Under the terms of the Burns
Agreement, as amended in 1995, Mr. Burns is entitled to receive $250,000 in
annual base compensation through December 31, 1997. Mr. Burns is also entitled
to receive a bonus payment each year of up to 50% of base compensation based on
the satisfaction of milestones established for such year by the Board of
Directors. Mr. Burns is also entitled to receive certain employee benefits and
other perquisites, including: (i) coverage for him and his dependents under the
Company's medical and disability plans; (ii) $1,000,000 of life insurance naming
Mr. Burns' designees as the beneficiaries; and (iii) an option to purchase
22,059 shares of the Company's Common Stock.
In the event of a termination without cause, Mr. Burns is entitled to
receive severance pay equal to the greater of: (i) the cash compensation Mr.
Burns would have received through the end of the remaining employment term; and
(ii) the cash compensation he would have received during a twelve month period,
in each case based on the cash compensation for the immediately preceding year
of service. Mr. Burns is also entitled to continue his participation in the
Company's medical and disability plans for the same period of time on which his
severance pay is based. In the event of a termination resulting from Mr. Burns'
death or disability, Mr. Burns is entitled to receive a severance payment
calculated in the same manner as described in the preceding sentence but based
on a period of twelve months; however, in the case of a termination upon Mr.
Burns' death, such payment is subject to a dollar-for-dollar offset by the
proceeds of any life insurance maintained by the Company for the benefit of Mr.
Burns or his designees. The Burns Agreement contains confidentiality and
intellectual property covenants and a two-year non-compete covenant.
On October 1, 1994, the Company and Daniel R. Marshak, Ph.D., entered into
an Employment Agreement (the "Marshak Agreement") pursuant to which the Company
agreed to employ Dr. Marshak as Senior Vice President, Research and Development
and Chief Technology Officer of the Company for a period of three years, subject
to renewal for two-year periods unless otherwise terminated. Under the
56
<PAGE>
terms of the Marshak Agreement, Dr. Marshak is entitled to receive $150,000 in
annual base compensation, which increases each October 1 by the greater of the
Company's local consumer price index ("CPI") or 5%. Dr. Marshak is also entitled
to receive a bonus payment each year of up to 30% of base compensation based on
the satisfaction of certain milestones established by the Chief Executive
Officer and approved by the Board of Directors. Dr. Marshak is also entitled to
receive certain employee benefits and other perquisites. In addition, Dr.
Marshak purchased 117,647 shares of Common Stock for a purchase price of $0.58
per share, which purchase amount of $68,000 was loaned to Dr. Marshak by the
Company. Of such shares, 11,029 were issued to Dr. Marshak and the remaining
shares vest over two years and upon the satisfaction of certain performance
milestones. The Marshak Agreement also contains provisions regarding
termination, severance payments, confidentiality, intellectual property and non-
competition which are substantially similar to those contained in the Burns
Agreement.
STOCK OPTION AND EMPLOYEE BENEFIT PLANS
AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN AND 1993 STOCK OPTION PLAN
The Company has adopted the Amended and Restated 1994 Stock Incentive Plan
and the 1993 Stock Option Plan (the "Stock Plans"), under which up to 1,176,471
shares of the Company's Common Stock may be granted pursuant to stock options or
granted or sold as restricted stock to directors, officers and employees of and
consultants and advisors to the Company. As of September 30, 1997, 901,739
shares of Common Stock were reserved for issuance under the Stock Plans,
pursuant to which options to purchase a total of 462,904 shares were
outstanding, and 222,496 shares of restricted stock were granted or sold to
officers, employees and consultants. All of these options and shares are subject
to vesting requirements based on duration of employment (typically 25% per year
of employment) or satisfaction of certain performance milestones, and as of
September 30, 1997, 118,885 of such shares had vested.
The Stock Plans are administered by the Compensation Committee of the Board
of Directors. Subject to limitations set forth in the Stock Plans, the Committee
determines to whom options are granted, the option term, the exercise price,
vesting schedules and the rate at which options may be exercised, provided that
the number of options that may be granted to any individual in any calendar year
may not exceed 200,000. The maximum term of options granted under the Stock
Plans is ten years and the exercise price may be equal to, less than or greater
than the fair value of such shares. Under the Stock Plans, the exercise price
may be payable in cash or, at the discretion of the Board of Directors, in
Common Stock or a combination of cash and Common Stock.
SAVINGS PLAN
The Company has adopted the Osiris Therapeutics, Inc. Retirement Savings
Plan (the "Savings Plan"). The Savings Plan is intended to be a qualified
retirement plan under the Internal Revenue Code. Employees of the Company are
eligible to participate in the Savings Plan upon the completion of three
consecutive months of employment. Participants may make salary deferral
contributions to the Savings Plan, subject to limitations imposed by the
Internal Revenue Code. The Company may, but is not required to, make matching
contributions to the Savings Plan based on the participants' contributions.
Employer contributions are subject to a graduated vesting schedule based upon
length of service with the Company. The Company has not made any matching
contributions under the Savings Plan to date.
57
<PAGE>
CERTAIN TRANSACTIONS
From its inception in December 1992 to the date of this Prospectus, the
Company has sold and issued Common Stock and Preferred Stock which will convert
into an aggregate of 5,510,002 shares of Common Stock. For the period from July
1, 1994 through September 30, 1997, the Company sold the following shares of its
Common Stock and Preferred Stock in private placements: 164,706 shares of Common
Stock at a price of $0.58 per share; 52,550 shares of Series D Preferred Stock
at $2.55 per share (each convertible into .59 shares of Common Stock); 3,599,070
shares of Series D Preferred Stock at $3.00 per share (each convertible into .59
shares of Common Stock); warrants to purchase 135,586 shares of Common Stock at
$5.10 per share pursuant to the Series D European Placement Agency Agreement;
2,246,224 shares of Series E Preferred Stock at $4.50 per share (each
convertible into .59 shares of Common Stock); warrants to purchase 50,985 shares
of Common Stock at $7.65 pursuant to the Series E European Placement Agency
Agreement; 692,059 shares of Common Stock at $14.45 per share; and 11,029 shares
of Common Stock at $8.50 per share.
The purchasers of the Preferred Stock and Common Stock included, among
others, the following executive officers, directors and beneficial holders of
more than 5% of the Company's Common Stock. The Company believes that all such
parties purchased their shares in arm's-length transactions on terms
substantially equivalent to those offered to non-affiliates.
<TABLE>
<CAPTION>
COMMON SERIES D SERIES E
------------------------ ----------------------- -----------------------
PURCHASE PURCHASE PURCHASE
NAME SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------- --------- ------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Peter Friedli (1).................... 344,195 - 643,340 $ 1,930,020 301,333 $ 1,356,000
Novartis Pharma AG (2)............... 692,059 $ 10,000,250
James S. Burns (3)................... 66,668 $ 200,000
Arnold I. Caplan, Ph.D.(3)........... 20,000 $ 60,000
Max E. Link, Ph.D. (4)............... 47,059 $ 27,200 52,550 $ 134,000 53,333 $ 240,000
Daniel R. Marshak, Ph.D.(5).......... 117,647 $ 68,000
Jack L. Bowman (6)................... 11,029 $ 93,750
</TABLE>
(1) Includes 55,333 shares of Series E Preferred Stock and 124,706 shares of
Common Stock issuable upon the exercise of warrants owned by Mr. Friedli.
Includes the following shares as to which Mr. Friedli has (except as
provided below) sole investment power: 20,000 shares of Series D Preferred
Stock and 124,784 shares of Common Stock issuable upon exercise of warrants
held by Joyce Ltd. (of which Mr. Friedli is Investment Manager); 333,340
shares of Series D Preferred Stock held by Nikatech, Inc. (of which Mr.
Friedli owns 3% of the outstanding capital stock and is President); 120,000
shares of Series D Preferred Stock and 74,117 shares of Common Stock
issuable upon exercise of warrants held by Pine, Inc. (of which Mr. Friedli
is Investment Manager); 166,000 shares of Series E Preferred Stock and
20,588 shares of Common Stock issuable upon the exercise of warrants held by
Spring Technology Corp. (of which Mr. Friedli is Investment Manager); and
170,000 shares of Series D Preferred Stock and 80,000 shares of Series E
Preferred Stock held by USVentech, Inc. (of which Mr. Friedli is Investment
Manager).
(2) On June 16, 1997, the Company issued and sold 692,059 shares of Common Stock
to Novartis Pharma AG pursuant to the Novartis Agreement.
(3) Mr. Burns and Dr. Caplan were issued shares of Series D Preferred in lieu of
cash compensation owed to them pursuant to their employment and consulting
agreements with the Company.
(4) In November 1994, the Company and Dr. Link entered into a consulting
agreement pursuant to which the Company agreed to retain Dr. Link to provide
business and financial advisory services for a three-year term and to serve
as the Company's Chairman of the Board. Under the terms of the Link
58
<PAGE>
Agreement, Dr. Link purchased 47,059 shares of Common Stock for a purchase price
of $0.58 per share and purchased 52,550 shares of Series D Preferred Stock
at $2.55 per share. Of such shares of Common Stock, 5,882 were issued
without vesting restrictions and the remaining vest over three years and
upon the satisfaction of certain performance milestones.
(5) In October 1994, in connection with the commencement of his employment with
the Company, Dr. Marshak purchased 117,647 shares of Common Stock for a
purchase price of $0.58 per share, which purchase amount of $68,000 was
loaned to Dr. Marshak by the Company. Of such shares, 11,029 were issued to
Dr. Marshak and the remaining shares vest over two years and upon the
satisfaction of certain performance milestones.
(6) In July 1997, in connection with the commencement of his service on the
Board of Directors, Mr. Bowman purchased 11,029 shares of Common Stock at
$8.50 per share, which purchase amount of $93,750 was loaned to Mr. Bowman
by the Company.
Since June 30, 1994, the Company has granted an aggregate of 11,765 shares
of Common Stock to its directors as compensation for attending Board of Director
meetings.
On February 22, 1995, the Company entered into a sponsored Research
Agreement with Drs. Caplan, Goldberg and Haynesworth that will provide $1.44
million in funding for mesenchymal stem cell research in their laboratories over
a three-year period ($120,000 per quarter) commencing January 1, 1995. The
Company will receive exclusive, worldwide rights to any intellectual property
resulting from such research that is not already the subject of the Technology
Transfer and License Agreement between CWRU and the Company, effective January
1, 1993. In addition, the researchers received an extension of their current
Consulting Agreements (Dr. Caplan for five years, Drs. Goldberg and Haynesworth
each for three years) providing for consulting fees of $60,000 per year. The
Research Agreement with Dr. Caplan and Dr. Goldberg has been extended for an
additional two years with no changes in the per annum level of funding.
For a discussion of certain relationships between the Company and Dr. Link
and Mr. Friedli, see "Management--Compensation Committee Interlocks and Insider
Participation."
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of October 18, 1997 (adjusted to reflect the
conversion of all outstanding shares of Preferred Stock into Common Stock) and
as adjusted to reflect the sale of 2,500,000 shares of Common Stock in this
Offering: (i) by each person (or group of affiliated persons) known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock; (ii) by each of the Named Executive Officers; (iii) by each director of
the Company; and (iv) by all of the Company's directors and executive officers
as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARED BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
(1) (1)
----------------------- -----------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Peter Friedli (2).................................................... 1,630,959 17.9% 1,630,959 14.1%
Novartis Pharma AG (3)............................................... 692,059 7.9 692,059 6.1
Arnold I. Caplan, Ph.D. (4).......................................... 609,412 7.0 609,412 5.4
James S. Burns (4)................................................... 496,128 5.7 496,128 4.4
Invesco Trust Company (5)............................................ 490,196 5.6 490,196 4.4
Daniel R. Marshak, Ph.D. (6)......................................... 135,000 1.5 135,000 1.1
Max Link, Ph.D....................................................... 126,402 1.4 126,402 1.1
Mark Novitch, M.D.................................................... 12,794 * 12,794 *
Jack L. Bowman....................................................... 11,029 * 11,029 *
All directors and executive officers as a group (9 persons).......... 2,447,607 26.8% 2,447,607 20.6%
</TABLE>
- ------------------------
* Less than one percent.
(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise
has or shares voting power and/or investment power and as to which such
person has the right to acquire such voting and/or investment power within
60 days. Percentage of beneficial ownership as to any person or group as of
a particular date is calculated by dividing the number of shares
beneficially owned by such person or group by the sum of the number of
shares outstanding as of such date and the number of shares as to which such
person or group has the right to acquire voting and/or investment power
within 60 days.
(2) Includes 179,365 shares and 124,706 shares issuable upon exercise of
warrants. Also includes the following shares and shares issuable upon the
exercise of warrants, as to which Mr. Friedli has (except as provided below)
sole investment power: 165,941 shares held by Ascent Holding AG (of which
Mr. Friedli owns 4% of the outstanding capital stock and is President);
64,706 shares held by Cruiseinvest Ltd. (of which Mr. Friedli is Investment
Manager); 70,588 shares held by Eagle Growth Ltd. (of which Mr. Friedli is
Investment Manager); 62,104 shares and 124,784 shares issuable upon exercise
of warrants held by Joyce Ltd. (of which Mr. Friedli is Investment Manager);
196,082 shares held by Nikatech, Inc. (of which Mr. Friedli owns 3% of the
outstanding capital stock and is President); 58,824 shares and 74,117 shares
issuable upon exercise of warrants held by Pine, Inc. (of which Mr. Friedli
is Investment Manager); 137,389 shares and 20,588 shares issuable upon
exercise of warrants held by Spring Technology Corp., (of which Mr. Friedli
is Investment Manager); 147,059 shares held by USVentech, Inc. (of which Mr.
Friedli is Investment Manager); and 204,706 shares held by Venturetec, Inc.
(of which Mr. Friedli owns 2% of the outstanding capital stock and is
President). Does not include any shares pursuant to Friedli AG's pre-emptive
right to purchase up to 10% of the shares offered by the Company in its
initial public offering, pursuant to which 250,000 shares (and 10% of any
shares purchased upon exercise of the Underwriters' over-allotment option)
will be offered to Friedli AG in this Offering. See "Underwriting." Mr.
Friedli's business address is c/o Freigutstrasse 5, 8002 Zurich,
Switzerland.
(3) The address of Novartis Pharma AG is CH-4002 Basel, Switzerland.
60
<PAGE>
(4) The address of Arnold I. Caplan, Ph.D., and James S. Burns is c/o Osiris
Therapeutics, Inc., 2001 Aliceanna Street, Baltimore, MD 21231.
(5) The address of Invesco Trust Company is 7800 East Union Drive, Suite 800,
Denver, Colorado 80237.
(6) Includes 12,941 shares issuable upon exercise of stock options.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock, $0.001
par value per share. Upon the consummation of this Offering, the Company will
have 11,263,166 shares of Common Stock outstanding (including 5,510,002 shares
of Common Stock to be issued upon conversion of all outstanding shares of
Preferred Stock). Each stockholder of record is entitled to one vote for each
outstanding share of Common Stock owned by him on every matter properly
submitted to the stockholders for their vote. Stockholder actions generally
require the approval of the holders of a majority of the Company's outstanding
shares of Common Stock.
Subject to the preferences which may be granted to holders of the Preferred
Stock, holders of Common Stock are entitled to any dividend declared by the
Board of Directors out of funds legally available for such purpose and to
receive on a pro rata basis all assets of the Company available for distribution
to the stockholders after the payment of liabilities in the event of the
liquidation, dissolution, or winding up of the Company. Holders of Common Stock
do not have any conversion, preemptive or other rights to become subscribers or
purchasers of additional shares of any class of the Company's capital stock, and
there are no redemption rights or sinking fund provisions with respect to the
Common Stock.
PREFERRED STOCK
As of the closing of this Offering, no shares of Preferred Stock will be
outstanding. Thereafter, the Board of Directors will be authorized, without
further stockholder approval, to issue up to 20,000,000 shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences and to fix the number of
shares constituting any series and the designations of such series.
The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company and may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock.
The issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to the holders of Common Stock or could adversely
affect the rights and powers, including voting rights, of the holders of the
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Common Stock. The Company currently has no
plans to issue any shares of Preferred Stock.
WARRANTS
In connection with certain of its private placements of Preferred Stock and
business transactions, the Company has granted, or sold for nominal
consideration, warrants to purchase Common Stock and Preferred Stock to certain
investors, placement agents and business partners. The Company has outstanding
warrants to purchase an aggregate of 181,766 shares of Common Stock at $4.42 per
share, which are exercisable through September 24, 1998; warrants to purchase up
to an aggregate of 136,762 shares of Preferred Stock (convertible into an
aggregate of 80,448 shares of Common Stock) at $3.00 per share, which are
exercisable through the fifth anniversary of the completion of this Offering;
warrants to purchase an aggregate of 190,776 shares of Common Stock at $5.10 per
share, which are exercisable through December 1, 2002; warrants to purchase an
aggregate of 135,663 shares of Common Stock at $5.10 per share, which are
exercisable through January 1, 2003; warrants to purchase an aggregate of 50,985
shares
61
<PAGE>
of Common Stock at $7.65 per share, which are exercisable through January 1,
2002; and warrants to purchase an aggregate of 33,000 shares of Preferred Stock
(convertible into an aggregate of 19,412 shares of Common Stock) at $3.00 per
share, which are exercisable through seven years from date of grant. Upon
consummation of the Offering, all warrants to purchase Preferred Stock will
become exercisable to purchase an equal number of shares of Common Stock at an
equal exercise price.
REGISTRATION RIGHTS AGREEMENTS
Following the sale of the shares of Common Stock offered hereby, the holders
of 1,909,546 shares issued upon the conversion of the Preferred Stock will have
certain rights to register those shares under the Securities Act. These rights
are provided under the terms of certain agreements among the Company and the
holders of such shares.
SERIES C AND SERIES C1 CONVERTIBLE PREFERRED STOCK. In connection with the
Company's issuance of its Series C and Series C1 Convertible Preferred Stock,
(the "Series C and Series C1 Preferred Stock"). purchasers received certain
demand and piggyback registration rights with respect to the Common Stock
issuable upon conversion of those shares (the "Converted Series C and C1
Shares"). At any time following the earlier of six months after the effective
date of the registration statement for this Offering and May 25, 1998, the
holders of at least 50% of the Converted Series C and C1 Shares may require, on
two occasions, that the Company register such shares for public resale. In
addition, if the Company registers any of its securities for its own account
(other than for the sale of securities under a stock option or employee benefit
plan), the holders of registrable shares are entitled to include their shares in
such registration. The participation of such holders in any registration of the
Company's securities is subject to the right of the underwriters to limit the
number of shares included in these offerings. The holders of the Converted
Series C and C1 Shares may also require the Company, on two occasions every 12
months, to register all or a portion of their registrable securities on Form
S-3, when use of such form becomes available to the Company. These registration
rights, however, are subject to certain limitations, including a requirement
that the aggregate selling price must be at least $1,000,000. All of the
foregoing registration rights expire upon the fifth anniversary of the Company's
initial public offering of securities which yields at least $7,500,000 in gross
proceeds and a price per share to the public of at least $23.12. With certain
exceptions, all fees, costs and expenses of registrations will be borne by the
Company. All holders of the Series C and C1 Preferred Stock have waived the
right to include their shares in this Offering.
SERIES D CONVERTIBLE PREFERRED STOCK. One of the holders of the Series D
Preferred Stock has certain demand and piggyback registration rights with
respect to the Common Stock issuable upon conversion of those shares (the
"Converted Series D Shares"). Within 30 days after the completion of this
Offering, the holder of the Converted Series D Shares may request that the
Company register no later than 180 days after completion of this Offering such
shares for public resale. In addition, if the Company registers any of its
securities for its own account (other than for the sale of securities under a
stock option or employee benefit plan), the holder is entitled to include its
shares in such registration. The participation of such holder in any
registration of the Company's securities is subject to the right of the
underwriters to limit the number of shares included in these offerings. With
certain exceptions, all fees, costs and expenses of registrations will be borne
by the Company.
SERIES E CONVERTIBLE PREFERRED STOCK. The holders of the Series E Preferred
Stock have certain demand registration rights with respect to the Common Stock
issuable upon conversion of those shares (the "Converted Series E Shares").
Within 30 days after the completion of this Offering, the holder of the
Converted Series E Shares may request that the Company register no later than
180 days after completion of this Offering such shares for public resale. These
registration rights expire on December 22, 1997. With certain exceptions, all
fees, costs and expenses of registrations will be borne by the Company.
COMMON STOCK. Novartis has certain demand and piggyback registration rights
with respect to the 692,059 shares of Common Stock it purchased under the
Novartis Agreement. If and when the Company
62
<PAGE>
becomes eligible to use Form S-3 (or similar short-form registration) under the
Securities Act, Novartis, on up to three occasions, may request that the Company
register on Form S-3 Novartis' shares of the Company's Common Stock having a
market value of at least $3,000,000. In addition, beginning on the first
anniversary of the Novartis Agreement, Novartis may request that the Company
include its shares of Common Stock whenever the Company proposes to register
other securities, subject to certain exceptions and the ability of the
underwriters to limit the number of shares offered.
WARRANTS. Certain holders of the Company's warrants to purchase Common
Stock and Preferred Stock (which will be exercisable for 659,051 shares of
Common Stock upon consummation of this Offering) have certain demand and
piggyback registration rights with respect to the Common Stock issuable upon
exercise of those warrants (the "Warrant Shares"). If the Company registers any
of its securities for its own account (other than for the sale of securities
under a stock option or employee benefit plan), all such warrant holders are
entitled to include their Warrant Shares in such registration. The participation
of such holders in any registration of the Company's securities is subject to
the right of the underwriters to limit the number of shares included in these
offerings. In addition, certain warrant holders may require, on two occasions,
that the Company register their Warrant Shares for public resale. Other holders
of the Company's warrants may, subject to certain limitations, require the
Company, on two occasions, to register all or a portion of their Warrant Shares
on Form S-3, when use of such form becomes available to the Company.
The existence and exercise of the foregoing registration rights may hinder
efforts by the Company to arrange future financing for the Company and may have
an adverse effect on the market price of the Common Stock. See "Risk
Factors--Need For Substantial Additional Funds."
DELAWARE LAW AND CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
The Company's Restated Certificate of Incorporation (the "Charter") allows
the Company to issue, without stockholder approval, Preferred Stock having
rights senior to those of the Common Stock. In addition, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law. Section 203 prohibits publicly held Delaware corporations from engaging in
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. These provisions could have the effect of
delaying, deferring or preventing a change in control of the Company or reducing
the price that certain investors might be willing to pay in the future for
shares of the Common Stock.
The Charter limits the personal liability of the Company's directors to the
fullest extent permitted by the Delaware General Corporation Law. Therefore, the
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends or distributions or the repurchase or redemption of stock; or (iv) for
any transaction from which the director derives an improper personal benefit. As
a result of this provision, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Additionally, the Charter provides for indemnification of the Company's
directors and officers to the fullest extent permitted by law. The Company has
entered into indemnification agreements with its directors and officers which
may, in certain cases, be broader than the specific indemnification provisions
63
<PAGE>
contained under applicable law. The indemnification agreements may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers of the Company, to advance the expenses incurred by such
parties as a result of any threatened claims or proceedings brought against them
as to which they could be indemnified and to cover such officers or directors
under the Company's directors' and officers' liability insurance policies to the
maximum extent that insurance coverage is maintained.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Sales of substantial amounts of Common Stock in the public
market following this Offering could adversely affect the prevailing market
price of the Common Stock and the Company's ability to raise capital in the
future.
Upon completion of this Offering, the Company will have a total of
11,263,166 shares of Common Stock outstanding, of which the 2,500,000 shares
offered hereby will be freely transferable without restriction under the
Securities Act by persons other than "affiliates" of the Company as defined in
Rule 144 under the Securities Act.
The remaining 8,763,166 shares of Common Stock outstanding are "restricted
securities" as the term is defined in Rule 144 (the "Restricted Shares"). Of the
Restricted Shares, 3,509,998 shares are eligible for sale in the public market
immediately upon completion of the Offering, and 4,546,080 shares will become
eligible for sale 90 days after completion of the Offering, subject in some
cases to certain volume restrictions and other conditions imposed under Rules
144 and 701. The remaining 707,088 shares will be eligible for sale upon the
expiration of their respective holding periods as set forth in Rule 144. In
addition, the holders of approximately 2,601,605 of the Restricted Shares,
including shares acquired upon exercise of certain outstanding warrants, are
entitled to certain registration rights with respect to such shares. See
"Description of Capital Stock--Registration Rights Agreements." Notwithstanding
these rights, however, 8,552,171 of the Restricted Shares are subject to lock-up
agreements and may not be sold for 180 days following the date of this
Prospectus, although such agreements provide that SBC Warburg Dillon Read Inc.
may, in its sole discretion and at any time without notice, release all or a
portion of the shares from these lock-up agreements.
Following the date of this Prospectus, the Company may register on one or
more registration statements on Form S-8 shares of Common Stock issuable under
the Stock Plans. Of the 1,176,471 shares issuable under the Stock Plans, 462,904
are subject to outstanding options as of September 30, 1997, 346,696 of which
are subject to lock-up agreements. Subject to the lock-up agreements, shares
covered by such registration statements will upon issuance pursuant to the Stock
Plan immediately be eligible for sale in the public market. In addition, the
Company has issued warrants to purchase 659,051 shares of Common Stock which are
currently exercisable, of which 532,026 shares are subject to the lock-up
agreements described above. See "Management--Stock Option and Employee Benefit
Plans."
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year (including holding periods of prior owners other than affiliates)
is entitled to sell, within any three-month period commencing 90 days after the
closing of this Offering, a number of shares that does not exceed the greater
of: (i) 1% of the then outstanding Common Stock (approximately 113,000 shares
immediately after this Offering, assuming no exercise of the Underwriters'
over-allotment option); or (ii) the average weekly trading volume in the public
market during the four calendar weeks preceding the sale, subject to the filing
of a Form 144 with respect to the
64
<PAGE>
sale and other limitations. In general, shares issued in compliance with Rule
701 may be sold by non-affiliates subject to the manner of sale requirements of
Rule 144, but without compliance with the other requirements of Rule 144.
Affiliates may sell shares they acquired under Rule 701 in compliance with the
provisions of Rule 144, except that there is no required holding period. A
person who is not an affiliate, has not been an affiliate within three months
prior to sale and has beneficially owned restricted securities for at least two
years, is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
The Company has also agreed not to sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or grant any rights to acquire
Common Stock for a period of 180 days after the date of this Prospectus, without
the prior written consent of SBC Warburg Dillon Read Inc., subject to certain
limited exceptions (including exercises of stock options).
65
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below (the
"Underwriters") has severally agreed to purchase, and the Company has agreed to
sell to such Underwriter, the number of shares of Common Stock set forth
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
SBC Warburg Dillon Read Inc................................................
Hambrecht & Quist LLC......................................................
-----------------
Total.................................................................. 2,500,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions,
including the effectiveness of the Registration Statement of which this
Prospectus is a part and the absence of any material adverse change in the
Company's condition from that reflected in this Prospectus. The Underwriters are
obligated to take and pay for all shares of Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken.
The Underwriters, for whom SBC Warburg Dillon Read Inc. and Hambrecht &
Quist LLC are acting as the representatives (the "Representatives"), propose to
offer part of the shares directly to the public at the public offering price set
forth on the cover page of this Prospectus and part of the shares to certain
dealers at a price which represents a concession not in excess of $ per share
under the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the initial offering of the shares to the public, the public
offering price and such concessions may be changed by the Representatives. The
Representatives have advised the Company that the Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 375,000 additional
shares of Common Stock at the price to public set forth on the cover page of
this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the offering of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
The Company, its officers and directors, and certain stockholders of the
Company, holding in the aggregate approximately 9,430,893 shares of Common
Stock, have agreed that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of SBC Warburg
Dillon Read Inc., offer, sell, contract to sell, or otherwise dispose of, any
shares of Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, Common Stock.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Shares
of Common Stock included in this Offering has been determined by negotiations
between the Company and the Representatives. Among the factors considered in
determining such price were the history of and prospects for the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of development of the Company and its proposed
products, the past and present revenues of the Company, the prospects for
earnings of the Company, the current state of the economy in the United States
and the current level of economic activity in the industry in which the Company
competes and in related or
66
<PAGE>
comparable industries, and currently prevailing conditions in the securities
markets, including current market valuations of publicly traded companies which
are comparable to the Company.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
At the request of the Company, approximately 125,000 shares of Common Stock
offered hereby are being reserved for sale to certain persons, including Company
employees and others who have a business relationship with the Company. In
addition, the Underwriters will offer 250,000 shares (and 10% of any shares
purchased upon exercise of the Underwriters' over-allotment option) to Friedli
AG in satisfaction of a pre-emptive right under a consulting agreement between
the Company and Friedli AG. See "Management--Compensation Committee Interlocks
and Insider Participation."
In connection with this Offering and in compliance with applicable law, the
Underwriters may over-allot (I.E., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the option described above rather
than by open market purchases. In addition, the contractual arrangements among
the Underwriters include a provision whereby, if, prior to termination of price
and trading restrictions, the Representatives purchase Common Stock in the open
market for the account of the underwriting syndicate and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Common Stock in question at the cost to the
syndicate or may recover from (or decline to pay to) the Underwriter or selling
group member in question, the selling concession applicable to the securities in
question. The Underwriters are not required to engage in any of these activities
and any such activities, if commenced, may be discontinued at any time.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Hogan & Hartson L.L.P., Washington, D.C. Certain legal
matters will be passed upon for the Underwriters by Manatt, Phelps & Phillips,
LLP, Los Angeles, California.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, and for the
period December 23, 1992 (date of inception) to December 31, 1996 included in
this Prospectus have been included herein in reliance upon the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
The statements in this Prospectus concerning the patents and patent
applications either owned or licensed by the Company under the captions "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights" and
"Business--Patents and Proprietary Rights" and the other references herein
concerning the patents and patent applications either owned or licensed by the
Company have been reviewed and approved by Carella, Byrne, Bain, Gilfillan,
Cecchi, Stewart & Olstein, P.A., Roseland, New Jersey, patent counsel to the
Company, as experts on such matters and are included herein in reliance upon
that review and approval.
67
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act, of which this
Prospectus is a part, with respect to the Common Stock offered hereby. This
Prospectus omits certain information contained in the Registration Statement and
reference is made to the Registration Statement for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of documents are necessarily summaries of such
documents and when any such document is an exhibit to the Registration
Statement, each such statement is qualified in its entirety by reference to the
copy of such document filed with the Commission. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and the Commission's Regional Offices at Seven World Trade Center,
New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60621-2511 and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement,
including all exhibits and schedules and such reports and other information may
also be accessed electronically by means of the Commission's site on the World
Wide Web, at http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent certified public accountants and
make available to its stockholders quarterly reports containing unaudited
financial data for the first three quarters of each fiscal year.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-------------
<S> <C>
Report of Independent Accountants.................................................................. F-2
Consolidated Balance Sheets........................................................................ F-3
Consolidated Statements of Operations.............................................................. F-4
Consolidated Statements of Stockholders' Equity.................................................... F-5
Consolidated Statements of Cash Flows.............................................................. F-6
Notes to Consolidated Financial Statements......................................................... F-7 to F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Osiris Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Osiris
Therapeutics, Inc. and Subsidiaries (the "Company"), a Development Stage
Enterprise, as of December 31, 1995 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 and for the period December
23, 1992 (date of inception) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Osiris
Therapeutics, Inc. and Subsidiaries as of December 31, 1995 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 and for the period December
23, 1992 (date of inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Rockville, Maryland
January 31, 1997, except as to the
reverse stock split discussed in
Note 1, as to which the date
is October 22, 1997.
F-2
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------ SEPTEMBER 30, ------------------
1995 1996 1997 SEPTEMBER 30, 1997
----------- ----------- ------------- ------------------
<S> <C> <C> <C> <C>
(NOTE 14)
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents (Note 2)............... $ 6,663,113 $ 3,005,149 $ 2,019,228 $ 2,019,228
Securities available-for-sale (Note 2)........... -- 6,344,804 16,172,894 16,172,894
Contract revenue receivable...................... -- 347,862 -- --
Other current assets............................. 154,469 243,752 799,105 799,105
----------- ----------- ------------- ------------------
Total current assets........................... 6,817,582 9,941,567 18,991,227 18,991,227
Property and equipment, net (Note 4)............... 2,184,812 8,327,179 9,262,986 9,262,986
Compensating bank balance.......................... 262,500 262,500 262,500 262,500
Other assets....................................... 160,053 246,931 248,147 248,147
----------- ----------- ------------- ------------------
Total assets................................... $ 9,424,947 $18,778,177 $28,764,860 $ 28,764,860
----------- ----------- ------------- ------------------
----------- ----------- ------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 206,012 $ 568,888 $ 849,345 $ 849,345
Accrued expenses (Note 11)....................... 651,195 597,421 1,069,136 1,069,136
Note payable (Note 5)............................ 48,913 65,217 65,217 65,217
Deferred revenue from collaborative research
agreements, net (Note 14)...................... -- -- 3,318,769 3,318,769
Obligations under capital leases (Note 9)........ 247,000 999,456 1,058,139 1,058,139
----------- ----------- ------------- ------------------
Total current liabilities...................... 1,153,120 2,230,982 6,360,606 6,360,606
Note payable (Note 5).............................. 701,087 635,870 586,957 586,957
Obligations under capital lease (Note 9)........... 575,456 6,024,321 5,267,322 5,267,322
----------- ----------- ------------- ------------------
Total liabilities.............................. 2,429,663 8,891,173 12,214,885 12,214,885
----------- ----------- ------------- ------------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Convertible Preferred Stock, issuable in series
$.001 par value, authorized 20,000,000 shares;
issued and outstanding 6,326,187 shares,
9,268,963 shares, 9,268,963 shares (unaudited),
respectively; no shares (unaudited) issued and
outstanding pro forma (liquidation preference
of $31,470,253 at December 31, 1996 and
September 30, 1997 (unaudited))................ 17,266,547 28,459,961 28,459,961 --
Common Stock, $.001 par value, authorized
30,000,000 shares; issued and outstanding
2,520,008 shares, 2,548,304 shares and
3,253,164 shares (unaudited), respectively;
8,763,166 shares (unaudited) issued and
outstanding pro forma.......................... 2,520 2,548 3,253 8,763
Additional paid-in-capital....................... 300,478 310,911 10,040,774 38,495,225
Deferred compensation and loans to officers for
the purchase of stock.......................... (144,750) (244,551) (388,528) (388,528)
Deficit accumulated during the development
stage.......................................... (10,429,511) (18,641,865) (21,565,485) (21,565,485)
----------- ----------- ------------- ------------------
Total stockholders' equity..................... 6,995,284 9,887,004 16,549,975 16,549,975
----------- ----------- ------------- ------------------
Total liabilities and stockholders' equity..... $ 9,424,947 $18,778,177 $28,764,860 $ 28,764,860
----------- ----------- ------------- ------------------
----------- ----------- ------------- ------------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM FOR THE NINE MONTHS PERIOD FROM
FOR THE YEAR ENDED DECEMBER 31, INCEPTION TO ENDED SEPTEMBER 30 INCEPTION TO
------------------------------------- DECEMBER 31, ------------------------ SEPTEMBER 30,
1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
Collaborative research and
grant income.............. $ 33,305 $ -- $ 1,066,984 $ 1,100,289 $ 564,976 $ 5,755,964 $ 6,856,253
Interest income............. 229,435 169,505 521,886 951,119 280,490 488,637 1,439,756
----------- ----------- ----------- ------------ ----------- ----------- -------------
Total revenues............ 262,740 169,505 1,588,870 2,051,408 845,466 6,244,601 8,296,009
----------- ----------- ----------- ------------ ----------- ----------- -------------
Expenses:
Research and development.... 2,340,873 4,533,374 7,364,086 14,575,575 4,586,616 7,341,080 21,916,655
General and
administrative............ 1,266,136 1,476,807 1,860,981 5,426,395 1,315,803 1,257,128 6,683,523
Interest expense............ 9,608 96,934 576,157 691,303 408,171 570,013 1,261,316
----------- ----------- ----------- ------------ ----------- ----------- -------------
Total expenses............ 3,616,617 6,107,115 9,801,224 20,693,273 6,310,590 9,168,221 29,861,494
----------- ----------- ----------- ------------ ----------- ----------- -------------
Net loss...................... $(3,353,877) $(5,937,610) $(8,212,354) $(18,641,865) $(5,465,124) $(2,923,620) $(21,565,485)
----------- ----------- ----------- ------------ ----------- ----------- -------------
----------- ----------- ----------- ------------ ----------- ----------- -------------
Net loss per common share and
common share equivalents.... $ (1.32) $ (2.14) $ (2.93) $ (1.95) $ (.95)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common shares
and common share equivalents
outstanding................. 2,536,799 2,775,950 2,806,186 2,803,959 3,081,386
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
AND LOANS
CONVERTIBLE TO OFFICERS
PREFERRED STOCK COMMON STOCK ADDITIONAL FOR THE
------------------------ --------------------- PAID-IN PURCHASE
SHARES AMOUNT SHARES AMOUNT CAPITAL OF STOCK
----------- ----------- ---------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 23, 1992........................ -- $ -- -- $ -- $ -- $ --
Initial capital contribution ($.002261 per share)... -- -- 123,529 124 156 --
Stock issued pursuant to Exchange Agreement
($.000476 per share).............................. -- -- 1,058,824 1,059 (559) --
Stock sold pursuant to Employee and Consulting
Agreements ($.0034 per share)..................... -- -- 562,497 562 2,258 --
Stock sold pursuant to License Agreement ($.002261
per share)........................................ -- -- 52,941 53 67 --
Stock sold pursuant to subscription and Board of
Directors Agreements ($.0068 per share)........... -- -- 352,941 353 2,047 --
Conversion of convertible note payable ($3.40 per
share)............................................ -- -- 36,765 37 124,963 --
Conversion of convertible note payable, related
parties ($3.00 per share)......................... 58,625 175,000 -- -- -- --
Issuance of Preferred Stock Series A, net of
offering expenses ($3.00 per share)............... 2,010,000 5,264,357 -- -- -- --
Net loss for the period December 23, 1992 (date of
inception) to December 31, 1993................... -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ----------------
Balance at December 31, 1993........................ 2,068,625 5,439,357 2,187,497 2,188 128,932 --
Issuance of Preferred Stock Series B, net of
offering expenses ($3.00 per share)............... 619,750 1,723,503 -- -- -- --
Stock sold pursuant to 1994 Stock Incentive Plan
($.0068 to $.578 per share)....................... -- -- 196,324 196 103,859 --
Stock sold pursuant to Consulting, Board of
Directors and Stock Purchase Agreements ($.51 to
$.578 per share).................................. -- -- 30,735 31 15,644 --
Issuance of Preferred Stock Series C, net of
offering expenses ($3.40 per share)............... 735,294 2,197,878 -- -- -- --
Loans made to officers for the purchase of stock.... -- -- -- -- -- (100,550)
Net loss for the year ended December 31, 1994....... -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ----------------
Balance at December 31, 1994........................ 3,423,669 9,360,738 2,414,556 2,415 248,435 (100,550)
Issuance of Preferred Stock Series D, net of
offering expenses ($3.00 per share)............... 2,902,518 7,905,809 -- -- -- --
Stock sold pursuant to 1994 Stock Incentive Plan
($.51 to $.578 per share)......................... -- -- 49,570 49 19,798 --
Stock sold pursuant to Consulting and Research
Agreements ($.51 to $.578 per share).............. -- -- 55,882 56 32,244 --
Loans made to officers for the purchase of stock.... -- -- -- -- -- (44,200)
Net loss for the year ended December 31, 1995....... -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ----------------
Balance at December 31, 1995........................ 6,326,187 17,266,547 2,520,008 2,520 300,477 (144,750)
Issuance of Preferred Stock Series D, net of
offering expenses ($3.00 per share)............... 579,884 1,555,324 -- -- -- --
Issuance of Preferred Stock Series D, pursuant to
Consulting and Employment Agreements ($3.00 per
share)............................................ 116,668 350,004 -- -- -- (110,001)
Issuance of Preferred Stock Series E, net of
offering expenses ($4.50 per share)............... 2,246,224 9,288,086 -- -- -- --
Stock transactions pursuant to Consulting,
Employment and Research Agreements................ -- -- 16,531 16 (1,215) 10,200
Issuance of Common Stock for services rendered by
Directors ($.578 to 2.55 per share)............... -- -- 11,765 12 11,649 --
Net loss for the year ended December 31, 1996....... -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ----------------
Balance at December 31, 1996........................ 9,268,963 $28,459,961 2,548,304 2,548 $ 310,911 $ (244,551)
Issuance of Common Stock ($14.45 per share)......... -- -- 692,059 692 9,430,773 --
Deferred compensation from stock option grants...... -- -- -- -- 200,325 (50,227)
Exercise of warrant to purchase common stock........ -- -- 493 1 2,178 --
Stock sold pursuant to 1994 Stock Incentive Plan.... -- -- 1,279 1 2,848 --
Purchase of Common Stock at (8.50 per share)........ -- -- 11,029 11 93,739 (93,750)
Net loss for the nine months ended September 30,
1997.............................................. -- -- -- -- --
----------- ----------- ---------- --------- ----------- ----------------
Balance at September 30, 1997 (unaudited)........... 9,268,963 28,459,961 3,253,164 3,253 10,040,774 (388,528)
Pro forma conversion of Convertible Preferred Stock
(unaudited)....................................... (9,268,963) (28,459,961) 5,510,002 5,510 28,454,451 --
----------- ----------- ---------- --------- ----------- ----------------
Pro forma Balance, September 30, 1997 (unaudited)... -- $ -- 8,763,166 $ 8,763 $38,495,225 $ (388,528)
----------- ----------- ---------- --------- ----------- ----------------
----------- ----------- ---------- --------- ----------- ----------------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
------------ ------------
<S> <C> <C>
Balance at December 23, 1992........................ $ -- $ --
Initial capital contribution ($.002261 per share)... -- 280
Stock issued pursuant to Exchange Agreement
($.000476 per share).............................. -- 500
Stock sold pursuant to Employee and Consulting
Agreements ($.0034 per share)..................... -- 2,820
Stock sold pursuant to License Agreement ($.002261
per share)........................................ -- 120
Stock sold pursuant to subscription and Board of
Directors Agreements ($.0068 per share)........... -- 2,400
Conversion of convertible note payable ($3.40 per
share)............................................ -- 125,000
Conversion of convertible note payable, related
parties ($3.00 per share)......................... -- 175,000
Issuance of Preferred Stock Series A, net of
offering expenses ($3.00 per share)............... -- 5,264,357
Net loss for the period December 23, 1992 (date of
inception) to December 31, 1993................... (1,138,024) (1,138,024)
------------ ------------
Balance at December 31, 1993........................ (1,138,024) 4,432,453
Issuance of Preferred Stock Series B, net of
offering expenses ($3.00 per share)............... -- 1,723,503
Stock sold pursuant to 1994 Stock Incentive Plan
($.0068 to $.578 per share)....................... -- 104,055
Stock sold pursuant to Consulting, Board of
Directors and Stock Purchase Agreements ($.51 to
$.578 per share).................................. -- 15,675
Issuance of Preferred Stock Series C, net of
offering expenses ($3.40 per share)............... -- 2,197,878
Loans made to officers for the purchase of stock.... -- (100,550)
Net loss for the year ended December 31, 1994....... (3,353,877) (3,353,877)
------------ ------------
Balance at December 31, 1994........................ (4,491,901) 5,019,137
Issuance of Preferred Stock Series D, net of
offering expenses ($3.00 per share)............... -- 7,905,809
Stock sold pursuant to 1994 Stock Incentive Plan
($.51 to $.578 per share)......................... -- 19,848
Stock sold pursuant to Consulting and Research
Agreements ($.51 to $.578 per share).............. -- 32,300
Loans made to officers for the purchase of stock.... -- (44,200)
Net loss for the year ended December 31, 1995....... (5,937,610) (5,937,610)
------------ ------------
Balance at December 31, 1995........................ (10,429,511) 6,995,284
Issuance of Preferred Stock Series D, net of
offering expenses ($3.00 per share)............... -- 1,555,324
Issuance of Preferred Stock Series D, pursuant to
Consulting and Employment Agreements ($3.00 per
share)............................................ -- 240,003
Issuance of Preferred Stock Series E, net of
offering expenses ($4.50 per share)............... -- 9,288,086
Stock transactions pursuant to Consulting,
Employment and Research Agreements................ -- 9,001
Issuance of Common Stock for services rendered by
Directors ($.578 to 2.55 per share)............... -- 11,660
Net loss for the year ended December 31, 1996....... (8,212,354) (8,212,354)
------------ ------------
Balance at December 31, 1996........................ $(18,641,865) $9,887,004
Issuance of Common Stock ($14.45 per share)......... -- 9,431,465
Deferred compensation from stock option grants...... -- 150,098
Exercise of warrant to purchase common stock........ -- 2,179
Stock sold pursuant to 1994 Stock Incentive Plan.... -- 2,849
Purchase of Common Stock at (8.50 per share)........ -- --
Net loss for the nine months ended September 30,
1997.............................................. (2,923,620) (2,923,620)
------------ ------------
Balance at September 30, 1997 (unaudited)........... (21,565,485) 16,549,975
Pro forma conversion of Convertible Preferred Stock
(unaudited)....................................... -- --
------------ ------------
Pro forma Balance, September 30, 1997 (unaudited)... $(21,565,485) $16,549,975
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, FROM
------------------------------------------- INCEPTION TO
1994 1995 1996 DECEMBER 31, 1996
------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Development stage activities:
Net loss................................................... $ (3,353,877) $ (5,937,610) $ (8,212,354) $ (18,641,865)
Adjustments to reconcile net loss to net cash used in
development stage activities:
Depreciation and amortization.......................... 124,806 390,071 1,167,116 1,681,993
Non cash compensation expense.......................... -- -- 251,663 251,663
Increase (decrease) in cash resulting from changes in
assets and liabilities:
Increase in contract revenue receivable................ -- -- (347,862) (347,862)
Other current assets................................... 14,115 3,916 (89,283) (108,557)
Other assets........................................... (41,412) (26,753) (86,878) (163,870)
Accounts payable....................................... 293,554 (118,858) 362,876 568,889
Deferrred revenue from collaborative research
agreements, net...................................... -- -- -- --
Accrued expenses and other............................. (27,792) 463,381 (53,774) 597,421
------------- ------------- ------------- -------------------
Net cash used in development stage activities.............. (2,990,606) (5,225,853) (7,008,496) (16,162,188)
------------- ------------- ------------- -------------------
Investing activities:
Purchases and sales of short-term investments, net....... -- -- (6,344,804) (6,344,804)
Purchases of property and equipment...................... (637,471) (1,006,807) (312,550) (2,005,182)
Technology rights........................................ -- -- -- (83,061)
------------- ------------- ------------- -------------------
Net cash used in investing activities...................... (637,471) (1,006,807) (6,657,354) (8,433,047)
------------- ------------- ------------- -------------------
Financing activities:
Proceeds from bank borrowing............................. -- 750,000 -- 750,000
Principal payments on capital lease obligations and bank
borrowing.............................................. (17,642) (166,959) (844,525) (1,029,126)
Proceeds from note payable, officer...................... -- -- -- 50,500
Proceeds from convertible notes payable.................. -- -- -- 250,000
Restricted cash and compensating bank balance............ (216,000) (46,500) -- (262,500)
Proceeds from the issuance of preferred and common stock,
net.................................................... 4,156,561 7,562,562 10,852,411 27,841,511
------------- ------------- ------------- -------------------
Net cash provided by financing activities................ 3,922,919 8,099,103 10,007,886 27,600,385
------------- ------------- ------------- -------------------
Net increase (decrease) in cash and cash equivalents....... 294,842 1,866,443 (3,657,964) 3,005,149
Cash and cash equivalents at beginning of period........... 4,501,828 4,796,670 6,663,113 --
------------- ------------- ------------- -------------------
Cash and cash equivalents at end of period................. $ 4,796,670 $ 6,663,113 $ 3,005,149 $ 3,005,149
------------- ------------- ------------- -------------------
------------- ------------- ------------- -------------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 8,857 $ 96,934 $ 576,157 $ 690,552
Supplemental schedule of noncash investing and financing
activities:
Conversion of note payable, officer to preferred stock... -- -- -- $ 50,000
Conversion of convertible notes payable, related party to
preferred stock........................................ -- -- -- $ 125,000
Conversion of convertible notes payable to common
stock.................................................. -- -- -- $ 125,000
Capital lease obligation incurred to acquire equipment
and facilities......................................... $ 258,081 $ 748,976 $ 6,996,933 $ 8,003,990
Loans to officers for the purchase of stock.............. $ 100,550 $ 44,200 $ (10,200) $ 134,550
Preferred stock sold pursuant to subscription............ -- $ 135,195 -- $ 135,195
Preferred stock issued pursuant to advance
subscriptions.......................................... -- $ 216,000 -- $ 216,000
Preferred stock issued to placement agent for services
rendered............................................... -- $ 300,000 -- $ 300,000
Preferred stock issued pursuant to employment and
consulting agreements.................................. -- -- $ 350,004 $ 350,004
Common stock issued to directors for services rendered... -- -- $ 11,660 $ 11,660
Deferred compensation from stock option grants........... -- -- -- --
<CAPTION>
FOR THE PERIOD
FOR THE NINE MONTHS FROM
ENDED SEPTEMBER 30, INCEPTION TO
---------------------------- SEPTEMBER 30,
1996 1997 1997
------------- ------------- -----------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Development stage activities:
Net loss................................................... $ (5,465,124) $ (2,923,620) $ (21,565,485)
Adjustments to reconcile net loss to net cash used in
development stage activities:
Depreciation and amortization.......................... 799,838 1,116,450 2,798,443
Non cash compensation expense.......................... -- 150,098 401,761
Increase (decrease) in cash resulting from changes in
assets and liabilities:
Increase in contract revenue receivable................ -- 347,862 --
Other current assets................................... 10,262 (555,353) (663,910
Other assets........................................... 33,578 (1,216) (165,086)
Accounts payable....................................... 132,596 280,457 849,345
Deferrred revenue from collaborative research
agreements, net...................................... -- 3,318,769 3,318,769
Accrued expenses and other............................. (286,546) 471,715 1,069,136
------------- ------------- -----------------
Net cash used in development stage activities.............. (4,775,396) 2,205,162 (13,957,027)
------------- ------------- -----------------
Investing activities:
Purchases and sales of short-term investments, net....... (9,254,375) (9,828,090) (16,172,891)
Purchases of property and equipment...................... (782,414) (2,052,257) (4,057,439)
Technology rights........................................ -- -- (83,061)
------------- ------------- -----------------
Net cash used in investing activities...................... (10,036,789) (11,880,347) (20,313,394)
------------- ------------- -----------------
Financing activities:
Proceeds from bank borrowing............................. -- -- 750,000
Principal payments on capital lease obligations and bank
borrowing.............................................. (590,526) (747,229) (1,776,355)
Proceeds from note payable, officer...................... -- -- 50,500
Proceeds from convertible notes payable.................. -- -- 250,000
Restricted cash and compensating bank balance............ -- -- (262,500)
Proceeds from the issuance of preferred and common stock,
net.................................................... 10,855,651 9,436,493 37,278,004
------------- ------------- -----------------
Net cash provided by financing activities................ 10,265,125 8,689,264 36,289,649
------------- ------------- -----------------
Net increase (decrease) in cash and cash equivalents....... (4,547,060) (985,921) 2,019,228
Cash and cash equivalents at beginning of period........... 6,663,113 3,005,149 --
------------- ------------- -----------------
Cash and cash equivalents at end of period................. $ 2,116,053 $ 2,019,228 $ 2,019,228
------------- ------------- -----------------
------------- ------------- -----------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 408,171 $ 570,014 $ 1,260,566
Supplemental schedule of noncash investing and financing
activities:
Conversion of note payable, officer to preferred stock... -- -- $ 50,000
Conversion of convertible notes payable, related party to
preferred stock........................................ -- -- $ 125,000
Conversion of convertible notes payable to common
stock.................................................. -- -- $ 125,000
Capital lease obligation incurred to acquire equipment
and facilities......................................... $ 6,490,039 -- $ 8,003,990
Loans to officers for the purchase of stock.............. -- $ 93,750 $ 228,300
Preferred stock sold pursuant to subscription............ -- -- $ 135,195
Preferred stock issued pursuant to advance
subscriptions.......................................... -- -- $ 216,000
Preferred stock issued to placement agent for services
rendered............................................... -- -- $ 300,000
Preferred stock issued pursuant to employment and
consulting agreements.................................. -- -- $ 350,004
Common stock issued to directors for services rendered... -- -- $ 11,660
Deferred compensation from stock option grants........... -- $ 200,325 $ 200,325
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
BUSINESS
Osiris Therapeutics, Inc. and Subsidiaries (the "Company") is primarily
engaged in the research and development of novel therapeutic products for
regenerative tissue therapy of diseased or injured tissue based on human
mesenchymal stem cells, the progenitor cells responsible for the formation of
structural and connective tissues, including bone marrow stroma, bone,
cartilage, muscle, tendon, ligament, fat and other connective tissues. The
Company is developing cell therapy products to regenerate tissue damaged by
acute injury or degenerative diseases and biopharmaceuticals that regulate the
growth and differentiation of human mesenchymal stem cells during tissue
regeneration.
The Company began operations on December 23, 1992 and is currently in the
development stage, as operations consist primarily of research and development
activities and securing adequate capital for anticipated growth and operations.
REGISTRATION STATEMENT
In July 1997, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission for the initial public
offering of shares of the Company's Common Stock.
REVERSE STOCK SPLIT
On October 22, 1997, the Board of Directors approved a proposed 1-for-1.7
reverse stock split, which was subsequently approved by the Company's
shareholders. All references to common stock, options, warrants, per share data,
and the conversion rates of the convertible preferred stock have been restated
to give effect to the reverse split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Osiris
Therapeutics, Inc., its wholly owned subsidiary Osiris Research, Inc. and its
65% owned subsidiary Gryphon Pharmaceuticals, Inc. ("Gryphon"), a development
stage enterprise formed as a joint venture with The Johns Hopkins University
School of Medicine (see Note 10). The Company records 100% of Gryphon's net loss
in consolidation. Intercompany transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
SECURITIES AVAILABLE-FOR-SALE
Marketable securities at December 31, 1996 are considered available-for-sale
and are carried at amortized cost which approximates fair market value, with
unrealized gains and losses, if any, reported as a separate component of
stockholders' equity.
The Company's marketable securities are held for an unspecified period of
time and are sold to meet liquidity needs. Accordingly, marketable securities at
December 31, 1996 are classified as current assets.
F-7
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company has invested its excess cash, generally, in securities of the
U.S. Treasury, U.S. Government Agencies, commercial paper with strong credit
ratings, overnight repurchase agreements and deposits with a major bank. The
Company has not experienced any significant losses on its investments. The
Company's contract revenue receivable consists of amounts due from its
collaborative partners. The Company periodically assesses the financial strength
of its collaborative partners and provides allowances for anticipated losses
when necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Laboratory and office equipment
and leasehold improvements are depreciated using the straight-line method over
the shorter of the estimated useful life or the term of the lease (four to seven
years).
LONG-LIVED ASSETS
The Company evaluates the recoverability of the carrying value of property
and equipment and intangible assets in accordance with the provisions of
Statement of Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of". The Company considers historical
performance and anticipated future results in its evaluation of potential
impairment. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of these assets in relation to the operating
performance of the business and future and undiscounted cash flows expected to
result from the use of these assets. Impairment losses are recognized when the
sum of expected future cash flows are less than the assets' carrying value. No
such impairment losses have been recognized to date.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. SFAS 123 allows the Company to account for its
stock-based compensation plans based upon either a fair value method or the
intrinsic value method, as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." The Company has elected the
intrinsic value method to account for options issued to employees. However, SFAS
123 requires certain other disclosures regarding the impact which the fair value
method would have had on the results of the Company's operations (see Note 8).
Options issued to non-employees are accounted for in accordance with the
provisions of SFAS 123.
REVENUE
Revenue from research grants is recognized as the related research
expenditures are incurred. Revenue from contract research agreements is recorded
when earned as defined under the terms of the agreement.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
F-8
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the estimated future
tax consequences of temporary differences and income tax credits. Temporary
differences are primarily the result of the differences between the tax bases of
assets and liabilities and their financial reporting amounts. Deferred tax
liabilities and assets are measured by applying enacted statutory tax rates
applicable to the future years in which deferred tax liabilities or assets are
expected to be settled or realized. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of the taxes payable for the current period and the
change during the period in deferred tax assets and liabilities.
NET LOSS PER SHARE
Net loss per common share is based upon the weighted average number of
common shares outstanding for all periods presented. Common shares and common
share equivalents issued by the Company at prices below the public offering
price during the twelve-month period prior to the proposed offering date have
been included in the calculation of common share and common share equivalents as
if they were outstanding for all periods presented. Common share equivalents
granted by the Company prior to the aforementioned twelve-month period have not
been included in the calculation of net loss per common share because such items
were antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128"), which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128 is
effective for financial statements ending after December 15, 1997. The Company
does not anticipate that the adoption of SFAS 128 will have a material effect on
its financial statements.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform to the 1996
financial statement presentation.
F-9
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS
During 1995, the Company loaned $50,000 to an officer of the Company to aid
in the relocation of his residence. The loan earns interest at 7.5% and is
forgiven at a rate of 25% per annum, beginning in 1996, pending the officer's
continued employment by the Company. Forgiven loan amounts are charged to the
officer as additional compensation and are taxed accordingly. At December 31,
1996, $37,500 was included in other assets related to this loan.
The Company has entered into agreements for the provision of research and
financial consulting services with three non-management members of the Board of
Directors. The aggregate compensation paid under these agreements was $168,000
per annum in 1995 and 1996. Consulting compensation for any individual
non-management director did not exceed $60,000 per annum. In addition, a member
of the Board of Directors was previously affiliated with the European Placement
Agent used by the Company for its Series D and Series E Preferred Stock
Offerings (See Note 8).
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following:
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Research and development facility................................ $ 309,217 $ 6,560,733
Computer and laboratory equipment................................ 1,175,240 3,355,585
Construction in progress......................................... 1,215,232 92,854
------------ -------------
2,699,689 10,009,172
Less accumulated depreciation and amortization................... (514,877) (1,681,993)
------------ -------------
$ 2,184,812 $ 8,327,179
------------ -------------
------------ -------------
</TABLE>
5. NOTE PAYABLE
During June 1995, the Company issued a $750,000 promissory note to Signet
Bank in connection with certain site and facility renovations to the Company's
facility in Baltimore, Maryland (see Note 9). The note, which contains a partial
guarantee of $500,000 by the State of Maryland, matures in December 2007 and
bears interest at LIBOR plus 2.0% to 2.5% (7.4% to 7.9% at December 31, 1996).
Compensating balance arrangements with Signet Bank require the Company to
maintain a cash balance of 105.0% of the non-guaranteed portion of the note,
which balance is wholly restricted and may not be used for any other purpose. At
December 31, 1996 and 1995, the Company's compensating bank balance was
$262,500.
F-10
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTE PAYABLE (CONTINUED)
Annual maturities of the note payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 65,217
1998.............................................................................. 65,217
1999.............................................................................. 65,217
2000.............................................................................. 65,217
2001.............................................................................. 65,217
Thereafter........................................................................ 375,002
----------
$ 701,087
----------
----------
</TABLE>
6. INCOME TAXES
The components of the Company's net deferred tax asset as of December 31 are
as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 3,934,000 $ 6,957,000
Research and experimentation credit carryforwards............. 133,000 327,000
Fixed assets.................................................. 18,000 109,000
Other......................................................... 6,000 42,000
------------- -------------
4,091,000 7,435,000
Valuation allowance............................................. (4,091,000) (7,435,000)
------------- -------------
Net deferred tax asset.......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The realization of deferred tax assets is dependent, primarily, on the
Company's ability to generate future taxable income, which is uncertain.
Accordingly, a full valuation allowance was recorded against these assets as of
December 31, 1995 and 1996.
As of December 31, 1996, the Company had available, for federal income tax
purposes, $18,000,000 of net operating loss carryforwards and $327,000 of
research and experimentation credit carryforwards, which expire beginning in
2008. The net operating loss carryforwards may be subject to limitation on
utilization as a result of certain ownership changes since the Company's
inception.
F-11
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK RIGHTS AND PREFERENCES
The Company's Convertible Preferred Stock consists of the following
designated shares at December 31:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Series A Convertible Preferred Stock, $.001 par value; designated 2,122,000 shares;
issued and outstanding 2,068,625 shares at December 31, 1995 and 1996............ $ 5,439,357 $ 5,439,357
Series B Convertible Preferred Stock, $.001 par value; designated 750,000 shares;
issued and outstanding 619,750 shares at December 31, 1995 and 1996.............. 1,723,503 1,723,503
Series C Convertible Preferred Stock, $.001 par value; designated 739,999 shares;
issued and outstanding 735,294 shares at December 31, 1995 and 1996.............. 2,197,878 2,197,878
Series C-1 Convertible Preferred Stock, $.001 par value; 1 share designated; none
issued or outstanding............................................................ -- --
Series D Convertible Preferred Stock, $.001 par value; designated 3,600,000 shares;
issued and outstanding 2,902,518 shares at December 31, 1995 and 3,599,070 shares
at December 31, 1996............................................................. 7,905,809 9,811,137
Series E Convertible Preferred Stock, $.001 par value; designated 2,788,000 shares;
none issued and outstanding at December 31, 1995; issued and outstanding
2,246,224 shares at December 31, 1996............................................ -- 9,288,086
------------- -------------
$ 17,266,547 $ 28,459,961
------------- -------------
------------- -------------
</TABLE>
The rights and preferences of the Convertible Preferred Stock are as
follows:
CONVERSION PROVISION
The holders of Preferred Stock are entitled at any time to convert 1.7
shares of Preferred Stock into one share of Common Stock (the "Conversion
Rate"). The Conversion Rate is subject to adjustment upon the occurrence of
certain events. On September 24, 1998, shares of Series A, Series B, Series D
and Series E Preferred Stock then outstanding will automatically be converted
into shares of Common Stock at the Conversion Rate. Outstanding shares of Series
A, Series B, Series D and Series E Preferred Stock will also be automatically
converted into shares of Common Stock at the Conversion Rate upon the occurrence
of certain specific events, subject to certain terms and conditions, including
an underwritten public offering or immediately prior to the consummation of a
consolidation or merger of the Company with or into another corporation.
Each share of Series C and Series C-1 Preferred Stock will automatically be
converted into shares of Common Stock at the Conversion Rate immediately upon
the consummation of an underwritten public offering of Common Stock of the
Company, subject to certain terms and conditions, or on the date specified by
written consent or agreement of the holders of 66 2/3% of the then outstanding
shares of Series C and Series C-1 Preferred Stock, consenting or agreeing
together as a single class.
F-12
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK RIGHTS AND PREFERENCES (CONTINUED)
The holder of any shares of Preferred Stock converted into common stock in
connection with such a public offering or other transaction will be entitled to
payment of all declared but unpaid dividends, if any, payable with respect to
such shares up to and including the date of the closing of such public offering
or other transaction.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company as
defined ("Liquidation Event"), the stockholders of the Company are entitled to
preferential liquidating distributions as follows:
<TABLE>
<CAPTION>
ORDER OF DISTRIBUTION STOCK CLASSIFICATION DISTRIBUTION PREFERENCE
- ---------------------- ---------------------- -----------------------------------------------------------------
<S> <C> <C>
First................. Series E $1.10 per share liquidation distribution
Second................ Series E, Series C and $0.40 per share liquidation distribution
Series C-1
Third................. All Preferred Stock $3.00 per share liquidation distribution plus accumulated and
unpaid dividends, if any
Fourth................ Common Stock $.51 per share liquidation distribution
Fifth................. Series C and C-1, Remainder (Series C and C-1 subject to the limits noted below)
Common Stock
</TABLE>
Notwithstanding the foregoing, the aggregate amount per share to be received
by the holders of Series C and Series C-1 Preferred Stock shall not exceed $8.00
if the Liquidation Event takes place on or before May 26, 1997 and $12.00 if the
Liquidation Event occurs after May 26, 1997.
DIVIDENDS AND VOTING RIGHTS
Holders of Convertible Preferred Stock are entitled to receive dividends on
an as-if-converted basis at the same rate as common stockholders, if and when
declared. In addition, holders of Convertible Preferred Stock are entitled to a
number of votes per share of Convertible Preferred Stock equal to the number of
shares of Common Stock into which such shares of Convertible Preferred Stock are
convertible. Holders of Convertible Preferred Stock vote together with the
holders of Common Stock as a single class, except as otherwise required by law.
REGISTRATION RIGHTS
In the event that the Company completes an initial public offering of any of
its securities, certain holders of Preferred Stock have demand registration
rights, subject to certain terms and conditions. In addition, holders of the
Series C and Series C-1 Preferred Stock have certain other demand registration
rights. The registration rights granted to the holders of Series C and Series
C-1 Preferred Stock will terminate after five years following the consummation
of the sale of securities pursuant to a registration statement filed by the
Company in connection with a firm commitment underwritten offering of its
securities to the general public.
The Company will bear the expenses of the registration of the investors'
shares, except any underwriting discounts and commissions.
F-13
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK, OPTIONS AND WARRANTS
Since inception, the Company has sold Common Stock to certain officers,
directors, employees, founding consultants and Scientific Advisory Board
members. A portion of the shares purchased is subject to forfeiture, through
calendar 1997, if certain vesting requirements are not satisfied.
The Company has reserved sufficient shares of Common Stock for issuance upon
the conversion of outstanding Preferred Stock and the exercise of stock options
and stock warrants.
In connection with the 1993 Private Placement Offering of Series A Preferred
Stock, the Company sold, for nominal consideration, warrants to purchase from
the Company 182,259 shares of Common Stock pursuant to the Placement Agency
Agreement. The exercise price for shares purchased upon exercise of such
warrants is $4.42 per share at December 31, 1996, as adjusted pursuant to
"weighted average" anti-dilution provisions that are triggered if the Company
sells shares of Common Stock or Common Stock Equivalents at a price per share
less than $4.42 (except in the case of sales to employees, directors,
consultants and other limited exceptions). Such warrants will be exercisable
until September 24, 1998.
In connection with the 1995 Private Placement Offering of Series D Preferred
Stock, the Company sold, for nominal consideration, warrants to purchase from
the Company 135,663 shares of Common Stock at an exercise price of $5.10 per
share pursuant to an agreement with the European Placement Agent. A total of
89,381 warrants will be exercisable until December 1, 2002, and 46,282 will be
exercisable until January 1, 2003. In addition, the Company also sold, for
nominal consideration, warrants to purchase from the Company 190,776 shares of
Common Stock at an exercise price of $5.10 per share to certain holders of
Series A Preferred Stock. Such warrants will be exercisable until December 1,
2002.
In connection with the 1996 Series E Preferred Stock sale, the Company sold,
for nominal consideration, warrants to purchase from the Company 50,985 shares
of Common Stock at an exercise price of 7.65 per share pursuant to an agreement
with the European Placement Agent. Such warrants will be exercisable until
January 1, 2003.
The Company's 1993 Stock Option Plan was succeeded by the Company's 1994
Amended and Restated Stock Incentive Plan (together, the "Stock Plans"). The
Stock Plans provide for the granting of restricted stock and option rights,
consisting of incentive stock options or nonqualified stock options, to
officers, employees, consultants and advisors to purchase shares of Common Stock
at prices which may be equal to, less than or greater than such fair market
value of the stock on the dates options are granted and vest over a period of up
to four years. Options expire no more than ten years after grant. The Company
has reserved 1,176,471 shares of Common Stock for issuance under the Stock
Plans. As of December 31, 1996, a net total of 547,341 shares of restricted
stock and options to purchase Common Stock have been granted under the Stock
Plans and 70,306 shares are available for grant. As of December 31, 1996, a net
total of 211,467 shares of restricted stock have been issued of which 114,706
shares are subject to certain vesting terms.
F-14
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
Stock option activity in the Stock Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- -----------------
<S> <C> <C>
Balance, December 31, 1993...................................... 60,294 .26
Granted....................................................... 56,735 .56
Exercised..................................................... (735) .02
Forfeited..................................................... -- --
-----------
Balance, December 31, 1994...................................... 116,294 $ .41
Granted....................................................... 61,985 .75
Exercised..................................................... (16,103) .02
Forfeited..................................................... (28,529) .54
-----------
Balance, December 31, 1995...................................... 133,647 .58
Granted....................................................... 188,947 2.02
Exercised..................................................... (34,117) .29
Forfeited..................................................... (3,559) 1.31
-----------
Balance, December 31, 1996...................................... 284,918 1.56
-----------
-----------
</TABLE>
All options and restricted stock purchase awards for Common Stock were made
at an exercise or purchase price equal to the fair market value at the date of
grant in 1996 and 1995. At December 31, 1996 the range of exercise prices for
all the outstanding stock options was $0.58 to $2.55. Of the outstanding options
at December 31, 1996, 86,450 were exercisable at a weighted average exercise
price of $.80 per share. At December 31, 1996, the weighted-average contractual
life of all the outstanding stock options was 8.45 years.
The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, STOCK BASED COMPENSATION ("SFAS 123"), for its
stock option plans. Had compensation cost for the Company's stock option plans
been determined on the fair value on the date of grant for awards in 1995 and
1996, consistent with the provisions of SFAS 123, the Company's net loss for
1995 and 1996 would have increased by $23,844 and $58,437 (with no change in the
net loss per share) respectively. The weighted average fair value at the date of
grant for Common Stock options granted during 1995 and 1996 was $.54 and $1.56,
respectively.
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
ALL YEARS
-----------
<S> <C>
Expected life (years)............................................................... 5
Risk free interest rate............................................................. 7.5%
Volatility.......................................................................... 100%
Dividend Yield...................................................................... N/A
</TABLE>
F-15
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS
FACILITY LEASE
Rent expense was $114,707 and $120,636 for the years ended December 31, 1994
and 1995, respectively, and $236,903 for the period from inception to December
31, 1996. There was no recorded rent expense for the year ended December 31,
1996 because in January 1996 the Company relocated to a new facility, the lease
for which was recorded as a capital asset with a related short and long-term
liability.
During January 1995, the Company entered into a sublease agreement with the
Maryland Economic Development Corporation, whereby the Company agreed to
relocate its principal offices and laboratories to Baltimore, Maryland. Certain
site and tenant improvements, consisting of the construction of approximately
30,000 sq. ft. of office and wet lab facilities, were made to a portion of the
building occupied by the Company.
The initial lease term is 6 1/2 years, expiring in December 2001 and
contains an initial extension term of 6 1/2 years plus two 5 year terms
thereafter. The sublease also contains a purchase and an expansion option. The
purchase option provides the Company with the right to purchase the entire
facility, consisting of 185,000 sq. ft., for a purchase price ranging from $6.1
million to $6.7 million through June 30, 1998, plus additional payments
associated with the site and tenant improvements. The expansion option provides
the Company with the right to lease up to 50,000 additional sq. ft. through June
30, 1998 and a right of first offer as to other expansion space within the
building. The Company occupied the facility in January 1996, upon completion of
the tenant improvements.
In consideration for arranging the financing and providing the guarantees
discussed above, the Company granted to the State of Maryland (the "State") and
City of Baltimore (the "City") warrants for the purchase of 33,000 shares of
Series D Convertible Preferred Stock (convertible into an aggregate of 19,412
shares of Common Stock) at $3.00 per share for a term of seven years. As an
additional incentive, the State and City purchased 233,338 shares of Series D
Convertible Preferred Stock at $3.00 per share from the Company.
EQUIPMENT LEASES
The Company leases certain of its equipment under various financing
arrangements. In February 1994, the Company entered into a Master Lease Line
Agreement (the "Lease Line") with Dominion Ventures, Inc. ("Dominion") in the
amount of $1,500,000, whereby the Company would use the Lease Line to acquire
computers and laboratory equipment. During June 1995, pursuant to an amendment,
the Company increased the Lease Line to $4,300,000. Lease terms range from 36 to
48 months.
The Lease Line includes a grant by the Company to Dominion for a warrant to
purchase 52,762 shares of Series A Convertible Preferred Stock (convertible into
an aggregate of 31,036 shares of Common Stock) at a price of $3.00 per share. As
additional consideration for the increase in the Lease Line to $4,300,000, the
Company granted to Dominion a warrant to purchase up to 84,000 shares of Series
D Preferred Stock (convertible into an aggregate of 49,412 shares of Common
Stock) at a price of $3.00 per share. Both warrants are exercisable until the
later of the tenth anniversary of the date of grant or the fifth anniversary of
the Company's initial public offering.
F-16
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
The terms of these facility and equipment arrangements meet the criteria
requiring capitalization specified in Statement of Financial Accounting
Standards No. 13, ACCOUNTING FOR LEASES. Included in the balance sheets are the
following amounts at December 31, 1995 and 1996, for capitalized leases:
<TABLE>
<CAPTION>
1995 1996
---------- -------------
<S> <C> <C>
Research and development facility................................. $ -- $ 5,003,163
Computer and laboratory equipment................................. 1,007,057 3,000,827
Less accumulated amortization..................................... (184,151) (1,217,089)
---------- -------------
$ 822,906 $ 6,786,901
---------- -------------
---------- -------------
</TABLE>
Future minimum annual rental commitments under these facility and equipment
arrangements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 FACILITY EQUIPMENT TOTAL
- ---------------------------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
1997.................................................................. $ 580,415 $ 985,585 $ 1,566,000
1998.................................................................. 580,415 935,313 1,515,728
1999.................................................................. 601,359 532,284 1,133,643
2000.................................................................. 608,817 144,824 753,641
2001.................................................................. 616,537 -- 616,537
Thereafter............................................................ 4,329,798 -- 4,329,798
------------- ------------ -------------
Total minimum lease payments.......................................... 7,317,341 2,598,006 9,915,347
------------- ------------ -------------
Less amounts representing interest.................................... (2,502,862) (388,708) (2,891,570)
------------- ------------ -------------
Present value of minimum lease payments............................... $ 4,814,479 $ 2,209,298 $ 7,023,777
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
AGREEMENTS
The Company has entered into a Technology Transfer and License Agreement
(the "License Agreement") with Case Western Reserve University ("CWRU") under
which the Company has purchased any and all rights to certain human MSC and
related technology and patents thereto and has an exclusive, worldwide license
to newly developed MSC technology and patents developed by the scientific
founders or persons working under their direction at CWRU since the Company's
inception (the "CWRU Developed Technology"). The License Agreement is
royalty-free as to purchased patents and requires the Company to pay royalties
on revenues related to CWRU Developed Technology covered by issued patents with
royalty payments commencing on the third anniversary of the date on which
products are sold. As a result of the License Agreement, the Company currently
owns three issued U.S. patents, numerous U.S. patent applications which are
pending or in preparation and is licensed by CWRU on one issued U.S. patent and
a number of other U.S. patent applications covering CWRU Developed Technology.
The Company has also commenced filing its own patent applications relating to
composition-of-matter for MSC products, clinical uses for MSC technology and its
delivery thereof.
F-17
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
In October 1994, the Company agreed to enter into a sponsored Research
Agreement and extensions to consulting agreements with the founding scientists
that will provide $1,440,000 in funding for mesenchymal stem cell research in
their laboratories over a three-year period ($120,000 per quarter) commencing in
January 1995. The Company will receive exclusive, worldwide rights to any
intellectual property resulting from such research that is not already the
subject of the Technology Transfer and License Agreement between CWRU and the
Company.
10. GRYPHON PHARMACEUTICALS, INC.
In December 1994, the Company entered into a Share Purchase Agreement,
Stockholders Agreement and Registration Rights Agreement (the "Gryphon
Agreement") with The Johns Hopkins University School of Medicine ("JHU") for
research funding and the purchase of equity in Gryphon Pharmaceuticals, Inc.
("Gryphon"), a newly incorporated entity. Gryphon, a Delaware corporation, is
engaged in the research and development of human hematopoietic stem cell and
progenitor cell growth factors, regulatory molecules and the biopharmaceuticals
based on these molecules. Pursuant to the Gryphon Agreement:
- The Company purchased 3,000,000 shares of Gryphon Series A Convertible
Preferred Stock entitling the Company to 65% voting control.
- The Company was issued a warrant to purchase 1,000,000 shares of Gryphon
common stock at $.01 per share, subject to certain terms and conditions.
- The Company will provide Gryphon with $1,200,000 in research funding over
a three-year period through 1997. In addition, at the option of Gryphon,
the Company will provide $1,000,000 in contingent funding over a two-year
period in the form of a loan if certain financing milestones are not
achieved. Gryphon will use all such research support money to fund work at
the JHU laboratories of Drs. Curt I. Civin and Donald Small to further
develop core licensed technologies. During 1996 and 1995, the Company paid
$425,000 and $490,000, respectively, to Gryphon for research funding at
JHU.
- Gryphon entered into a License Agreement with JHU regarding rights to
commercially develop, manufacture and distribute products resulting from
the funded research.
The Company and Gryphon entered into a separate cross-license agreement,
specifying that Gryphon discoveries relating to mesenchymal stem cells will be
licensed to the Company and jointly-owned discoveries relating to hematopoiesis
will be licensed to Gryphon.
F-18
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACCRUED EXPENSES
Accrued expenses of the Company consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Accrued external research............................................. $ 197,400 $ 353,205
Accrued private placement agent fees.................................. 200,000 --
Accrued professional fees............................................. 121,250 --
Other................................................................. 132,545 244,216
---------- ----------
$ 651,195 $ 597,421
---------- ----------
---------- ----------
</TABLE>
12. DEFINED CONTRIBUTION PLAN
In 1994, the Company adopted a 401(k) plan available to all employees.
Employee contributions are voluntary and are determined on an individual basis
up to the amount allowable under federal tax regulations. Employer contributions
to the plan are at the discretion of management. Employer contributions vest
over a seven-year period, beginning after the third year of eligibility. No
employer contributions have been made to date.
13. RESEARCH COLLABORATION AGREEMENTS
In June 1996, the Company was awarded a sole source, $6,000,000, three year
research agreement from the U.S. Defense Advanced Research Projects Agency
("DARPA"). Annual funding of $2,000,000 from DARPA will be supplemented by
approximately $1,000,000 of cost-sharing contributions from the Company in the
form of equipment and indirect costs. The research is aimed at developing human
mesenchymal stem cell systems genetically engineered for the sequential release
of multiple vaccines and the recognition and neutralization of toxic or
infectious agents. Under the agreement, the Company retains worldwide
intellectual property and commercialization rights subject to a non-exclusive,
paid-up license to the U.S. government. During 1996, the Company recognized
$1,025,289 of revenue pursuant to the agreement with DARPA.
14. UNAUDITED INFORMATION
BASIS OF PRESENTATION
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The unaudited interim consolidated
financial statements reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly present
the consolidated financial position, results of operations and changes in cash
flows as of and at the end of the periods presented. The unaudited interim
consolidated financial information should be read in conjunction with the
audited consolidated financial statements and related notes thereto, appearing
elsewhere herein.
F-19
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
The results for the interim periods presented are not necessarily indicative of
results to be expected for the full year.
Unaudited pro forma financial information gives effect to the conversion of
all outstanding shares of Preferred Stock into 5,510,002 shares of Common Stock.
Pro forma net loss per share was $1.10 and $0.35, respectively, for the year
ended December 31, 1996 and the nine months ended September 30, 1997. The pro
forma weighted average shares outstanding were 7,465,776 and 8,353,200,
respectively, for the year ended December 31, 1996 and the nine months ended
September 30, 1997.
Pro forma net loss per share is based upon the net loss and the weighted
average number of common shares and common share equivalents outstanding during
that period. Common shares and common share equivalents issued by the Company at
prices below the public offering price during the twelve-month period preceding
the proposed offering date have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method. Common
share equivalents issued by the Company prior to the aforementioned twelve-month
period have not been included in the per share calculation because their
inclusion would be anti-dilutive. Upon completion of the Company's proposed
initial public offering, all 9,268,963 shares of Preferred Stock will
automatically convert into 5,510,002 shares of Common Stock. As a result, all
outstanding shares of Preferred Stock are assumed to have been converted to
Common Stock at the time of issuance, except for those shares issued during the
aforementioned twelve-month period which are treated as outstanding for all
periods presented.
NOVARTIS AGREEMENT
In June 1997, the Company entered into a research and licensing agreement
with Novartis Pharmaceuticals Corporation ("the Novartis Agreement") for the
development of MSC products for osteoporosis, osteoarthritis, cartilage injury
and selected gene therapy applications. Pursuant to the Novartis Agreement, the
Company is entitled, subject to certain conditions, to receive up to $50,000,000
during the five-year period of the agreement for research and development
funding of certain portions of the Company's bone, cartilage and gene therapy
research programs. The Company could also receive milestone payments of
$93,000,000 if it achieves all of its development and regulatory objectives. In
addition, Novartis paid the Company an initial up-front payment of $3,000,000
and purchased 692,059 shares of Common Stock for $10,000,250.
In return, Novartis received exclusive worldwide rights to use and sell
certain MSC products developed in the osteoporosis, osteoarthritis, cartilage
injury and gene therapy fields. Novartis is required to pay the Company
royalties based upon net sales, if any, for such products. The Company has
retained the option to manufacture MSC products in the osteoporosis,
osteoarthritis and cartilage therapy field at cost plus a percentage profit,
subject to certain conditions.
Under the Novartis Agreement, in addition to making the equity investment
and the research and milestone payments noted above, Novartis is responsible for
funding the cost of all clinical development, regulatory submissions, marketing,
sales and manufacturing (excluding North America) of MSC products, if any,
developed pursuant to the collaborations. As a result of these collaborations,
the Company is dependent upon Novartis to seek regulatory approvals for, to
conduct trials and to determine the ultimate commercialization of the MSC
products subject to the collaboration.
F-20
<PAGE>
OSIRIS THERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. UNAUDITED INFORMATION (CONTINUED)
Pursuant to the Novartis Agreement, the $3,000,000 initial up-front payment
was recorded as income in the quarter ended June 30, 1997. Under the Agreement,
the up-front payment is neither allocable, refundable nor creditable against any
future obligations and thus is recordable as immediate income. Through September
30, 1997, the Company has received $5,000,000 of research and development
funding from Novartis, of which $3,418,769 has been deferred in accordance with
the Company's revenue recognition policy. The milestone payments will be earned
and recognized as income upon the occurrence of the specific regulatory or
development events to which they relate. Under the Agreement, milestone payments
are creditable in part against future royalty obligations, and thus the Company
will record appropriate deferrals of portions of future milestone payments.
OTHER AGREEMENTS
In March 1997, the Company was awarded a $750,000 Phase II Small Business
Innovation Research Grant for a two-year continuation of research into tendon
regeneration.
In May 1997, the Company's cost sharing contribution to DARPA was increased
to $1.6 million per annum.
In July 1997, the Company entered into a three-year $1,000,000 agreement
with the Centro di Biotechnologie Avanzate whereby the Company will help fund
research and development activities related to: (i) regeneration of stroma and
other elements of bone marrow following chemotherapy; (ii) regeneration of bone
which has been depleted by cancer chemotherapy or osteoporosis; and (iii)
regeneration of damaged skeletal and connective tissue in orthopedic
applications.
COMMON STOCK OPTIONS
Stock option activity for the nine months ended September 30, 1997 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
----------------- -----------------
<S> <C> <C>
Balance, December 31, 1996............................... 284,918 $ 1.56
Granted................................................ 196,647 5.41
Exercised.............................................. (12,308) 7.85
Forfeited.............................................. (6,353) 2.87
--------
Balance, September 30, 1997.............................. 462,904 $ 1.80
--------
--------
</TABLE>
The Company calculated deferred compensation expense of $200,325 related to
certain options granted during the nine months ended September 30, 1997 and has
recognized compensation expense over the vesting period of those stock options.
F-21
<PAGE>
[ARTWORK DEPICTING MESENCHYMAL STEM CELL DIFFERENTIATION INTO VARIOUS CONNECTIVE
TISSUE]
MESENCHYMAL STEM CELL (MSCS) ARE ISOLATED, PURIFIED AND EXPANDED IN THE
COMPANY'S CELL PROCESSING FACILITIES. MSCS CAN DIFFERENTIATE INTO CHONDROCYTES
(CARTILAGE); OSTEOCYTES (BONE); TENOCYTES (TENDON); OR ADIPOCYTES (FAT).
PHOTOGRAPHS SHOW SPECIFIC MARKERS FOR EACH TISSUE: CARTILAGE (TYPE II COLLAGEN
IN GREEN); BONE (MINERALIZED BONE MATRIX IN BLUE); TENDON (CRIMP PATTERN OF NEW
TENDON UNDER POLARIZED LIGHT); AND FAT (LIPID VACUOLES IN RED).
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or by any of the Underwriters. This Prospectus does
not constitute an offer of any securities other than those to which it relates
or an offer to sell, or a solicitation of an offer to buy, those to which it
relates in any state to any person to whom it is not lawful to make such offer
in such state. The delivery of this Prospectus at any time does not imply that
the information contained herein is correct as of any time subsequent to its
date.
TABLE OF CONTENTS
-------------------------------------------
<TABLE>
<CAPTION>
Prospectus Summary.............................. 3
<S> <C>
Risk Factors.................................... 7
Use of Proceeds................................. 16
Dividend Policy................................. 16
Dilution........................................ 17
Capitalization.................................. 18
Selected Financial Data......................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business........................................ 24
Management...................................... 46
Certain Transactions............................ 58
Principal Stockholders.......................... 60
Description of Capital Stock.................... 61
Shares Eligible for Future Sale................. 65
Underwriting.................................... 66
Legal Matters................................... 67
Experts......................................... 67
Additional Information.......................... 68
Glossary of Scientific Terms.................... 69
Index to Consolidated Financial Statements...... F-1
</TABLE>
Until , 1997 (25 days after the commencement of the Offering), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
PROSPECTUS , 1997
2,500,000 Shares
[LOGO]
Common Stock
SBC WARBURG DILLON READ INC.
HAMBRECHT & QUIST
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered. All amounts shown are
estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Securities and Exchange Commission registration fee............................... $ 11,326
NASD filing fee................................................................... 4,611
Nasdaq National Market fee........................................................ 50,000
Blue sky qualification fees and expenses.......................................... 20,000
Accounting fees and expenses...................................................... 110,000
Legal fees and expenses........................................................... 275,000
Printing and engraving expenses................................................... 115,000
Transfer agent and registrar fees................................................. 7,500
Miscellaneous expenses............................................................ 56,937
----------
Total......................................................................... $ 650,000
----------
----------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation, as amended, (the "Charter")
provides for the indemnification of the Company's directors and officers to the
fullest extent permitted by law. Insofar as indemnification for liabilities
under the Securities Act may be permitted to directors, officers or controlling
persons of the Company pursuant to the Charter and Bylaws, as amended, of the
Company and the Delaware General Corporation Law, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable.
The Charter limits the personal liability of the Company's directors to the
fullest extent permitted by the Delaware General Corporation Law. Therefore, the
directors of the Company are not personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends or distributions or the repurchase or redemption of stock; or (iv) for
any transaction from which the director derives an improper personal benefit. As
a result of this provision, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Additionally, the Company has entered into indemnification agreements, in
the form attached hereto as Exhibit 10.31 with certain of its directors,
officers and other key personnel, which may, in certain cases, be broader than
the specific indemnification provisions contained under applicable law. The
indemnification agreement may require the Company, among other things, to
indemnify such officers, directors and key personnel against certain liabilities
that may arise by reason of their status or service as directors, officers or
employees of the Company, to advance the expenses incurred by such parties as a
result of any threatened claims or proceedings brought against them as to which
they could be indemnified and to cover such officers, directors and key
employees under the Company's directors' and officers' liability insurance
policies to the maximum extent that insurance coverage is maintained. The
Company maintains an
II-1
<PAGE>
insurance policy, providing an aggregate of $2,000,000 in coverage, insuring all
of its directors and officers against certain liabilities arising from actions
taken in their official capacities as directors and officers.
The Underwriting Agreement, in the form attached hereto as Exhibit 1.1,
provides for the indemnification of directors, officers, employees, agents and
controlling persons of the Company by the Underwriters under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 1, 1994, the Company entered into a three-year consulting
agreement with Max Link, Ph.D., Chairman of the Company's Board of Directors.
The agreement entitled Dr. Link to purchase a total of 47,059 shares of Common
Stock at a price of $0.58 per share and to purchase 100,000 shares of Series D
Preferred Stock for $2.55 per share.
On January 18, 1995, the Company entered into a Sublease Agreement with the
Maryland Economic Development Corporation ("MEDCO") for 30,000 square feet of
renovated laboratory and office space in Baltimore, Maryland. Under the Sublease
Agreement and related agreements, MEDCO (together with the City of Baltimore)
guaranteed renovation bond financing for up to $3,600,000 to renovate the
Company's facilities. As part of the transaction, the State of Maryland and the
City of Baltimore purchased $700,000 of the Series D Preferred Stock and
received warrants to purchase 33,000 shares of Series D Preferred Stock at an
exercise price of $3.00 per share.
On various dates in 1995 and 1996, the Company sold 3,599,070 shares of
Series D Preferred Stock for an aggregate of $10,623,004 to various existing and
new investors. In connection with these sales, the Company sold, for nominal
consideration, warrants to purchase 135,586 shares of Common Stock at an
exercise price of $5.10 per share pursuant to an agreement with the European
Placement Agent.
On various dates in 1996, the Company sold 2,246,224 shares of Series E
Preferred Stock for an aggregate of $10,108,004 to various existing and new
investors. In connection with these sales, the Company sold, for nominal
consideration, warrants to purchase 50,985 shares of Common Stock at an exercise
price of $7.65 per share pursuant to an agreement with the European Placement
Agent.
On June 16, 1997, the Company issued and sold 692,059 shares of Common Stock
to Novartis Pharma AG ("Novartis") for $10,000,250. In addition, the Company
entered into a Research and Licensing Agreement with Novartis Pharmaceuticals
Corporation, the U.S. affiliate of Novartis, pursuant to which Novartis
Pharmaceuticals Corporation paid the Company an initial up-front payment of
$3,000,000 for rights to the MSC technology in the fields of treating
degenerative diseases, regenerating cartilage and certain gene therapy
applications. In exchange, the Company will receive, subject to certain
conditions, up to $50,000,000 over five years for research and development
funding of certain portions of the Company's bone, cartilage and gene therapy
research programs.
Since June 30, 1994, the Company has granted an aggregate of 11,765 shares
of Common Stock to its directors as compensation for attending Board of Director
meetings.
On July 28, 1997, in a connection with the commencement of his service on
the Board of Directors, the Company sold to Jack L. Bowan 11,029 shares of
Common Stock at $8.50 per share. The purchase amount of $93,750 was loaned to
Mr. Bowman by the Company.
The issuances described above were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation, as amended.**
3.1.1 Form of Amendment to Restated Certificate of Incorporation, as amended.
3.1.2 Form of Amendment to Restated Certificate of Incorporation, as amended.
3.2 Form of Bylaws, as amended.**
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Hogan & Hartson L.L.P. with respect to the legality of the securities being
registered.
10.1 Share Purchase Agreement for Gryphon Pharmaceuticals, Inc. stock, dated December 23, 1994, by
and between the Company and The Johns Hopkins University.**
10.2 Stockholders Agreement for Gryphon Pharmaceuticals, Inc., dated December 23, 1994, by and
between the Company and The Johns Hopkins University.**
10.3 Registration Rights Agreement for Gryphon Pharmaceuticals, Inc. stock, dated December 23,
1994, by and between the Company and The Johns Hopkins University.**
10.4 Form of Registration Rights Agreement by and among the Company and the Investors in the
Series C Convertible Preferred offering.**
10.5 Form of Registration Rights Agreement by and among the Company and the Investors in the
Series D Convertible Preferred offering.**
10.6 Form of Registration Rights Agreement by and among the Company and the Investors in the
Series E Convertible Preferred offering.**
10.7 Stock Purchase Agreement, dated June 16, 1997, by and between the Company and Novartis Pharma
AG.**
10.8 Technology Transfer and License Agreement, dated March 31, 1993, by and between the Company
and Case Western Reserve University.+
10.9 Research and License Agreement, dated December 23, 1994, by and between Gryphon
Pharmaceuticals, Inc. and The Johns Hopkins University.+
10.10 License Agreement, dated December 23, 1994, by and between the Company and Gryphon
Pharmaceuticals, Inc.+
10.11 Research Agreement, dated February 22, 1995, by and between the Company and Case Western
Reserve University.+
10.12 Material Transfer and Research Agreement, dated April 1, 1995, by and between the Company and
the Fred Hutchinson Cancer Research Center, with amendments.**
10.13 Research Contract, dated June 11, 1996, as amended on May 31, 1997, by and between the
Company and the Defense Advanced Research Projects Agency.+
10.14 Clinical Study Support Agreement, dated October 28, 1996, by and between the Company,
University Hospitals of Cleveland, Ireland Cancer Center and Case Western Reserve
University.**
10.15 Research and Licensing Agreement, dated June 16, 1997, by and between the Company and
Novartis Pharmaceuticals Corporation.+
10.16 Master Equipment Lease Agreement, dated as February 28, 1994 and as amended on June 20, 1995,
by and between Dominion Ventures, Inc. and Osiris Therapeutics, Inc.**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
10.17 Master Lease Agreement, dated January 18, 1995, by and between Saga Limited Partnership and
Maryland Economic Development Corporation.**
<S> <C>
10.18 Sublease Agreement effective January 18, 1995, as amended on June 2, 1995, by and between
Maryland Economic Development Corporation and Osiris Therapeutics, Inc.**
10.19 Financing and Construction Loan Agreement, dated as of June 2, 1995, by and among Maryland
Economic Development Corporation, The Whiting-Turner Contracting Company, Mayor and City
Council of Baltimore, Signet Trust Company and the Company.**
10.20 Loan Agreement, dated June 1, 1995, by and between the Company and Signet Bank/ Maryland.**
10.21 Consulting Agreement, dated March 11, 1993, by and between the Company and Arnold I. Caplan,
Ph.D.**
10.22 Consulting Agreement, dated March 11, 1993, by and between the Company and Victor M.
Goldberg, M.D.**
10.23 Consulting Agreement, dated March 11, 1993, by and between the Company and Stephen
Haynesworth, Ph.D.**
10.24 Employment Agreement, dated March 11, 1993, as amended, by and between the Company and James
S. Burns.**
10.25 Employment Agreement, dated October 1, 1994, by and between the Company and Daniel R.
Marshak, Ph.D.**
10.26 Consulting Agreement, dated November 23, 1994, by and between the Company and Max Link,
Ph.D.**
10.27 1994 Amended and Restated Stock Incentive Plan, as amended, and form of Stock Option
Agreements.**
10.28 Consulting Agreement, dated November 1, 1995, by and between the Company and Friedli
Corporate Finance AG.**
10.29 Employment Agreement, dated November 1, 1996, by and between the Company and Michael J.
Demchuk, Jr.**
10.30 Employment Agreement, dated June 1, 1997, by and between the Company and David J. Fink,
Ph.D.**
10.31 Form of Indemnification Agreement.**
10.32 Research Agreement between the Company and the Centro di Biotecnologie Avanzate.+
10.33 1993 Stock Option Plan.
11.1 Statement re computation of pro forma net loss per share.**
21.1 Subsidiaries.**
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.3 Consent of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, P.A.
24.1 Power of Attorney (see page II-6).**
27.1 Financial Data Schedule.**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Portions have been omitted pursuant to a request for confidential treatment.
Unredacted agreement has been submitted to the Commission.
II-4
<PAGE>
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is included elsewhere in the Consolidated Financial
Statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Form S-1 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Baltimore, State of Maryland on the 25th day of November, 1997.
OSIRIS THERAPEUTICS, INC.
By: /s/ JAMES S. BURNS
-----------------------------------------
James S. Burns
President, Chief Executive Officer,
Treasurer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Form S-1 Registration Statement has been signed by the following
persons in the capacities indicated on the 25th day of November, 1997.
NAME TITLE
- ------------------------------ ---------------------------
President, Chief Executive
/s/ JAMES S. BURNS Officer,
- ------------------------------ Treasurer and Director
James S. Burns (Principal Executive
Officer)
Vice President & Chief
Financial
/s/ MICHAEL J. DEMCHUK, JR. Officer, Secretary and
- ------------------------------ Assistant Treasurer
Michael J. Demchuk, Jr. (Principal Financial and
Accounting Officer)
* Chairman of the Board
- ------------------------------
Max Link, Ph.D.
* Director
- ------------------------------
Jack L. Bowman
* Director
- ------------------------------
Peter Friedli
* Director
- ------------------------------
Mark Novitch, M.D.
*By: /s/ MICHAEL J.
DEMCHUK, JR.
- ------------------------------
Michael J. Demchuk, Jr.
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation, as amended.**
3.1.1 Proposed Form of Amendment to Restated Certificate of Incorporation, as amended.
3.1.2 Form of Amendment to Restated Certificate of Incorporation, as amended.
3.2 Form of Bylaws, as amended.**
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Hogan & Hartson L.L.P. with respect to the legality of the securities being
registered.
10.1 Share Purchase Agreement for Gryphon Pharmaceuticals, Inc. stock, dated December 23, 1994, by
and between the Company and The Johns Hopkins University.**
10.2 Stockholders Agreement for Gryphon Pharmaceuticals, Inc., dated December 23, 1994, by and
between the Company and The Johns Hopkins University.**
10.3 Registration Rights Agreement for Gryphon Pharmaceuticals, Inc. stock, dated December 23,
1994, by and between the Company and The Johns Hopkins University.**
10.4 Form of Registration Rights Agreement by and among the Company and the Investors in the
Series C Convertible Preferred offering.**
10.5 Form of Registration Rights Agreement by and among the Company and the Investors in the
Series D Convertible Preferred offering.**
10.6 Form of Registration Rights Agreement by and among the Company and the Investors in the
Series E Convertible Preferred offering.**
10.7 Stock Purchase Agreement, dated June 16, 1997, by and between the Company and Novartis Pharma
AG.**
10.8 Technology Transfer and License Agreement, dated March 31, 1993, by and between the Company
and Case Western Reserve University.+
10.9 Research and License Agreement, dated December 23, 1994, by and between Gryphon
Pharmaceuticals, Inc. and The Johns Hopkins University.+
10.10 License Agreement, dated December 23, 1994, by and between the Company and Gryphon
Pharmaceuticals, Inc.+
10.11 Research Agreement, dated February 22, 1995, by and between the Company and Case Western
Reserve University.+
10.12 Material Transfer and Research Agreement, dated April 1, 1995, by and between the Company and
the Fred Hutchinson Cancer Research Center, with amendments.**
10.13 Research Contract, dated June 11, 1996, as amended on May 31, 1997, by and between the
Company and the Defense Advanced Research Projects Agency.+
10.14 Clinical Study Support Agreement, dated October 28, 1996, by and between the Company,
University Hospitals of Cleveland, Ireland Cancer Center and Case Western Reserve
University.**
10.15 Research and Licensing Agreement, dated June 16, 1997, by and between the Company and
Novartis Pharmaceuticals Corporation.+
10.16 Master Equipment Lease Agreement, dated as February 28, 1994 and as amended on June 20, 1995,
by and between Dominion Ventures, Inc. and Osiris Therapeutics, Inc.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
10.17 Master Lease Agreement, dated January 18, 1995, by and between Saga Limited Partnership and
Maryland Economic Development Corporation.**
10.18 Sublease Agreement effective January 18, 1995, as amended on June 2, 1995, by and between
Maryland Economic Development Corporation and Osiris Therapeutics, Inc.**
10.19 Financing and Construction Loan Agreement, dated as of June 2, 1995, by and among Maryland
Economic Development Corporation, The Whiting-Turner Contracting Company, Mayor and City
Council of Baltimore, Signet Trust Company and the Company.**
10.20 Loan Agreement, dated June 1, 1995, by and between the Company and Signet Bank/ Maryland.**
10.21 Consulting Agreement, dated March 11, 1993, by and between the Company and Arnold I. Caplan,
Ph.D.**
10.22 Consulting Agreement, dated March 11, 1993, by and between the Company and Victor M.
Goldberg, M.D.**
10.23 Consulting Agreement, dated March 11, 1993, by and between the Company and Stephen
Haynesworth, Ph.D.**
10.24 Employment Agreement, dated March 11, 1993, as amended, by and between the Company and James
S. Burns.**
10.25 Employment Agreement, dated October 1, 1994, by and between the Company and Daniel R.
Marshak, Ph.D.**
10.26 Consulting Agreement, dated November 23, 1994, by and between the Company and Max Link,
Ph.D.**
10.27 1994 Amended and Restated Stock Incentive Plan, as amended, and form of Stock Option
Agreements.**
10.28 Consulting Agreement, dated November 1, 1995, by and between the Company and Friedli
Corporate Finance AG.**
10.29 Employment Agreement, dated November 1, 1996, by and between the Company and Michael J.
Demchuk, Jr.**
10.30 Employment Agreement, dated June 1, 1997, by and between the Company and David J. Fink,
Ph.D.**
10.31 Form of Indemnification Agreement.**
10.32 Research Agreement between the Company and the Centro di Biotecnologie Avanzate.+
10.33 1993 Stock Option Plan.
11.1 Statement re computation of pro forma net loss per share.**
21.1 Subsidiaries.**
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.3 Consent of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, P.A.
24.1 Power of Attorney (see page II-6).**
27.1 Financial Data Schedule.**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Portions have been omitted pursuant to a request for confidential treatment.
Unredacted agreement has been submitted to the Commission.
<PAGE>
EXHIBIT 1.1
2,500,000 Shares
(Subject to increase of up to 375,000
additional shares to cover over-allotments)
OSIRIS THERAPEUTICS, INC.
(a Delaware corporation)
Common Stock
(par value $0.001 per share)
UNDERWRITING AGREEMENT
_______________, 1997
SBC WARBURG DILLON READ INC.
HAMBRECHT & QUIST LLC,
as Managing Underwriters
c/o SBC WARBURG DILLON READ INC.
535 Madison Avenue
New York, New York 10022
Dear Sirs:
Osiris Therapeutics, Inc. (the "Company") proposes to issue and sell to the
underwriters named in Schedule A annexed hereto (the "Underwriters") an
aggregate of 2,500,000 shares (the "Firm Shares") of Common Stock, $0.001 par
value (the "Common Stock"), of the Company. In addition, solely for the purpose
of covering over-allotments, the Company proposes to grant to the Underwriters
the option to purchase from the Company up to an additional 375,000 shares of
Common Stock (the "Additional Shares"). The Firm Shares and the Additional
Shares are hereinafter collectively sometimes referred to as the "Shares". The
Shares are described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the Securities
Act of 1933, as amended, and the rules and regulations thereunder (collectively
called the "Act"), with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1, including a prospectus,
relating to the Shares. The Company has furnished to you, for use by the
Underwriters and by dealers, copies of one or more preliminary prospectuses
(each thereof being herein called a "Preliminary Prospectus") relating to the
Shares. Except where the context otherwise requires, the registration
statement, as amended when it becomes effective, including
1
<PAGE>
all documents filed as a part thereof, and including any information contained
in a prospectus subsequently filed with the Commission pursuant to Rule 424(b)
under the Act and deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430(A) under the Act, is herein called the
"Registration Statement," and the prospectus, in the form filed by the Company
with the Commission pursuant to Rule 424(b) under the Act or, if no such filing
is required, the form of final prospectus included in the Registration Statement
at the time it became effective, is herein called the "Prospectus."
The Company and the Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the warranties and
representations and the other terms and conditions herein set forth, the Company
agrees to sell to the respective Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company the aggregate
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A attached hereto in each case at a purchase price of $_________ per
Share. The Company is advised by you that the Underwriters intend (i) to make a
public offering of their respective portions of the Firm Shares as soon after
the effective date of the Registration Statement as in your judgment is
advisable and (ii) initially to offer the Firm Shares upon the terms set forth
in the Prospectus. You may from time to time increase or decrease the public
offering price after the initial public offering to such extent as you may
determine.
In addition, the Company hereby grants to the several Underwriters the
option to purchase, and upon the basis of the warranties and representations
and the other terms end conditions herein set forth, the Underwriters shall
have the right to purchase, severally and not jointly, from the Company,
ratably in accordance with the number of Firm Shares to be purchased by each
of them, all or a portion of the Additional Shares as may be necessary to
cover over-allotments made in connection with the offering of the Firm
Shares, at the same purchase price per share to be paid by the Underwriters
to the Company for the Firm Shares. This option may be exercised at any time
(but not more than once) on or before the thirtieth (30th) day following the
date hereof, by written notice to the Company. Such notice shall set forth
the aggregate number of Additional Shares as to which the option is being
exercised, and the date and time when the Additional Shares are to be
delivered (such date and time being herein referred to as the additional time
of purchase); provided, however, that the additional time of purchase shall
not be earlier than the time of purchase (as defined below) nor earlier than
the second business day(1) after the date on which the option shall have been
exercised nor later than the tenth business day after the date on which the
option shall have been exercised. The number of Additional Shares to be sold
to each Underwriter shall be the number which bears the same proportion to
the aggregate number of
- ---------------------
1 As used herein "business day" shall mean a day on which the New York Stock
Exchange is open for trading.
2
<PAGE>
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter on Schedule A hereto bears to the total
number of Firm Shares (subject, in each case, to such adjustment as you may
determine to eliminate fractional shares).
The Underwriters agree to offer to Friedli Corporate Finance AG ("Friedli")
or its designees, and to permit Friedli or such designees to purchase, 250,000
of the Firm Shares and 10% of the aggregate number of Additional Shares as to
which the option referred to in the immediately preceding paragraph is
exercised, as part of and subject to the terms and conditions of the public
offering contemplated by this Agreement.
2. Payment and Delivery. Payment of the purchase price for the Firm
Shares shall be made to the Company by certified or official bank check, in New
York Clearing House funds, or by wire transfer of immediately available funds at
the office of SBC Warburg Dillon Read Inc. in New York City, against delivery of
the certificates for the Firm Shares to you for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York
City time, on _____________, 1997 (unless another time shall be agreed to by you
and the Company or unless postponed in accordance with the provisions of
Section 8 hereof). The time at which such payment and delivery are actually
made is hereinafter sometimes called the time of purchase. Certificates for the
Firm Shares shall be delivered to you in definitive form in such names and in
such denominations as you shall specify on the second business day preceding the
time of purchase. For the purpose of expediting the checking of the
certificates for the Firm Shares by you, the Company agrees to make such
certificates available to you for such purpose at least one full business day
preceding the time of purchase.
Payment of the purchase price for the Additional Shares shall be made at
the additional time of purchase in the same manner and at the same office as the
payment for the Firm Shares. Certificates for the Additional Shares shall be
delivered to you in definitive form in such names and in such denominations as
you shall specify on the second business day preceding the additional time of
purchase. For the purpose of expediting the checking of the certificates for
the Additional Shares by you, the Company agrees to make such certificates
available to you for such purpose at least one full business day preceding the
additional time of purchase.
3. Representations and Warranties of the Company. The Company represents
and warrants to each of the Underwriters that:
(a) when the Registration Statement becomes effective, the
Registration Statement and the Prospectus will comply in all material respects
with the provisions of the Act, and the Registration Statement will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and the Prospectus will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in
3
<PAGE>
light of the circumstances under which they were made, not misleading; provided,
however, that the Company makes no warranty or representation with respect to
any statement contained in the Registration Statement or the Prospectus in
reliance upon and in conformity with information concerning the Underwriters and
furnished in writing by or on behalf of any Underwriter through you to the
Company expressly for use in the Registration Statement or the Prospectus;
(b) as of the date of this Agreement, the Company has an authorized
capitalization as set forth in the section of the Registration Statement and the
Prospectus entitled "Capitalization"; all of the issued and outstanding shares
of capital stock including Common Stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable; the Company
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware, with full power and authority
to own its properties and conduct its business as described in the Registration
Statement and the Prospectus, to execute and deliver this Agreement and to issue
and sell the Shares as herein contemplated;
(c) the Company and each of its subsidiaries (the "Subsidiaries") are
duly qualified or licensed by and are in good standing in each jurisdiction in
which they conduct their respective businesses and in which the failure,
individually or in the aggregate, to be so licensed or qualified would have a
material adverse effect on the operations, business or condition of the Company
and its Subsidiaries, taken as a whole; and the Company and each of its
Subsidiaries are in compliance in all material respects with the laws, orders,
rules, regulations and directives issued or administered by such jurisdictions;
(d) neither the Company nor any of its Subsidiaries is in breach of,
or in default under (nor has any event occurred which with notice, lapse of
time, or both would constitute a breach of, or default under), its respective
charter or by-laws or in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, bank loan or credit agreement or other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which any of them is
bound, except where such breach or default, singly or in the aggregate, would
not have a material adverse effect on the condition, business, net worth or
results of operations of the Company and its Subsidiaries, taken as a whole, and
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with, or result in any
breach of or constitute a default under (nor constitute any event which with
notice, lapse of time, or both would constitute a breach of, or default under),
any provisions of the charter or by-laws of the Company or any of its
Subsidiaries or under any provision of any license, indenture, mortgage, deed of
trust, bank loan or credit agreement or other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which any of them or
their respective properties may be bound or affected, or under any federal,
state, local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company or any of its Subsidiaries, except where such breach
4
<PAGE>
or default, singly or in the aggregate, would not have a material adverse effect
on the condition, business, net worth or results of operations of the Company
and its Subsidiaries, taken as a whole;
(e) this Agreement has been duly authorized, executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy, and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratoriums and
other laws relating to or affecting creditors' rights generally and by general
equitable principles;
(f) the capital stock of the Company, including the Shares, conforms
in all material respects to the description thereof contained in the
Registration Statement and Prospectus, and the certificates for the Shares are
in due and proper form and the holders of the Shares will not be subject to
personal liability by reason of being such holders;
(g) no approval, authorization, consent or order of or filing with
any national, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the issuance and sale of the
Shares as contemplated hereby, other than registration of the Shares under the
Act and the Securities Exchange Act of 1934, as amended, or the rules and
regulations thereunder (collectively, the "Exchange Act"), and any necessary
qualification under the securities or blue sky laws of the various jurisdictions
in which the Shares are being offered by the Underwriters;
(h) except as described in the Prospectus, no person has the right
(other than rights that have been waived), contractual or otherwise, to cause
the Company to issue to it any shares of capital stock of the Company upon the
issue and sale of the Shares to the Underwriters hereunder, nor does any person
have preemptive rights, rights of first refusal or other rights to purchase any
of the Shares;
(i) Coopers & Lybrand L.L.P., whose reports on the consolidated
financial statements of the Company and its Subsidiaries are filed with the
Commission as part of the Registration Statement and Prospectus, are independent
public accountants as required by the Act;
(j) except as described in the Prospectus, each of the Company and
its Subsidiaries has all necessary licenses, authorizations, consents and
approvals and has made all necessary filings required under any federal, state,
local or foreign law, regulation or rule, and has obtained all necessary
authorizations, consents and approvals from other persons, in order to conduct
its respective business, except for licenses, authorizations, consents and
approvals the lack of which, and filings the failure of which to make, would not
have a material adverse effect on the Company and its Subsidiaries taken as a
whole; neither the Company nor any of its
5
<PAGE>
Subsidiaries is in violation of, or in default under, any such license,
authorization, consent or approval or any federal, state, local or foreign law,
regulation or rule or any decree, order or judgment applicable to the Company or
any of its Subsidiaries the effect of which would have a material adverse effect
on the Company and its Subsidiaries taken as a whole;
(k) all legal or governmental proceedings, contracts or documents of
a character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement have been
so described or filed as required;
(l) there are no actions, suits or proceedings pending or threatened
against the Company or any of its Subsidiaries or any of their respective
properties, at law or in equity, or before or by any federal, state, local or
foreign governmental or regulatory commission, board, body, authority or agency
which could reasonably be expected to result in a judgment, decree or order
having a material adverse effect on the business, condition, prospects or
property of the Company and its Subsidiaries taken as a whole;
(m) the audited financial statements included in the Registration
Statement and the Prospectus present fairly the consolidated financial position
of the Company and its Subsidiaries as of the dates indicated and the
consolidated results of operations and changes in financial position of the
Company and its Subsidiaries for the periods specified; such financial
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved, except as
disclosed therein;
(n) the Company and each of its Subsidiaries has filed all tax
returns required to be filed, which returns are complete and correct in all
material respects, and neither the Company nor any Subsidiary is in default in
the payment of any taxes which were payable pursuant to said returns or any
assessments with respect thereto;
(o) except as disclosed in the Prospectus, no holder of any security
of the Company has any right (other than rights that have been validly waived)
to require registration under the Act of shares of Common Stock or any other
security of the Company because of the filing of the registration statement or
the consummation of the transactions contemplated by this Agreement and, except
as disclosed in the Prospectus, no person has the right (other than rights that
have been validly waived) to require registration under the Act of any shares of
Common Stock or other securities of the Company. No person has the right (other
than rights that have been validly waived), contractual or otherwise, to cause
the Company to permit such person to underwrite the sale of any of the Shares.
Except as described in or contemplated by the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, and
there are no firm commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any of its Subsidiaries or any security
convertible into or exchangeable or exercisable for capital stock of the Company
or any of its Subsidiaries;
6
<PAGE>
(p) except as described in the Prospectus, the Company and its
Subsidiaries own or possess all patents, trademarks, trademark registrations,
service marks, service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the Prospectus as being owned
by them or any of them or necessary for the conduct of their respective
businesses as currently being conducted, and the Company is not aware of any
pending or threatened claim to the contrary or any challenge by any other person
to the rights of the Company and its Subsidiaries or any facts or circumstances
reasonably likely to lead to a valid claim of infringement with respect to the
foregoing;
(q) the Company is not now, and after sale of the Shares to be sold
by it hereunder and application of the net proceeds from such sale as described
in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended;
(r) the Company is in compliance with all provisions of Florida
Statutes, Section 517.075, and the regulations thereunder, relating to issuers
doing business with Cuba;
(s) subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may be
otherwise stated in the Registration Statement or Prospectus, there has not been
(A) any material and unfavorable change, financial or otherwise, in the
business, properties, prospects, regulatory environment, results of operations
or condition (financial or otherwise), present or prospective, of the Company
and its Subsidiaries taken as a whole, (B) any transaction, which is material to
the Company and its Subsidiaries taken as a whole, entered into by the Company
or any of its Subsidiaries or (C) any obligation, contingent or otherwise,
directly or indirectly incurred by the Company or any of its Subsidiaries which
is material to the Company and its Subsidiaries taken as a whole; and
(t) the Company has obtained the agreement of each of its directors
and officers and certain of its stockholders designated by you not to sell,
contract to sell, grant any option to sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to purchase Common
Stock for a period of 180 days after the date of the Prospectus.
4. Certain Covenants of the Company. The Company hereby agrees:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as you may designate and to maintain such
qualifications in effect so long as required for the distribution of the Shares,
provided that the Company shall not be required to qualify as a foreign
corporation or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale of the
Shares); and to promptly advise you of the
7
<PAGE>
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose;
(b) to make available to you in New York City, as soon as practicable
after the Registration Statement becomes effective, and thereafter from time to
time to furnish to the Underwriters, as many copies of the Prospectus (or of the
Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Act;
(c) to advise you promptly and (if requested by you) to confirm such
advice in writing, (i) when the Registration Statement has become effective and
when any post-effective amendment thereto becomes effective and (ii) if Rule
430A under the Act is used, when the Prospectus is filed with the Commission
pursuant to Rule 424(b) under the Act (which the Company agrees to file in a
timely manner under such Rules);
(d) to advise you promptly, confirming such advice in writing, of any
request by the Commission for amendments or supplements to the Registration
Statement or Prospectus or for additional information with respect thereto, or
of notice of institution of proceedings for, or the entry of a stop order
suspending the effectiveness of the Registration Statement and, if the
Commission should enter a stop order suspending the effectiveness of the
Registration Statement, to make every reasonable effort to obtain the lifting or
removal of such order as soon as possible; to advise you promptly of any
proposal to amend or supplement the Registration Statement or Prospectus and to
file no such amendment or supplement to which you shall reasonably object in
writing;
(e) to furnish to you and, upon request, to each of the other
Underwriters for a period of five years from the date of this Agreement (i)
copies of any reports or other communications which the Company shall send to
its stockholders or shall from time to time publish or publicly disseminate,
(ii) copies of all annual, quarterly and current reports filed with the
Commission on Forms 10-K, 10-Q and 8-K, or such other similar form as may be
designated by the Commission, and (iii) such other information as you may
reasonably request regarding the Company or its Subsidiaries;
(f) to advise the Underwriters promptly of the happening of any event
known to the Company within the time during which a prospectus relating to the
Shares is required to be delivered under the Act which, in the judgment of the
Company, would require the making of any change in the Prospectus then being
used so that the Prospectus would not include an untrue statement of material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they are made, not misleading,
and, during such
8
<PAGE>
time, to prepare and furnish, at the Company's expense, to the Underwriters
promptly such amendments or supplements to such Prospectus as may be necessary
to reflect any such change and to furnish you a copy of such proposed amendment
or supplement before filing any such amendment or supplement with the
Commission;
(g) to make generally available to its security holders, and to
deliver to you, an earnings statement of the Company (which will satisfy the
provisions of Section 11(a) of the Act) covering a period of twelve months
beginning after the effective date of the Registration Statement and ending not
later than 15 months after such date, as soon as is reasonably practicable after
the termination of such twelve-month period;
(h) to furnish to you three(2) signed copies of the Registration
Statement, as initially filed with the Commission, and of all amendments thereto
(including all exhibits thereto) and sufficient conformed copies of the
foregoing (other than exhibits) for distribution of a copy to each of the other
Underwriters;
(i) to furnish to you as early as practicable prior to the time of
purchase and the additional time of purchase, as the case may be, but not later
than two business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements, if any, of the Company and its
Subsidiaries which have been read by the Company's independent certified public
accountants, as stated in their letter to be furnished pursuant to Section 6(c)
of this Agreement;
(j) to apply the net proceeds from the sale of the Shares in the
manner set forth under the caption "Use of Proceeds" in the Prospectus;
(k) to pay all expenses, fees and taxes (other than any transfer
taxes and fees and disbursements of counsel for the Underwriters except as set
forth under Section 5 hereof and (iv) below) in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
printing and furnishing of copies of each thereof to the Underwriters and to
dealers (including costs of mailing and shipment), (ii) the issue, sale and
delivery of the Shares, (iii) the word processing and/or printing of this
Agreement, any Agreement Among Underwriters, any dealer agreements, any
Statements of Information and Powers of Attorney and the reproduction and/or
printing and furnishing of copies of each thereof to the Underwriters and to
dealers (including costs of mailing and shipment), (iv) the qualification of the
Shares for offering and sale under state laws and the determination of their
eligibility for investment under state law as aforesaid
- -------------------
2 One copy for each Managing Underwriter and one copy for counsel for the
Underwriters.
9
<PAGE>
(including the legal fees and filing fees and other disbursements of counsel for
the Underwriters) and the printing and furnishing of copies of any blue sky
surveys or legal investment surveys to the Underwriters and to dealers, (v) any
listing of the Shares on any securities exchange or qualification of the Shares
for quotation on Nasdaq and any registration thereof under the Exchange Act,
(vi) any filing for review of the public offering of the Shares by the National
Association of Securities Dealers, Inc. (the "NASD") and (vii) the performance
of the Company's other obligations hereunder;
(l) to furnish to you, before filing with the Commission subsequent
to the effective date of the Registration Statement and during the period
referred to in paragraph (f) above, a copy of any document proposed to be filed
pursuant to Sections 13, 14 or 15(d) of the Exchange Act;
(m) not to sell, contract to sell, grant any option to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock or permit the registration under the Act
of any shares of Common Stock, except for the registration of the Shares and the
sales to the Underwriters pursuant to this Agreement, issuances of Common Stock
upon the exercise of outstanding options, warrants and debentures and grants of
stock options under existing employee benefit plans, for a period of 180 days
after the date hereof, without the prior written consent of SBC Warburg Dillon
Read Inc.; and
(n) to use its best efforts to cause the Common Stock to be listed on
the Nasdaq National Market (the "Exchange").
5. Reimbursement of Underwriters' Expenses. If the Shares are not
delivered for any reason other than a default by one or more of the Underwriters
in its or their respective obligations hereunder, the Company shall reimburse
the Underwriters for all of their reasonable out-of-pocket expenses, including
the fees and disbursements of their counsel, incurred by the Underwriters in
connection with this Agreement and the offering contemplated hereby.
6. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company on the date hereof and at the time of
purchase (and the several obligations of the Underwriters at the additional time
of purchase are subject to the accuracy of the representations and warranties on
the part of the Company on the date hereof and at the time of purchase (unless
previously waived) and at the additional time of purchase, as the case may be),
the performance by the Company of its obligations hereunder and to the following
conditions:
(a) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Hogan &
Hartson L.L.P., counsel
10
<PAGE>
for the Company, addressed to the Underwriters, and dated the time of purchase
or the additional time of purchase, as the case may be, with reproduced copies
for each of the other Underwriters and in form reasonably satisfactory to
Manatt, Phelps & Phillips, LLP, counsel for the Underwriters, stating that:
(i) the Company was incorporated, and is validly existing and in
good standing as of the date of the certificate specified in the opinion, under
the laws of the State of Delaware, with corporate power and corporate authority
to own its properties and conduct its business as described in the Registration
Statement and the Prospectus;
(ii) each of the Subsidiaries was incorporated, and is validly
existing and in good standing, as of the date of the certificate specified in
the opinion, under the laws of its respective jurisdiction of incorporation with
corporate power and corporate authority to own its respective properties and to
conduct its respective business as described in the Registration Statement and
the Prospectus, and, except for Gryphon Pharmaceuticals, Inc., of which the
Company owns of record 65% of the outstanding voting stock, all of the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and, assuming the receipt of the consideration therefor as provided
in resolutions of the Subsidiaries' Board of Directors authorizing the issuance
thereof, are validly issued, are fully paid and nonassessable, and are owned of
record by the Company;
(iii) the Company and each of its Subsidiaries are authorized
to transact business as a foreign corporation in the states set forth in such
opinion as of the respective dates of the certificates specified therein;
(iv) this Agreement has been duly authorized, executed and
delivered by the Company;
(v) the authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus.
All shares of capital stock of the Company shown as issued and outstanding under
said caption are duly authorized and, assuming the receipt of consideration
therefor as provided in the resolutions of the Company's Board of Directors
authorizing the issuance thereof, are validly issued, fully paid and
nonassessable;
(vi) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and, except
as disclosed in the Prospectus, free of any statutory preemptive right under the
Delaware General Corporation Law or, to such counsel's knowledge, any
contractual right to subscribe for any of the Shares;
11
<PAGE>
(vii) the Shares conform in all material respects as to legal
matters to the description thereof contained in the Prospectus under the caption
"Description of Capital Stock";
(viii) the form of certificate for the Shares complies with
the requirements of the Delaware General Corporation Law;
(ix) the Registration Statement and the Prospectus (except as to
the financial statements and notes thereto and the supporting schedules and
other financial and statistical data included therein or omitted therefrom, as
to which such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act;
(x) the Registration Statement has become effective under the
Act, the required filings of the Prospectus pursuant to Rule 424(b) promulgated
pursuant to the Securities Act have been made in the manner and within the time
period required by Rule 424(b) and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are threatened by the
Commission;
(xi) no approval, authorization, consent or order of or filing
with any Delaware court or governmental agency is required to be obtained or
made by the Company in connection with the execution, delivery and performance
as of the time of purchase by the Company of this Agreement;
(xii) the execution, delivery and performance of this
Agreement by the Company as of the date of purchase do not (a) violate the
charter or by-laws of the Company or any of its Subsidiaries, (b) breach or
constitute a default under any agreement or contract to which the Company or any
of its Subsidiaries is a party filed as an exhibit to the Registration
Statement, or (c) violate any applicable law, rule, regulation, order, judgment
or decree of any Delaware or Maryland court or governmental agency.
In addition to the foregoing opinions, such counsel shall state that during
the course of preparation of the Registration Statement, such counsel has
participated in conferences with officers and other representatives of the
Company, with representatives of the independent public accountants of the
Company and with the Underwriters and representatives of the Underwriters.
While such counsel has not undertaken to determine independently, and does not
assume any responsibility for, the accuracy, completeness or fairness of the
statements in the Registration Statement or the Prospectus, such counsel may
state that on the basis of these conferences and its activities as counsel to
the Company in connection with the Registration Statement, that no facts have
come to the attention of such counsel which cause them to believe that (i) the
Registration Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements
12
<PAGE>
therein not misleading, or that the Prospectus, as of its date and as of the
time of purchase and the additional time of purchase, as the case may be,
contained an untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, (ii) there are any
legal or governmental proceedings pending or threatened against the Company that
are required to be disclosed in the Registration Statement or the Prospectus,
other than those disclosed therein, or (iii) there are any contracts or
documents of a character required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or referred to therein or so filed; provided that in making
the foregoing statements (which shall not constitute an opinion), such counsel
is not expressing any views as to the financial statements and the notes thereto
and the supporting schedules and other financial and statistical information and
data included in or omitted from the Registration Statement or the Prospectus or
as to any patent matters relating to the Company which are addressed in an
opinion letter to the Underwriters of Carella, Byrne, Bain, Gilfillan, Cecchi,
Stewart & Olstein, P.C.
In rendering their opinion as aforesaid, counsel may limit their opinion to
the federal securities laws of the United States and regulations thereunder, the
General Corporation Law of the State of Delaware and the laws of the State of
Maryland (excluding blue sky laws).
(b) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Carella,
Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, P.C., patent counsel for the
Company, addressed to the Underwriters, and dated the time of purchase or the
additional time of purchase, as the case may be, with reproduced copies for each
of the other Underwriters and in form satisfactory to Manatt, Phelps & Phillips,
LLP, stating that:
(i) To such firm's knowledge, the statements in the Registration
Statement and Prospectus (A) under the caption "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Rights," (B) under the caption "Business --
Patents and Proprietary Rights" and (C) elsewhere in the Registration Statement
or Prospectus concerning the patents and patent applications either owned or
licensed by the Company, in all material respects are accurate statements or
summaries of the matters set forth therein;
(ii) Such counsel is not aware of any pending or threatened
action, suit, proceeding or claim by others that the Company is infringing or
otherwise violating any patents, trademarks, trade secrets, know-how or other
proprietary rights;
(iii) Such counsel is not aware of any pending or threatened
action, suit, proceeding, or claim by others challenging the validity or scope
of the patent applications or the patents held by or licensed to the Company;
13
<PAGE>
(vi) No facts have come to the attention of such counsel
which would form a basis for the belief that (a) the Registration Statement or
any amendment thereto at the time it became effective or (b) the Prospectus, as
amended or supplemented, contain any untrue statement of a material fact with
respect to the patent position or proprietary rights of the Company, or omit to
state any material fact relating to the patent position or proprietary rights of
the Company, which is necessary to make the statements contained therein not
misleading.
(c) You shall have received from Coopers & Lybrand L.L.P., letters
dated, respectively, the date of this Agreement and the time of purchase and
additional time of purchase, as the case may be, and addressed to the
Underwriters (with reproduced copies for each of the Underwriters) in the forms
heretofore approved by the Managing Underwriters.
(d) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, the favorable opinion of
Manatt, Phelps & Phillips, LLP, counsel for the Underwriters, dated the time of
purchase or the additional time of purchase, as the case may be, as to such
matters as you may request.
(e) No amendment or supplement to the Registration Statement or
Prospectus shall be filed prior to the time the Registration Statement becomes
effective to which you reasonably object in writing.
(f) The Registration Statement shall become effective, or if Rule
430A under the Act is used, the Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) under the Act, at or before 5:00 P.M., New
York City time, on the date of this Agreement, unless a later time (but not
later than 5:00 P.M., New York City time, on the second full business day after
the date of this Agreement) shall be agreed to by the Company and you in writing
or by telephone, confirmed in writing; provided, however, that the Company and
you and any group of Underwriters, including you, who have agreed hereunder to
purchase in the aggregate at least 50% of the Firm Shares may from time to time
agree on a later date.
(g) Prior to the time of purchase or the additional time of purchase,
as the case may be, (i) no stop order with respect to the effectiveness of the
Registration Statement shall have been issued under the Act or proceedings
initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement
and all amendments thereto, or modifications thereof, if any, shall not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and (iii) the Prospectus and all amendments or supplements thereto, or
modifications thereof, if any, shall not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading.
14
<PAGE>
(h) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, no material and
unfavorable change, financial or otherwise (other than as referred to in the
Registration Statement and Prospectus), in the business, condition or prospects
of the Company and its Subsidiaries taken as a whole shall occur or become
known.
(i) The Company will, at the time of purchase or additional time of
purchase, as the case may be, deliver to you a certificate of two of its
executive officers to the effect that the representations and warranties of the
Company as set forth in this Agreement and the conditions set forth in paragraph
(f) and paragraph (g) have been met and that they are true and correct as of
each such date.
(j) You shall have received signed letters, dated the date of this
Agreement, from each of the directors and officers of the Company and certain
stockholders of the Company designated by you to the effect that such persons
shall not sell, contract to sell, grant any option to sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock of the Company or
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock for a period of 180 days after the date of
the Prospectus without the prior written consent of SBC Warburg Dillon Read Inc.
(k) The Company shall have furnished to you such other documents and
certificates as to the accuracy and completeness of any statement in the
Registration Statement and the Prospectus as of the time of purchase and the
additional time of purchase, as the case may be, as you may reasonably request.
(l) The Company shall perform such of its obligations under this
Agreement as are to be performed by the terms hereof at or before the time of
purchase and at or before the additional time of purchase, as the case may be.
(m) The Shares shall have been approved for listing on the Exchange,
subject only to notice of issuance at or prior to the time of purchase.
(n) Between the time of execution of this Agreement and the time of
purchase or additional time of purchase, as the case may be, there shall not
have occurred any downgrading, nor shall any notice have been given of (i) any
intended or potential downgrading or (ii) any review or possible change that
does not indicate an improvement, in the rating accorded any securities of or
guaranteed by the Company or any subsidiary of the Company by any "nationally
recognized statistical rating organization", as that term is defined in Rule
436(g)(2) promulgated under the Act.
15
<PAGE>
7. Effective Date of Agreement; Termination. This Agreement shall become
effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of you or any group of Underwriters
(which may include you) which has agreed to purchase in the aggregate at least
50% of the Firm Shares, if, since the time of execution of this Agreement or the
respective dates as of which information is given in the Registration Statement
and Prospectus, (y) there has been any material adverse and unfavorable change,
financial or otherwise (other than as referred to in the Registration Statement
and Prospectus), in the business, condition or prospects of the Company and its
Subsidiaries taken as a whole, which would, in your judgment or in the judgment
of such group of Underwriters, make it impracticable to market the Shares, or
(z) there shall have occurred any downgrading, or any notice shall have been
given of (i) any intended or potential downgrading or (ii) any review or
possible change that does not indicate an improvement, in the rating accorded
any securities of or guaranteed by the Company or any subsidiary of the Company
by any "nationally recognized statistical rating organization", as that term is
defined in Rule 436(g)(2) promulgated under the Act or, if, at any time prior to
the time of purchase or, with respect to the purchase of any Additional Shares,
the additional time of purchase, as the case may be, trading in securities on
the New York Stock Exchange shall have been suspended or minimum prices shall
have been established on the New York Stock Exchange, or if a banking moratorium
shall have been declared either by the United States or New York State
authorities, or if the United States shall have declared war in accordance with
its constitutional processes or there shall have occurred any material outbreak
or escalation of hostilities or other national or international calamity or
crisis of such magnitude in its effect on the financial markets of the United
States as, in your judgment or in the judgment of such group of Underwriters, to
make it impracticable to market the Shares.
If you or any group of Underwriters elects to terminate this agreement as
provided in this Section 7, the Company and each other Underwriter shall be
notified promptly by letter or telegram.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply with any of the terms of this Agreement, the Company shall not
be under any obligation or liability under this Agreement (except to the extent
provided in Sections 4(k), 5 and 9 hereof), and the Underwriters shall be under
no obligation or liability to the Company under this Agreement (except to the
extent provided in Section 9 hereof) or to one another hereunder.
16
<PAGE>
8. Increase in Underwriters' Commitments. If any Underwriter shall
default in its obligation to take up and pay for the Firm Shares to be purchased
by it hereunder and if the number of Firm Shares which all Underwriters so
defaulting shall have agreed but failed to take up and pay for does not exceed
10% of the total number of Firm Shares, the non-defaulting Underwriters shall
take up and pay for (in addition to the aggregate principal amount of Firm
Shares they are obligated to purchase pursuant to Section 1 hereof) the number
of Firm Shares agreed to be purchased by all such defaulting Underwriters, as
hereinafter provided. Such Shares shall be taken up and paid for by such
non-defaulting Underwriter or Underwriters in such amount or amounts as you may
designate with the consent of each Underwriter so designated or, in the event no
such designation is made, such Shares shall be taken up and paid for by all
non-defaulting Underwriters pro rata in proportion to the aggregate number of
Firm Shares set opposite the names of such non-defaulting Underwriters in
Schedule A.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Firm Shares hereunder unless all of the Firm Shares are purchased
by the Underwriters (or by substituted Underwriters selected by you with the
approval of the Company or selected by the Company with your approval).
If a new Underwriter or Underwriters are substituted by the Underwriters or
by the Company for a defaulting Underwriter or Underwriters in accordance with
the foregoing provision, the Company or you shall have the right to postpone
the time of purchase for a period not exceeding five business days in order that
any necessary changes in the Registration Statement and Prospectus and other
documents may be effected.
The term Underwriter as used in this agreement shall refer to and include
any Underwriter substituted under this Section 8 with like effect as if such
substituted Underwriter had originally been named in Schedule A.
9. Indemnity by the Company and the Underwriters.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter, its directors and officers, and any person who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, from and against any loss, expense, liability or claim (including
the reasonable cost of investigation) which, jointly or severally, any such
Underwriter or any such person may incur under the Act, the Exchange Act or
otherwise insofar as such loss, expense, liability or claim arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus (the term Prospectus for the purpose of this Section 9 being deemed
to include any Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of or is based upon any
omission or alleged
17
<PAGE>
omission to state a material fact required to be stated in either such
Registration Statement or Prospectus or necessary to make the statements made
therein not misleading, except insofar as any such loss, expense, liability
or claim arises out of or is based upon any untrue statement or alleged
untrue statement of a material fact contained in and in conformity with
information furnished in writing by any Underwriter through you to the
Company expressly for use with reference to such Underwriter in such
Registration Statement or such Prospectus or arises out of or is based upon
any omission or alleged omission to state a material fact in connection with
such information required to be stated in either such Registration Statement
or Prospectus or necessary to make such information not misleading, provided,
however, that the indemnity agreement contained in this subsection (a) with
respect to any Preliminary Prospectus or amended Preliminary Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) from whom the person asserting any such loss,
expense, liability or claim purchased the Shares which is the subject thereof
if the Prospectus corrected any such alleged untrue statement or omission and
if such Underwriter failed to send or give a copy of the Prospectus to such
person at or prior to the written confirmation of the sale of such Shares to
such person.
If any action is brought against an Underwriter or any such person in
respect of which indemnity may be sought against the Company pursuant to the
foregoing paragraph, such Underwriter or such person shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment of counsel
reasonably satisfactory to such indemnified party and payment of all fees and
expenses, provided, however, that the omission to so notify the Company shall
not relieve the Company from any liability which they may have to any
Underwriter or any such person or otherwise. Such Underwriter or such person
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or of such person unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have employed counsel to have charge of the
defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to the Company (in which
case the Company shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by the Company and paid as incurred (it being
understood, however, that the Company shall not be liable for the expenses of
more than one separate counsel in any one action or series of related actions in
the same jurisdiction representing the indemnified parties who are parties to
such action). The Company shall not be liable for any settlement of any such
claim or action effected without its written consent but if settled with the
written consent of the Company, the Company agrees to indemnify and hold
harmless any Underwriter and any such person from and against any loss or
liability by reason of such settlement. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second sentence of this paragraph, then the
18
<PAGE>
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 60 business days after receipt by such indemnifying party
of the aforesaid request, (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement and (iii) such indemnified party shall have given the indemnifying
party at least 30 days' prior notice of its intention to settle. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(b) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, its directors and officers, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from and against any loss, expense, liability or claim (including
the reasonable cost of investigation) which, jointly or severally, the Company
or any such person may incur under the Act or otherwise, insofar as such loss,
expense, liability or claim arises out of or is based upon any untrue statement
or alleged untrue statement of a material fact contained in and in conformity
with information furnished in writing by or on behalf of such Underwriter
through you to the Company expressly for use with reference to such Underwriter
in the Registration Statement (or in the Registration Statement as amended by
any post-effective amendment thereof by the Company) or in a Prospectus, or
arises out of or is based upon any omission or alleged omission to state a
material fact in connection with such information required to be stated either
in such Registration Statement or Prospectus or necessary to make such
information not misleading.
If any action is brought against the Company or any such person in respect
of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify such
Underwriter in writing of the institution of such action and such Underwriter
shall assume the defense of such action, including the employment of counsel
reasonably satisfactory to such indemnified party and payment of all fees and
expenses, provided, however, that the omission to so notify such Underwriter
shall not relieve such Underwriter, from any liability which they may have to
the Company or any such person or otherwise. The Company or such person shall
have the right to employ its own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of the Company or such person
unless the employment of such counsel shall have been authorized in writing by
such Underwriter in connection with the defense of such action or such
Underwriter shall not have employed counsel to have charge of the defense of
such action or such indemnified party or parties shall have reasonably concluded
that there may be defenses available to it or them which are different from or
additional to those available to such Underwriter (in which case such
Underwriter shall not have the right to direct the defense of such action on
behalf of the
19
<PAGE>
indemnified party or parties, but such Underwriter may employ counsel and
participate in the defense thereof but the fees and expenses of such counsel
shall be at the expense of such Underwriter), in any of which events such fees
and expenses shall be borne by such Underwriter and paid as incurred (it being
understood, however, that such Underwriter shall not be liable for the expenses
of more than one separate counsel in any one action or series of related actions
in the same jurisdiction representing the indemnified parties who are parties to
such action). No Underwriter shall be liable for any settlement of any such
claim or action effected without the written consent of such Underwriter but if
settled with the written consent of such Underwriter, such Underwriter agrees to
indemnify and hold harmless the Company and any such person from and against any
loss or liability by reason of such settlement. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second sentence of this paragraph, then the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 60 business days after receipt by such indemnifying party
of the aforesaid request, (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement and (iii) such indemnified party shall have given the indemnifying
party at least 30 days' prior notice of its intention to settle. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(c) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 9 in respect of any losses, expenses, liabilities or claims referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, expenses, liabilities or claims
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other hand
from the offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and of the Underwriters
on the other in connection with the statements or omissions which resulted in
such losses, expenses, liabilities or claims, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault of the Company on the one hand and of the
Underwriters on the other shall be determined by reference to, among other
things, whether the
20
<PAGE>
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, expenses, liabilities and
claims referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any claim or action.
(d) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in subsection (c) above. Notwithstanding
the provisions of this Section 9, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by such Underwriter and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue statement or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriter's obligations to contribute
pursuant to this Section 9 are several in proportion to their respective
underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this
Section 9 and the covenants, warranties and representations of the Company
contained in this Agreement shall remain in full force and effect regardless of
any investigation made by or on behalf of any Underwriter, its directors or
officers or any person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of
the Company, its directors and officers or any person who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and shall survive any termination of this Agreement or the issuance and delivery
of the Shares. The Company and each Underwriter agree promptly to notify the
others of the commencement of any litigation or proceeding against it and, in
the case of the Company, against any of the Company's officers and directors in
connection with the issuance and sale of the Shares, or in connection with the
Registration Statement or Prospectus.
10. Notices. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
SBC Warburg Dillon Read Inc., 535 Madison Avenue, New York, N.Y. 10022,
Attention: Syndicate Department and, if to the Company, shall be sufficient in
all respects if delivered or sent to the Company at the offices of the Company
at 2001 Aliceanna Street, Baltimore, Maryland, 21231, Attention: Chief Financial
Officer.
21
<PAGE>
11. Construction. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York. The Section headings in
this Agreement have been inserted as a matter of convenience of reference and
are not a part of this Agreement.
12. Submission to Jurisdiction. The Company irrevocably submits to the
nonexclusive jurisdiction of any State or Federal court sitting in New York over
any suit, action or proceeding arising out of or relating to this agreement.
The Company irrevocably waives, to the fullest extent permitted by law, any
objection it may now or thereafter have to the laying of venue of any such court
and any claim that any such suit, action or proceeding brought in such a court
has been brought in an inconvenient forum. The Company agrees that a final
judgment in any such suit, action or proceeding brought in any such court shall
be conclusive and binding upon the Company and may be enforced in any other
courts to the jurisdiction of which the Company is or may be subject, by suit
upon such judgment.
13. Parties at Interest. The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters and the Company and the
controlling persons, directors and officers referred to in Section 9 hereof, and
their respective successors, assigns, executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
14. Counterparts. This agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.
15. Miscellaneous. SBC Warburg Dillon Read Inc., an indirect, wholly
owned subsidiary of Swiss Bank Corporation, is not a bank and is separate from
any affiliated bank, including any U.S. branch or agency of Swiss Bank
Corporation. Because SBC Warburg Dillon Read Inc. is a separately incorporated
entity, it is solely responsible for its own contractual obligations and
commitments, including obligations with respect to sales and purchases of
securities. Securities sold, offered or recommended by SBC Warburg Dillon Read
Inc. are not deposits, are not insured by the Federal Deposit Insurance
Corporation, are not guaranteed by a branch or agency, and are not otherwise an
obligation or responsibility of a branch or agency.
A lending affiliate of SBC Warburg Dillon Read Inc. may have lending
relationships with issuers of securities underwritten or privately placed by SBC
Warburg Dillon Read Inc. To the extent required under the securities laws,
prospectuses and other disclosure documents for securities underwritten or
privately placed by SBC Warburg Dillon Read Inc. will disclose the existence of
any such lending relationships and whether the proceeds of the issue will be
used to repay debts owed to affiliates of SBC Warburg Dillon Read Inc.
22
<PAGE>
Without your prior written approval, the U.S. branches and agencies of
Swiss Bank Corporation will not share with SBC Warburg Dillon Read Inc. any
non-public information concerning you, and SBC Warburg Dillon Read Inc. will not
share any non-public information received from you with any of such U.S.
branches and agencies of Swiss Bank Corporation.
If the foregoing correctly sets forth the understanding among the Company
and the Underwriters, please so indicate in the space provided below for the
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement among the Company and the Underwriters, severally.
Very truly yours,
OSIRIS THERAPEUTICS, INC.
By: --------------------------------------
James S. Burns
President and Chief Executive Officer
Accepted and agreed to as of the
date first above written, on
behalf of themselves and the other
several Underwriters named in
Schedule A hereto:
SBC WARBURG DILLON READ INC.
HAMBRECHT & QUIST LLC
By: SBC WARBURG DILLON READ INC.
By:
---------------------------
Name:
Title:
23
<PAGE>
SCHEDULE A
SCHEDULE A
Number of
Underwriter Firm Shares
- -------------------------- ---------------
SBC WARBURG DILLON READ INC..................
HAMBRECHT & QUIST LLC........................
[NAMES OF OTHER UNDERWRITERS]................
Total...............................
<PAGE>
Exhibit 3.1.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
OSIRIS THERAPEUTICS, INC.
OSIRIS THERAPEUTICS, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware
(the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a
meeting held on July 3, 1997, duly adopted resolutions proposing and
declaring advisable amendments to the Restated Certificate of Incorporation
of the Corporation and directing that such amendments be submitted to the
stockholders of the Corporation for their consideration and approval. The
resolutions setting forth the proposed amendments are as follows:
RESOLVED, that it is advisable and in the best interests of the
Corporation to amend clause (A) of Section 4(b)(i) of each of Subdivisions
A-1 and A-2 of Section 2 of Article FOURTH of the Restated Certificate of
Incorporation of the Corporation (the "Restated Certificate") to read in
its entirety as follows:
(A) the moment immediately prior to the Corporation's
consummation of an underwritten public offering of Common
Shares;
FURTHER RESOLVED, that it is advisable and in the best interests
of the Corporation to amend clause (i) of Section 4(b)(i) of Subdivision
A-3 of Section 2 of Article FOURTH of the Restated Certificate to read in
its entirety as follows:
(i) the moment immediately prior to the Corporation's
consummation of an underwritten public offering of
Common Stock;
<PAGE>
FURTHER RESOLVED, that it is advisable and in the best interests
of the Corporation to amend Section 4(a) of Subdivision A-1 of Section 2
of Article FOURTH of the Restated Certificate to read in its entirety as
follows:
(a) Optional Conversion. Subject to the terms and
conditions of this Section 4, the holder of any Series A
Preferred Shares shall have the right, at its option at any time
and from time to time, to convert all or any portion of such
shares into such number of fully paid and nonassessable Common
Shares as is obtained by multiplying the number of Series A
Preferred Shares to be converted by $3.00 (after giving effect to
the 1-for-4 reverse stock split of the Series A Preferred Shares
effected by the Corporation on or about November 1, 1994) and
dividing the result by the conversion price of $3.00 (after
giving effect to the 1-for-4 reverse stock split of the Common
Shares effected by the Corporation on or about November 1, 1994)
per share or, in the event any adjustment of such conversion
price has taken place pursuant to the provisions of this Section
4, by the conversion price in effect on the date such Series A
Preferred Shares are surrendered for conversion (such conversion
price, or such conversion price as last adjusted, being referred
to herein as the "Conversion Price"); provided, however, that in
the event of the liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares shall only
be entitled to convert their shares in accordance with the terms
of this Section 4 at any time prior to the earlier of the tenth
day following the date on which such liquidation, distribution or
winding up was approved by the stockholders of the Corporation
and the date which is three days prior to the distribution of the
proceeds from such liquidation, dissolution or winding up of the
Corporation.
FURTHER RESOLVED, that it is advisable and in the best interests
of the Corporation to amend Section 4(a) of Subdivision A-2 of Section 2 of
Article FOURTH of the Restated Certificate to read in its entirety as
follows:
(a) Optional Conversion. Subject to the terms and
conditions of this Section 4, the holder of any Series B
Preferred Shares shall have the right, at its option at any
time and from time to time, to convert all or any portion of
such shares into such number of fully paid and nonassessable
Common Shares as is obtained by multiplying
2
<PAGE>
the number of Series B Preferred Shares to be converted by
$3.00 (after giving effect to the 1-for-4 reverse stock
split of the Series B Preferred Shares effected by the
Corporation on or about November 1, 1994) and dividing the
result by the conversion price of $3.00 (after giving effect
to the 1-for-4 reverse stock split of the Common Shares
effected by the Corporation on or about November 1, 1994)
per share or, in the event any adjustment of such conversion
price has taken place pursuant to the provisions of this
Section 4, by the conversion price in effect on the date
such Series B Preferred Shares are surrendered for
conversion (such conversion price, or such conversion price
as last adjusted, being referred to herein as the
"Conversion Price"); provided, however, that in the event of
the liquidation, dissolution or winding up of the
Corporation, the holders of Series B Preferred Shares shall
only be entitled to convert their shares in accordance with
the terms of this Section 4 at any time prior to the earlier
of the tenth day following the date on which such
liquidation, distribution or winding up was approved by the
stockholders of the Corporation and the date which is three
days prior to the distribution of the proceeds from such
liquidation, dissolution or winding up of the Corporation.
FURTHER RESOLVED, that it is advisable and in the best interests
of the Corporation to amend the last three sentences of Section 4(a) of
Subdivision A-3 of Section 2 of Article FOURTH of the Restated Certificate
to read in their entirety as follows:
The Series C Conversion Price and the Series C1 Conversion Price
shall each be $3.40 (after giving effect to the 1-for-4 reverse
stock split of the Common Stock effected by the Corporation on or
about November 1, 1994). The Conversion Value per share of
Series C Preferred Stock and Series C1 Preferred Stock shall be
$3.40 per share (after giving effect to the 1-for-4 reverse stock
split of the Series C Preferred Stock and the Series C1 Preferred
Stock effected by the Corporation on or about November 1, 1994).
The Series C Conversion Price and Series C1 Conversion Price
shall be subject to further adjustment as set forth below.
FURTHER RESOLVED, that it is advisable and in the best interests
of the Corporation to amend the Restated Certificate so as to delete
entirely Section 6 of Subdivision A-3 of Section 2 of Article FOURTH
thereof.
3
<PAGE>
FURTHER RESOLVED, that it is advisable and in the best interests
of the Corporation to amend the Restated Certificate so as to add the
following paragraph after the second paragraph of Section 2 of Article
FOURTH thereof:
Unless otherwise provided in the certificate of designations
relating to a series of Preferred Stock, shares of a series of
Preferred Stock that are convertible into shares of any other
class or series of shares of the Corporation shall, upon their
conversion, be deemed authorized but unissued and undesignated
shares of Preferred Stock.
SECOND: That the stockholders of the Corporation, at a meeting held
on August 8, 1997, duly approved the foregoing amendments.
THIRD: That the foregoing amendments were duly adopted in accordance
with the applicable provisions of Section 242 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President and attested by its Secretary this 2nd
day of September, 1997.
OSIRIS THERAPEUTICS, INC
By: _____________________
James S. Burns, President and
Chief Executive Officer
ATTEST:
____________________________
Michael J. Demchuk, Jr.,
Secretary
4
<PAGE>
Exhibit 3.1.2
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
OSIRIS THERAPEUTICS, INC.
OSIRIS THERAPEUTICS, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a
meeting duly called and held on October 22, 1997, in accordance with the
Bylaws of the Corporation, duly adopted resolutions proposing and declaring
advisable the amendment set forth below to the Corporation's Restated
Certificate of Incorporation, as amended, and directing that the amendment be
submitted to the stockholders of the Corporation for their consideration and
approval.
SECOND: That Article FOURTH of the Restated Certificate of
Incorporation, as amended, of the Corporation is further amended by adding
the following new Subdivision C to such Article FOURTH:
SUBDIVISION C
1-FOR-1.7 REVERSE STOCK SPLIT
Upon the filing in the Office of the Secretary of State of
Delaware of the Certificate of Amendment to Restated Certificate
of Incorporation, as amended, of the Corporation to reflect the
addition of this Subdivision C to Article FOURTH of the
Corporation's Restated Certificate of Incorporation, as amended
(the "Effective Time"), the shares of common stock, par value
$.001 per share, of the Corporation, issued and outstanding
immediately before the Effective Time (the "Old Common Stock"),
shall immediately following the Effective Time be changed,
reclassified and changed into shares of common stock, par value
$.001 per share, of the Corporation (the "New Common Stock") on
the basis of 0.588235 of a share of New Common Stock for each
share of Old Common Stock (such change, reclassification and
combination being referred to herein as the "Reverse Stock
Split"). Immediately following the Effective Time, each holder
of record of a certificate that immediately prior to the
Effective Time represented outstanding shares of Old Common Stock
(the "Old Certificate") shall be entitled to receive, as soon as
reasonably practicable following the surrender by such holder of
such Old Certificate, a new certificate representing that number
of whole shares of New Common Stock into which the shares of Old
Common
<PAGE>
Stock so surrendered have been changed, reclassified and combined as
of the Effective Time pursuant to the Reverse Stock Split (one share
of Old Common Stock changed, reclassified and combined into 0.588235
of a share of New Common Stock), and until the Old Certificates are
surrendered, the Old Certificates shall be deemed, for all corporate
purposes, to evidence ownership of that number of whole shares of New
Common Stock into which the shares of Old Common Stock have been
changed, reclassified and combined pursuant to the Reverse Stock
Split. The Corporation shall not issue to any holder of Old Common
Stock fractions of shares or scrip by reason of the Reverse Stock
Split but shall pay in cash in lieu thereof an amount equal to $12.00
(which the Board of Directors has determined to be the fair value per
share of Old Common Stock) multiplied by the fractional interest to
which such holder would otherwise be entitled. The Board of Directors
is further empowered to take further necessary action, not
inconsistent with this paragraph, to fully effectuate the Reverse
Stock Split
THIRD: That the foregoing amendment to the Corporation's
Restated Certificate of Incorporation, as amended, was duly approved by a
majority of the outstanding stock of the Corporation entitled to vote
thereon, and by a majority of the outstanding stock of the Corporation of
each class entitled to vote thereon as a class, in each case acting by
written consent in accordance with Section 228 of the Delaware General
Corporation Law, and written notice of the approval and adoption of the
amendment without a meeting will be given to those stockholders who did not
consent in writing as provided in Section 228(d) of the Delaware General
Corporation Law.
FOURTH: That the foregoing amendment was duly adopted in
accordance with the applicable provisions of Section 242 of the Delaware
General Corporation Law.
2
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Amendment to be signed by its President and attested by its
Secretary this 18th day of November, 1997.
OSIRIS THERAPEUTICS, INC
By: _____________________________
James S. Burns, President and
Chief Executive Officer
ATTEST:
Michael J. Demchuk, Jr.,
Secretary
3
<PAGE>
Exhibit 4.1
NUMBER SHARES
OSIRIS
OSIRIS THERAPEUTICS, INC. SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE CUSIP 688272 10 3
THIS CERTIFIES THAT
is the Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001 PER
SHARE, OF
OSIRIS THERAPEUTICS, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
Dated:
<TABLE>
<S> <C> <C>
/s/ Michael J. Demchuk Jr. OSIRIS THERAPEUTICS, INC /s/ James S. Burns
CORPORATE SEAL
SECRETARY 1992 DELAWARE PRESIDENT
</TABLE>
<TABLE>
<S> <C>
__________________________________________ _______________________________________________
AMERICAN BANKNOTE COMPANY PRODUCTION COORDINATOR-LISA MARTIN 215-830-2155
680 BLAIR MILL ROAD PROOF OF NOVEMBER 24, 1997
HORSHAM, PA 19044 OSIRIS THERAPEUTICS, INC
215-657-3480 H53813face
__________________________________________ _______________________________________________
SALES PERSON- R JOHNS 212-557-9100 Opr. larry/JW/JW Rev. 1
__________________________________________ _______________________________________________
/net/banknote/Home46/Osiris53813 /net/banknote/home46/P
__________________________________________ _______________________________________________
</TABLE>
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK N.Y.) TRANSFER AGENT
AND REGISTRAR
By
AUTHORIZATION
<PAGE>
The Corporation has the authority to issue shares of more than one class,
including shares of serial preferred stock. The Corporation will furnish
without charge to each stockholder who so requests a statement of the
designations, powers, preferences and relative participating, optional and
other special rights of each class of stock or series thereof of the
Corporation and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or the
Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT _________ Custodian _________
TEN ENT - as tenants by the entities (Cust) (Name)
JT TEN - as joint tenants with rights of under Uniform Gifts to Minors
survivorship and not as tenants Act ______________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________ shares
of the capital stock represented by the within Certificate, and to hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney,
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________
_________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ANY CHANGE OR ENLARGEMENT OR
ANY CHANGE WHATEVER
Signature(s) Guaranteed:
________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKHOLDERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNION WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15.
<TABLE>
<S> <C>
__________________________________________ _______________________________________________
AMERICAN BANKNOTE COMPANY PRODUCTION COORDINATOR-LISA MARTIN 215-830-2155
680 BLAIR MILL ROAD PROOF OF NOVEMBER 24, 1997
HORSHAM, PA 19044 OSIRIS THERAPEUTICS, INC
215-657-3480 H53813bk
__________________________________________ _______________________________________________
SALES PERSON- R JOHNS 212-557-9100 Opr. larry/JW/JW Rev. 1
__________________________________________ _______________________________________________
/net/banknote/Home46/0%/Osiris Ther53813/bk /net/banknote/home46/O
__________________________________________ _______________________________________________
</TABLE>
<PAGE>
Exhibit 5.1
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington D.C. 20004
(202) 637-5600
Fax: (202) 637-5910
November 25, 1997
Board of Directors
Osiris Therapeutics, Inc.
2001 Aliceanna Street
Baltimore, Maryland 21231
Gentlemen:
This firm has acted as counsel to Osiris Therapeutics, Inc. (the
"Company"), a Delaware corporation, in connection with its registration,
pursuant to a registration statement on Form S-1, as amended (the "Registration
Statement"), of up to 2,875,000 shares (the "Shares") of common stock, par value
$.001 per share, of the Company. This letter is furnished to you pursuant to
the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section
229.601(b)(5), in connection with such registration.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Restated Certificate of Incorporation of the Company, as amended
(the "Charter"), as certified by the Secretary of the Company on the
date hereof as then being complete, accurate and in effect.
3. The By-laws of the Company, as amended, as certified by the Secretary
of the Company on the date hereof as then being complete, accurate and
in effect.
4. The proposed form of Underwriting Agreement among the Company and the
several Underwriters to be named therein, for whom SBC Warburg Dillon
Read Inc. and Hambrecht & Quist LLC will act as representatives, filed
as Exhibit 1.1 to the Registration Statement (the "Underwriting
Agreement").
<PAGE>
5. Resolutions of the Board of Directors of the Company adopted on July
11, 1997, by unanimous written consent as certified by the Secretary
of the Company on the date hereof as then being complete, accurate and
in effect relating to, among other things, approval of the
Registration Statement, execution of the Underwriting Agreement and
the issuance and sale of the Shares and the arrangements in connection
therewith.
In our examination of the aforesaid certificates, records, and documents,
we have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity, accuracy and completeness of all documents submitted
to us, and the authenticity, accuracy and completeness and conformity to the
authentic original documents of all documents submitted to us as copies
(including telecopies). We also have assumed the accuracy, completeness and
authenticity of the foregoing certifications (of public officials, governmental
agencies and departments, and/or corporate officers) and statements of fact, on
which we are relying, and have made no independent investigations thereof. This
opinion letter is given, and all statements herein are made, in the context of
the foregoing.
This opinion letter is based as to matters of law solely on the General
Corporation Law of the State of Delaware. We express no opinion herein as to
any other laws, statutes, regulations, or ordinances.
Based upon, subject to, and limited by the foregoing, we are of the opinion
that following (i) due execution and delivery by the Company of the Underwriting
Agreement, (ii) effectiveness of the Registration Statement, (iii) issuance of
the Shares in the manner contemplated by the Registration Statement and pursuant
to the terms of the Underwriting Agreement, (iv) receipt by the Company of the
consideration for the Shares specified in the resolutions of the Board of
Directors, and (v) final action of the Company's Board of Directors or the
Pricing Committee thereof approving the price of the Shares, the Shares will be
validly issued, fully paid and non-assessable under the General Corporation Law
of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of Amendment No. 4 to
the Registration Statement on the date of this letter, and should not be quoted
in whole or in part or otherwise be referred to, nor be filed with or furnished
to any governmental agency or other person or entity, without the prior written
consent of this firm.
<PAGE>
We hereby consent to the filing of this opinion letter as Exhibit 5.1 to
the Registration Statement. In giving this consent, we do not thereby admit
that we are an "expert" within the meaning of the Securities Act of 1933, as
amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
----------------------
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 10.27
OSIRIS THERAPEUTICS, INC.
AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN
<PAGE>
OSIRIS THERAPEUTICS, INC.
AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN
Table of Contents
PAGE
-------
1. Purpose................................................. 1
2. Definitions............................................. 1
3. Shares Available under the Plan......................... 2
4. Option Rights........................................... 3
5. Restricted Stock........................................ 4
6. Transferability......................................... 6
7. Adjustments............................................. 6
8. Fractional Shares....................................... 7
9. Withholding Taxes....................................... 7
10. Participation by Employees of or Consultants
to Less-Than-80-Percent Subsidiary...................... 7
11. Certain Terminations of Employment or Consulting
Services, Hardship and Approved Leaves of Absence...... 8
12. Foreign Participants.................................... 8
13. Administration of the Plan.............................. 8
14. Amendments and Other Matters............................ 9
15. Termination of the Plan................................. 10
<PAGE>
OSIRIS THERAPEUTICS, INC.
AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN
l. Purpose. The purpose of this Plan is to attract, compensate and retain
directors and officers and other key employees of and consultants to Osiris
Therapeutics, Inc., a Delaware corporation (the "Corporation"), and its
Subsidiaries and to provide such persons with incentives and rewards for
superior performance.
2. Definitions. As used in this Plan,
"Board" means the Board of Directors of the Corporation
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the committee described in Section 13(a) of this Plan.
"Common Stock" means (i) shares of the common stock, par value $.00l per
share, of the Corporation and (ii) any security into which shares of Common
Stock may be converted by reason of any transaction or event of the type
referred to in Section 7 of this Plan.
"Date of Grant" means the date specified by the Committee on which a grant
of Option Rights shall become effective, which shall not be earlier than the
date on which the Committee takes action with respect thereto.
"Incentive Stock Option" means an Option Right that is intended to qualify
as an "incentive stock option" under Section 422 of the Code or any successor
provision.
"IPO" means the initial public offering of Common Stock pursuant to a
registration statement that shall have become effective under the Securities
Act of 1933.
"Less-Than-80-Percent Subsidiary" means a Subsidiary with respect to which
the Corporation directly or indirectly owns or controls less than 80 percent
of the total combined voting or other decision-making power.
"Management Objectives" means the achievement or performance objectives
that may be established by the Board pursuant to this Plan for Participants
who have received grants of Restricted Stock.
<PAGE>
"Market Value per Share" means the fair market value of a share of Common
Stock as determined by the Board from time to time.
"Nonqualified Option" means an Option Right that is not intended to qualify
as a Tax-Qualified Option.
"Optionee" means the person so designated in an agreement evidencing an
outstanding Option Right.
"Option Price" means the purchase price payable upon the exercise of an
Option Right.
"Option Right" means the right to purchase shares of Common Stock from the
Corporation upon the exercise of a Nonqualified Option or a Tax-Qualified
Option granted pursuant to Section 4 of this Plan.
"Participant" means a person who is selected by the Board to receive
benefits under this Plan and (i) is at that time an officer, including
without limitation an officer who may also be a member of the Board, or other
key employee of or a consultant to or a director of the Corporation or any
Subsidiary or (ii) has agreed to commence serving in any such capacity.
"Restricted Stock" means Common Stock granted or sold pursuant to Section 5
of this Plan as to which neither the substantial risk of forfeiture nor the
restrictions on transfer referred to in Section 5 hereof have expired.
"Rule l6b-3" means Rule 16b-3 under the Securities Exchange Act of 1934 or
any successor rule to the same effect.
"Subsidiary" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Corporation has a
direct or indirect ownership or other equity interest; provided, however, for
purposes of determining whether any person may be a Participant for purposes
of any grant of Incentive Stock Options, "Subsidiary" means any corporation
in which the Corporation owns or controls directly or indirectly more than 50
percent of the total combined voting power represented by all classes of
stock issued by such corporation at the time of the grant.
"Tax-Qualified Option" means an Option Right that is intended to qualify
under particular provisions of the Code, including without limitation an
Incentive Stock Option.
3. Shares Available under the Plan. Subject to adjustment as provided in
Section 7 of this Plan, (i) the number shares of Common Stock issued or
transferred and covered by outstanding awards granted under this Plan shall
not in the aggregate exceed 2,000,000 shares, which may be shares of original
issuance or shares held in treasury or a combination thereof, and (ii) the
number of shares that may be subject to Option Rights granted to any
individual in any calendar year shall not in the aggregate exceed 200,000. For
the purposes of this Section 3:
<PAGE>
(a) Shares of Common Stock covered by an Option Right granted under
this Plan shall be deemed to have been issued or transferred, and shall
cease to be available for issuance or transfer in respect of any other
award granted hereunder, at the earlier of the time when they are
actually issued or transferred or the time when dividend equivalents are
paid thereon.
(b) Shares of Common Stock covered by a Restricted Stock award
granted under this Plan shall be deemed to have been issued or
transferred, and shall cease to be available for issuance or transfer in
respect of any other award granted hereunder, at the earlier of the time
when they cease to be subject to a substantial risk of forfeiture or the
time when dividends are paid there on.
4. Option Rights. The Board may from time to time authorize grants to
Participants of options to purchase shares of Common Stock upon such terms
and conditions as the Board may determine in accordance with the following
provisions:
(a) Each grant shall specify the number of shares of Common Stock to
which it pertains.
(b) Each grant shall specify an Option Price per share of Common
Stock, which may be less than, equal to or greater than the Market Value
per Share on the Date of Grant, except that the Option Price per Common
Share of an Incentive Stock Option shall be equal to or greater than the
Market Value per Share on the Date of Grant.
(c) Each grant shall specify the form of consideration to be paid in
satisfaction of the Option Price and the manner of payment of such
consideration, which may include (i) cash in the form of currency or
check or other cash equivalent acceptable to the Corporation, (ii)
nonforfeitable, nonrestricted shares of Common Stock, which are already
owned by the Optionee and have a value at the time of exercise that is
equal to the Option Price, (iii) any other legal consideration that the
Board may deem appropriate, including without limitation any form of
consideration authorized under Section 4(d) below, on such basis as the
Board may determine in accordance with this Plan and (iv) any
combination of the foregoing.
(d) On or after the Date of Grant of any Nonqualified Option, the
Board may determine that payment of the Option Price may also be made in
whole or in part in the form of shares of Restricted Stock or other
shares of Common Stock that are subject to risk of forfeiture or
restrictions on transfer. Unless otherwise determined by the Board on
or after the Date of Grant, whenever any Option Price is paid in whole
or in part by means of any of the forms of consideration specified in
this Section 4(d), the shares of Common Stock received by the Optionee
upon the exercise of
<PAGE>
the Nonqualified Option shall be subject to the same risks of forfeiture
or restrictions on transfer as those that applied to the consideration
surrendered by the Optionee; provided, however, that such risks of
forfeiture and restrictions on transfer shall apply only to the same
number of shares of Common Stock received by the Optionee as applied to
the forfeitable shares of Common Stock or Restricted Stock surrendered
by the Optionee.
(e) Any grant may provide for deferred payment of the Option Price
from the proceeds of sale through a broker of some or all of the shares
of Common Stock to which the exercise relates.
(f) Successive grants may be made to the same Participant regardless
of whether any Option Rights previously granted to the Participant
remain unexercised.
(g) Each grant shall specify the period or periods of continuous
employment, or continuous engagement of the consulting services, of the
Optionee by the Corporation or any Subsidiary that are necessary before
the Option Rights or installments thereof shall become exercisable, and
any grant may provide for the earlier exercise of the Option Rights in
the event of a change in control of the Corporation or other similar
transaction or event.
(h) Option Rights granted pursuant to this Section 4 may be
Nonqualified Options or Tax-Qualified Options or combinations thereof.
(i) On or after the Date of Grant of any Nonqualified Option, the
Board may provide for the payment to the Optionee of dividend
equivalents thereon in cash or shares of Common Stock on a current,
deferred or contingent basis, or the Board may provide that any dividend
equivalents shall be credited against the Option Price.
(j) No Option Right granted pursuant to this Section 4 may be
exercised more than 10 years from the Date of Grant.
(k) Each grant shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and
delivered to and accepted by the Optionee and shall contain such terms
and provisions as the Board may determine consistent with this Plan.
5. Restricted Stock. The Board may also authorize grants or sales to
Participants of shares of Restricted Stock upon such terms and conditions as
the Board may determine in accordance with the following provisions:
(a) Each grant or sale shall constitute an immediate transfer of the
ownership of shares of Common Stock to the Participant in consideration
of the performance of services,
<PAGE>
entitling such Participant to dividend, voting and other ownership
rights, subject to the substantial risk of forfeiture and restrictions
on transfer hereinafter referred to.
(b) Each grant or sale may be made without additional consideration
from the Participant or in consideration of a payment by the Participant
that is less than the Market Value per Share on the Date of Grant.
(c) Each grant or sale shall provide that the shares of Restricted
Stock covered thereby shall be subject to a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code for a period to
be determined by the Committee on the Date of Grant, and any grant or
sale may provide for the earlier termination of such period in the event
of a change in control of the Corporation or other similar transaction
or event.
(d) Each grant or sale shall provide that, during the period for
which such substantial risk of forfeiture is to continue, the
transferability of the shares of Restricted Stock shall be prohibited
or restricted in the manner and to the extent prescribed by the Board on
the Date of Grant. Such restrictions may include without limitation
rights of repurchase or first refusal in the Corporation or provisions
subjecting the shares of Restricted Stock to a continuing substantial
risk of forfeiture in the hands of any transferee.
(e) Any grant or sale may require that any or all dividends or other
distributions paid on the shares of Restricted Stock during the period
of such restrictions be automatically sequestered and reinvested on an
immediate or deferred basis in additional shares of Common Stock, which
may be subject to the same restrictions as the underlying award or such
other restrictions as the Committee may determine.
(f) Each grant may specify one or more Management Objectives that
are to be achieved by the Participant, which may be described in terms
of Corporation-wide objectives or objectives that are related to the
performance of the individual Participant or the Subsidiary, division,
department or function within the Corporation or Subsidiary in which the
Participant is employed or with respect to which the Participant
provides consulting services, and to the extent that any grant so
specifies one or more Management Objectives:
(i) it shall also specify a minimum level of acceptable
achievement, below which all of the shares of Restricted Stock
covered by the award shall be forfeited, and shall set forth a
formula for determining the number of shares of Restricted Stock to
<PAGE>
be retained by the Participant if performance is at or above the
minimum level of acceptable achievement but falls short of full
achievement of the specified Management Objectives; and
(ii) the Board may adjust the specified Management Objectives
and the related minimum level of acceptable achievement if, in the
sole judgment of the Committee, events or transactions have occurred
after the Date of Grant that are unrelated to the performance of the
Participant and result in distortion of the specified Management
Objectives or the related minimum level of acceptable achievement.
(g) Each grant or sale shall be evidenced by an agreement, which
shall be executed on behalf of the Corporation by any officer thereof
and delivered to and accepted by the Participant and shall contain such
terms and provisions as the Board may determine consistent with this
Plan. Unless otherwise directed by the Board, all certificates
representing shares of Restricted Stock, together with a stock power
that shall be endorsed in blank by the Participant with respect to the
shares of Restricted Stock, shall be held in custody by the Corporation
until all restrictions thereon lapse.
6. Transferability. (a) No Option Right or other "derivative security"
(as that term is used in Rule 16b-3) granted under this Plan may be
transferred by a Participant except by will or the laws of descent and
distribution. Option Rights may not be exercised during a Participant's
lifetime except by the Participant or, in the event of the Participant's legal
incapacity, by his guardian or legal representative acting in a fiduciary
capacity on behalf of the Participant under state law and court supervision.
(b) Any grant of Option Rights made under this Plan may provide that all or
any part of the shares of Common Stock that are to be issued or transferred by
the Corporation upon the exercise thereof shall be subject to further
restrictions upon transfer.
7. Adjustments. The Board may make or provide for such adjustments in the
number of shares of Common Stock covered by outstanding Option Rights, the
Option Prices per share of Common Stock applicable to any such Option Rights,
and the kind of shares (including shares of another issuer) covered thereby,
as the Board may in good faith determine to be equitably required in order to
prevent dilution or expansion of the rights of Participants that otherwise
would result from (i) any stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the Corporation
or (ii) any merger, consolidation, spin-off, spin-out, split-off, split-up,
reorganization, partial or complete liquidation or other distribution of
assets, issuance of warrants or other
<PAGE>
rights to purchase securities or (iii) any other corporate transaction or
event having an effect similar to any of the foregoing. In the event of any
such transaction or event, the Board may provide in substitution for any or
all outstanding awards under this Plan such alternative consideration as it
may in good faith determine to be equitable under the circumstances and may
require in connection therewith the surrender of all awards so replaced.
Moreover, the Board may on or after the Date of Grant provide in the
agreement evidencing any award under this Plan that the holder of the award
may elect to receive an equivalent award in respect of securities of the
surviving entity of, any merger, consolidation or other transaction or event
having a similar effect, or the Board may provide that the holder will
automatically be entitled to receive such an equivalent award. The Board may
also make or provide for such adjustments in the maximum number of shares of
Common Stock specified in Section 3 of this Plan, the maximum number of
shares of Common Stock specified in Section 4(a) of this Plan, as the Board
may in good faith determine to be appropriate in order to reflect any
transaction or event described in this Section 7.
8. Fractional Shares. The Corporation shall not be required to issue any
fractional shares of Common Stock pursuant to this Plan. The Board may
provide for the elimination of fractions or for the settlement thereof in
cash.
9. withholding Taxes. To the extent that the Corporation is required to
withhold federal, state, local or foreign taxes in connection with any
payment made or benefit realized by a Participant or other person under this
Plan, and the amounts available to the Corporation for the withholding are
insufficient, it shall be a condition to the receipt of any such payment or
the realization of any such benefit that the Participant or such other person
make arrangements satisfactory to the Corporation for payment of the balance
of any taxes required to be withheld. At the discretion of the Board, any
such arrangements may include relinquishment of a portion of any such payment
or benefit. The Corporation and any Participant or such other person may
also make similar arrangements with respect to the payment of any taxes with
respect to which withholding is not required.
10. Participation by Employees of or Consultants to a Less-Than-80-Percent
Subsidiary. As a condition to the effectiveness of any grant or award to be
made hereunder to a Participant who is an employee of or a consultant to a
Less-Than-80-Percent Subsidiary, regardless of whether the Participant is
also employed by or engaged as a consultant to the Corporation or another
Subsidiary, the Board may require the Less-Than-80-Percent Subsidiary to
agree to transfer to the Participant (as, if and when provided for under this
Plan and any applicable agreement entered into between the Participant and
the Less-Than-80-Percent Subsidiary pursuant to this Plan) the shares of
Common Stock that would otherwise be delivered by the Corporation upon
receipt by the Less-Than-80-Percent Subsidiary
<PAGE>
of any consideration then otherwise payable by the Participant to the
Corporation. Any such grant or award may be evidenced by an agreement
between the Participant and the Less-Than-80-Percent Subsidiary, in lieu of
the Corporation, on terms consistent with this Plan and approved by the Board
and the Less-Than-80-Percent Subsidiary. All shares of Common Stock so
delivered by or to a Less-Than-80-Percent Subsidiary will be treated as if
they had been delivered by or to the Corporation for purposes of Section 3 of
this Plan, and all references to the Corporation in this Plan shall be deemed
to refer to the Less-Than-80-Percent Subsidiary except with respect to the
definitions of the Board and the Committee and in other cases where the
context otherwise requires.
11. Certain Terminations of Employment or Consulting Services, Hardship and
Approved Leaves of Absence. Notwithstanding any other provision of this Plan
to the contrary, in the event of termination of employment, consulting
services or service as a director by reason of death, disability, normal
retirement, early retirement with the consent of the Corporation, termination
of employment, consulting services or service as a director to enter public
service with the consent of the Corporation or leave of absence approved by the
Corporation, or in the event of hardship or other special circumstances, of a
Participant who holds an Option Right that is not immediately and fully
exercisable, any shares of Restricted Stock as to which the substantial risk
of forfeiture or the prohibition or restriction on transfer has not lapsed, or
any shares of Common Stock that are subject to any transfer restriction pursuant
to Section 6(b) of this Plan, the Board may take any action that it deems to be
equitable under the circumstances or in the best interests of the Corporation,
including without limitation waiving or modifying any limitation or requirement
with respect to any award under this Plan.
12. Foreign Participants. In order to facilitate the making of any award
or combination of awards under this Plan, the Board may provide for such
special terms for awards to Participants who are foreign nationals, or who
are employed by or engaged as consultants to the Corporation or any
Subsidiary outside of the United States of America, as the Board may consider
necessary or appropriate to accommodate differences in local law, tax policy
or custom. The Board may also approve such supplements to, or amendments,
restatements or alternative versions of, this Plan as it may consider
necessary or appropriate for such purposes without thereby affecting the
terms of this Plan as in effect for any other purpose; provided, however,
that no such supplements, amendments, restatements or alternative versions
shall include any provisions that are inconsistent with the terms of this
Plan, as then in effect, unless this Plan could have been amended to
eliminate the inconsistency without further approval by the stockholders of
the Corporation.
13. Administration of the Plan. (a) This Plan shall be administered by the
Board until consummation of an IPO. Upon
<PAGE>
the consummation of an IPO, the authority of the Board shall be delegated to
a committee composed of not less than two members of the Board, each of
whom shall be a "non-employee director" within the meaning of Rule 16b-3, and
the Plan shall thereafter be administered by the Committee. A majority of
the members of the Board or the committee, as the case may be, shall
constitute a quorum, and the acts of the members of the Board or the
Committee who are present at any meeting thereof at which a quorum is
present, or acts unanimously approved in writing by the members of the Board
or the Committee, shall be the acts of the Board or the Committee.
(b) The interpretation and construction by the Board or the Committee of
any provision of this Plan or any agreement, notification or document
evidencing a grant of Option Rights or shares of Restricted Stock, and any
determination by the Board or the Committee pursuant to any provision of this
Plan or any such agreement, notification or document, shall be final and
conclusive. No member of the Board or the Committee shall be liable for any
such action taken or determination made in good faith.
14. Amendments and Other Matters. (a) This Plan may be amended from time
to time by the Board; Provided, however, except as expressly authorized by
this Plan, no such amendment shall increase the number of shares of Common
Stock specified in Section 3 of this Plan, or otherwise cause this Plan to
cease to satisfy any applicable condition of Rule 16b-3 following the
consummation of an IPO, without the further approval of the stockholders of
the Corporation. The Board may grant under this Plan any award or
combination of awards authorized under this Plan in exchange for the
cancellation of an award that was not granted under this Plan.
(b) With the concurrence of the affected Optionee, the Board may cancel any
agreement evidencing Option Rights granted under this Plan. In the event of
any such cancellation, the Board may authorize the granting of new Option
Rights hereunder, which may or may not cover the same number shares of Common
Stock as had been covered by the cancelled Option Rights, at such Option
Price, in such manner and subject to such other terms, conditions and
discretion as would have been permitted under this Plan had the cancelled
Option Rights not been granted.
(c) This Plan shall not confer upon any Participant any right with respect
to continuance of employment or other service with the Corporation or any
Subsidiary and shall not interfere in any way with any right that the
Corporation or any Subsidiary would otherwise have to terminate any
Participant's employment or other service at any time.
(d) (i) To the extent that any provision of this Plan would prevent
any Option Right that was intended to qualify as a Tax-Qualified Option
from so qualifying, any such provision shall be null and void with
respect to any such
<PAGE>
Option Right; provided, however, that any such provision shall remain in
effect with respect to other Option Rights, and there shall be no
further effect on any provision of this Plan.
(ii) Any award that may be made pursuant to an amendment to this
Plan that shall have been adopted without the approval of the
stockholders of the Corporation shall be null and void if it is
subsequently determined that such approval was required in order for
this Plan to continue to satisfy the applicable conditions of Rule 16b-3
following the consummation of an IPO.
15. Termination of the Plan. No further awards shall be granted under this
Plan after the passage of 10 years from the date on which this Plan is first
approved by the stockholders of the Corporation.
<PAGE>
Exhibit 10.33
OSIRIS THERAPEUTICS, INC.
1993 STOCK OPTION PLAN
<PAGE>
OSIRIS THERAPEUTICS, INC.
1993 STOCK OPTION PLAN
Table of Contents
-----------------
PAGE
----
1. Purpose.......................................... 1
2. Definitions...................................... 1
3. Shares Available under the Plan.................. 2
4. Option Rights.................................... 2
5. Transferability.................................. 4
6. Adjustments...................................... 4
7. Fractional Shares................................ 5
8. Withholding Taxes................................ 5
9. Participation by Employees of a Less-Than-80-
Percent Subsidiary............................... 5
10. Certain Terminations of Employment, Hardship and
Approved Leaves of Absence....................... 6
11. Foreign Employees................................ 6
12. Administration of the Plan....................... 6
13. Amendments and Other Matters..................... 7
<PAGE>
OSIRIS THERAPEUTICS, INC.
1993 STOCK OPTION PLAN
1. Purpose. The purpose of this Plan is to attract and retain officers,
directors, consultants and other key employees of Osiris Therapeutics, Inc.,
a Delaware corporation (the "Corporation"), and its Subsidiaries and to
provide such persons with incentives and rewards for superior performance.
2. Definitions. As used in this Plan,
"Board" means the Board of Directors of the Corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the committee described in Section 12(a) of this Plan.
"Common Shares" means (i) shares of the common stock, par value $.01 per
share, of the Corporation and (ii) any security into which Common Shares may
be converted by reason of any transaction or event of the type referred to in
Section 6 of this Plan.
"Date of Grant" means the date specified by the Board on which a grant of
Option Rights shall become effective, which shall not be earlier than the
date as of which the Board takes action with respect thereto.
"Incentive Stock Option" means an Option Right that is intended to
qualify as an "incentive stock option" under Section 422 of the Code or any
successor provision.
"IPO" means the initial public offering of Common Shares pursuant to a
registration statement that shall have become effective under the Securities
Act of 1933.
"Less-Than-80-Percent Subsidiary" means a Subsidiary with respect to
which the Corporation directly or indirectly owns or controls less than 80
percent of the total combined voting or other decision-making power.
"Market Value per Share" means the fair market value of the Common Shares
as determined by the Board from time to time.
<PAGE>
"Nonqualified Option" means an Option Right that is not intended to
qualify as a Tax-Qualified Option.
"Optionee" means the person so designated in an agreement evidencing
an outstanding Option Right.
"Option Price" means the purchase price payable upon the exercise of
an Option Right.
"Option Right" means the right to purchase Common Shares from the
Corporation upon the exercise of a Nonqualified Option or a Tax-Qualified
Option granted pursuant to Section 4 of this Plan.
"Participant" means a person who is selected by the Board to receive
benefits under this Plan and (i) is at that time an officer, including
without limitation, an officer who may also be a member of the Board, or
other key employee or consultant of the Corporation or any Subsidiary or (ii)
has agreed to commence serving in any such capacity.
"Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of
1934 or any successor rule to the same effect.
"Subsidiary" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Corporation has a
direct or indirect ownership or other equity interest; provided, however, for
purposes of determining whether any person may be a Participant for purposes
of any grant of Incentive Stock Options, "Subsidiary" means any corporation
in which the Corporation owns or controls directly or indirectly more than 50
percent of the total combined voting power represented by all classes of
stock issued by such corporation at the time of the grant.
"Tax-Qualified Option" means an Option Right that is intended to
qualify under particular provisions of the Code, including without limitation
an Incentive Stock Option.
3. Shares Available under the Plan. Subject to adjustment as
provided in Section 6 of this Plan, the number of Common Shares issued or
transferred and covered by outstanding Option Rights granted under this Plan
shall not in the aggregate exceed 700 Common Shares, which may be Common
Shares of original issuance or Common Shares held in treasury or a
combination thereof. For the purposes of this Section 3, Common Shares
covered by any Option Rights granted under this Plan shall be deemed to have
been issued or transferred, and shall cease to be available for future
issuance or transfer in respect of any other
2
<PAGE>
Option Rights granted hereunder, at the earlier of the time of when they are
actually issued or transferred or the time when dividend equivalents are paid
thereon.
4. Option Right. The Board may from time to time authorize grants
to Participants of options to purchase Common Shares upon such terms and
conditions as the Board may determine in accordance with the following
provisions:
(a) Each grant shall specify the number of Common Shares to which it
pertains.
(b) Each grant shall specify an Option Price per Common Share, which may
be less than, equal to or greater than the Market Value per Share on the Date
of Grant, except that the Option Price per Common Share of an Incentive Stock
Option shall be equal to or greater than the Market Value per Share on the
Date of Grant.
(c) Each grant shall specify the form of consideration to be paid in
satisfaction of the Option Price and the manner of payment of such
consideration, which may include (i) cash in the form of currency or check or
other cash equivalent acceptable to the Corporation, (ii) nonforfeitable,
unrestrictable Common Shares, which are already owned by the Optionee and
have a value at the time of exercise that is equal to the Option Price, (iii)
any other legal consideration that the Board may deem appropriate, including
without limitation any form of consideration authorized under Section 4(d)
below, on such basis as the Board may determine in accordance with this Plan
and (iv) any combination of the foregoing.
(d) On or after the Date of Grant of any Nonqualified Option, the Board
may determine that payment of the Option Price may also be made in whole or
in part in the form of Common Shares that are subject to risk or forfeiture
or restrictions on transfer. Unless otherwise determined by the Board on or
after the Date of Grant, whenever any option Price is paid in whole or in
part by means of the form of consideration specified in this Section 4(d),
the Common Shares received by the Optionee upon the exercise of the
Nonqualified Option shall be subject to the same risk of forfeiture or
restrictions on transfer as those that applied to the consideration
surrendered by the Optionee; provided, however, that any such risk of
forfeiture or restrictions on transfer shall apply only to the same number of
Common Shares received by the Optionee as applied to the forfeiture or
restricted Common Shares surrendered by the Optionee.
(e) Any grant may provide for deferred payment of the Option Price from
the proceeds of sale through a bank or broker on the date of exercise of some
or all of the Common Shares to which the exercise relates.
3
<PAGE>
(f) Successive grants may be made to the same Participant regardless of
whether any Option Rights previously granted to the Participant remain
unexercised.
(g) Each grant shall specify the period or periods of continuous
employment of the Optionee by the Corporation or any Subsidiary that are
necessary before the Option Rights or installments thereof shall become
exercisable, and any grant may provide for the earlier exercise of the Option
Rights in the event of a change in control of the Corporation or other
similar transaction or event.
(h) Option Rights granted pursuant to this Section 4 may be
Nonqualified Options or Tax-Qualified Options or combinations thereof.
(i) On or after the Date of Grant of any Nonqualified Option, the Board
may provide for the payment to the optionee of dividend equivalents thereon
in cash or Common Shares on a current, deferred or contingent basis, or the
Board may provide that any dividend equivalents shall be credited against the
Option Price.
(j) No Option Right granted pursuant to this Section 4 may be
exercised more than 10 years from the Date of Grant.
(k) Each grant shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and delivered to
and accepted by the Optionee and shall contain such terms and provisions as
the Board may determine consistent with this Plan.
5. Transferability. (a) No Option Right or other "derivative
security" (as that term is used in Rule 16b-3) granted under this Plan may be
transferred by a Participant except by will or the laws of decent and
distribution. Option Rights may not be exercised during a Participant's
lifetime except by the Participant or, in the event of the Participant's
legal incapacity, by his guardian or legal representative acting in a
fiduciary capacity on behalf of the Participant under state law and court
supervision.
(b) Any grant of Option Rights made under this Plan may provide that
all or any part of the Common Shares that are to be issued or transferred by
the Corporation upon the exercise thereof shall be subject to further
restrictions upon transfer.
6. Adjustments. The Board may make or provide for such adjustments
in the number of Common Shares covered by outstanding Option Rights, the
Option Prices per Common Share applicable thereto, and the kind of shares
(including shares of another issuer) covered thereby, as the Board may in good
faith determine to be equitably required in order to prevent dilution or
4
<PAGE>
expansion of the rights of Participants that otherwise would result from
(i) any stock dividend, stock split, combination of shares, recapitalization
or other change in the capital structure of the Corporation or (ii) any
merger, consolidation, spin-off, spin-out, split-off, split-up,
reorganization, partial or complete liquidation or other distribution of
assets, issuance of warrants or other rights to purchase securities or (iii)
any other corporate transaction or event having an effect similar to any of
the foregoing. In the event of any such transaction or event, the Board may
provide in substitution for any or all outstanding Option Rights under this
Plan such alternative consideration as it may in good faith determine to be
equitable under the circumstances and may require in connection therewith the
surrender of all Option Rights so replaced. Moreover, the Board may on or
after the Date of Grant provide in the agreement evidencing any grant of
Option Rights under this Plan that the Optionee may elect to receive an
equivalent award in respect of securities of the surviving entity of any
merger, consolidation or other transaction or event having a similar effect,
or the Board may provide that the optionee will automatically be entitled to
receive such an equivalent award. The Board may also make or provide for such
adjustments in the number of Common Shares specified in Section 3 of this
Plan as the Board may in good faith determine to be appropriate in order to
reflect any transaction or event described in this Section 6.
7. Fractional Shares. The Corporation shall not be required to
issue any fractional Common Shares pursuant to this Plan. The Board may
provide for the elimination of fractions or for the settlement thereof in
cash.
8. Withholding Taxes. To the extent that the Corporation is
required to withhold federal, state, local or foreign taxes in connection
with any payment made or benefit realized by a Participant or other person
under this Plan, and the amounts available to the Corporation for the
withholding are insufficient, it shall be a condition to the receipt of any
such payment or the realization of any such benefit that the participant or
such other person make arrangements satisfactory to the Corporation for
payment of the balance of any taxes required to be withheld. At the
discretion of the Board, any such arrangements may include relinquishment of
a portion of any such payment or benefit. The Corporation and any Participant
or such other person may also make similar arrangements with respect to the
payment of any taxes with respect to which withholding is not required.
9. Participation by Employee of a Less-Than-80-Percent Subsidiary.
As a condition to the effectiveness of any grant of Option Rights to be made
hereunder to a Participant who is an employee of a Less-Than-80-Percent
Subsidiary, regardless whether the Participant is also employed by the
Corporation or another Subsidiary, the Board may require the
Less-Than-80-Percent Subsidiary to agree to transfer to the Participant (as,
if and when provided for under this Plan and any applicable agreement entered
into between the Participant and the Less-Than-80-Percent Subsidiary pursuant
to this Plan) the Common Shares that
5
<PAGE>
would otherwise be delivered by the Corporation upon receipt by the
Less-Than-80-Percent Subsidiary of any consideration then otherwise payable
by the Participant to the Corporation. Any such grant of Option Rights may be
evidenced by an agreement between the Participant and the
Less-Than-80-Percent Subsidiary, in lieu of the Corporation, on terms
consistent with this Plan and approved by the Board and the
Less-Than-80-Percent Subsidiary. All Common Shares so delivered by or to a
Less-Than-80-Percent Subsidiary will be treated as if they had been delivered
by or to the Corporation for purposes of Section 3 of this Plan, and all
references to the Corporation in this Plan shall be deemed to refer to the
Less-Than-80-Percent Subsidiary except with respect to the definitions of the
Board and the Committee and in other cases where the context otherwise
requires.
10. Certain Terminations of Employment, Hardship and Approved
Leaves of Absence. Notwithstanding any other provision of this Plan to the
contrary, in the event of termination of employment by reason of death,
disability, normal retirement, early retirement with the consent of the
Corporation, termination of employee to enter public service with the consent
of the Corporation or leave of absence approved by the Corporation,
termination of employment to enter public service with the consent of the
Corporation or leave of absence approved by the Corporation, or in the event
of hardship or other special circumstances, of a Participant who holds an
Option Right that is not immediately and fully exercisable or any Common
Shares that are subject to any transfer restriction pursuant to Section 5(b)
of this Plan, the Board may take any action that it deems to be equitable
under the circumstances or in the best interests of the Corporation,
including without limitation waiving or modifying any limitation or
requirement with respect to any grant of Option Rights under this Plan.
11. Foreign Employees. In order to facilitate the making of any
grant of Option Rights under this Plan, the Board may provide for such
special terms for grants of Option Rights to Participants who are foreign
nationals, or who are employed by the Corporation or any Subsidiary outside
of the United States of America, as the Board may consider necessary or
appropriate to accommodate differences in local law, tax policy or custom.
Moreover, the Board may approve such supplements to, or amendments,
restatements or alternative versions of, this Plan as it may consider
necessary or appropriate for such purposes without thereby affecting the
terms of this Plan as in effect for any other purpose; provided, however,
that no such supplements, amendments, restatements, or alternative versions
shall include any provisions that are inconsistent with the terms of this
Plan, as then in effect, unless this Plan could have been amended to
eliminate the inconsistency without further approval by the stockholders of
the Corporation.
12. Administration of the Plan. (a) This Plan shall be
administered by the Board until the consummation of the IPO. Upon the
consummation of the IPO, the authority of the Board under this Plan shall be
delegated to a committee of not less than three members of the Board, each of
whom shall be a "disinterested person" within the meaning of Rule 16b-3, and
the Plan shall thereafter be administered by the Committee. A majority of the
members of the Board or the Committee, as the
6
<PAGE>
case may be, shall constitute a quorum, and the acts of the members of the
Board or the Committee who are present at any meeting thereof at which a
quorum is present, or acts unanimously approved in writing by the members of
the Board or the Committee, shall be the acts of the Board or the Committee.
(b) The interpretation and construction by the Board or the
Committee, as the case may be, of any provision of this Plan or any
agreement, notification or document evidencing a grant of Options Rights, and
any determination by the Board or the Committee pursuant to any provision of
this Plan or any such agreement, notification or document, shall be final and
conclusive. No member of the Board or the Committee shall be liable for any
such action taken or determination made in good faith.
13. Amendments and Other Matters. (a) This Plan may be amended
from time to time by the Board; provided, however, that except as expressly
authorized by this Plan, no such amendment shall increase the number of
Common Shares specified in Section 3 of this Plan, or otherwise cause this
Plan to cease to satisfy any applicable condition of Rule 16b-3 following the
consummation of an IPO, without the further approval of the stockholders of
the Corporation.
(b) With the concurrence of the affected Optionee, the Board may
cancel any agreement evidencing Option Rights granted under this Plan. In the
event of any such cancellation, the Board may authorize the granting of new
Option Rights hereunder, which may or may not cover the same number of Common
Shares as had been covered by the canceled Option Rights, at such Option
Price, in such manner and subject to such other terms, conditions and
discretion as would have been permitted under this Plan had the canceled
Option Rights not been granted.
(c) This Plan shall not confer upon any Participant any right
with respect to continuance of employment or other service with the
Corporation or any Subsidiary and shall not interfere in any way with any
right that the Corporation or any Subsidiary would otherwise have to
terminate any Participant's employment or other service at any time.
(d)(i) To the extent that any provision of this Plan would prevent any
Option Right that was intended to qualify as a Tax-Qualified Option from so
qualifying, any such provision shall be null and void with respect to any
such Option Right; provided, however, that any such provision shall remain
in effect with respect to other Option Rights, and there shall be no further
effect on any provision of this Plan.
(ii) Any award that may be made pursuant to an amendment to this
Plan that shall have been adopted without the approval of the stockholders
of the Corporation shall be null and void if it is subsequently determined
that
7
<PAGE>
such approval was required in order for this Plan to continue to satisfy
the applicable conditions of Rule 16b-3 following the consummation of an
IPO.
8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated January 31,1997, except as to the reverse stock split
discussed in Note 1 as to which the date is October 22, 1997, on our audits
of the consolidated financial statements of Osiris Therapeutics, Inc. and its
subsidiaries as of December 31, 1995 and 1996 and for each of the three years
in the period ended December 31, 1996 and the period December 23, 1992 (date
of inception) to December 31, 1996. We also consent to the reference to our
firm under the caption "Experts".
/s/ Coopers & Lybrand, LLP
-------------------------
Coopers & Lybrand L.L.P.
McLean, Virginia
November 25, 1997
<PAGE>
<TABLE>
<CAPTION>
Exhibit 23.3
CARELLA, BYRNE, BAIN, GILFILLAN, CECCHI, STEWART & OLSTEIN
<S> <C> <C>
CHARLES C. CARELLA A PROFESSIONAL CORPORATION RAYMOND J. LILLIE
BRONDAN T. BYRNE COUNSELLORS AT LAW WALTER G. LUGER
JOHN H. BAIN CHARLES M. CARELLA
JOHN G. GILFILLAN,III 6 BECKER FARM ROAD CHARLES J. HERRONE
PETER G. STEWART ROSELAND, N.J. 07068-1739 G. GLENNON TROUBLEFIELD
ELLIOT M. OLSTEIN (973) 994-1700 WILLIAM SQUIRE
ARTHUR T. VANDERBILT, II TELECOPIER (973) 994-1744 DENNIS F. GLEASON
JAN ALAN BRODY DAVID G. GILFILLAN
JOHN M. AGNELLO BRIAN H. FENLON
MELVYN M. BERGSTEIN JAMES E. CECCHI
JAMES T. BYERS ANDREW P. GORDON
DONALD F. MICELI LYNN A. WEISINGER
A. RICHARD ROSS CYNTHIA N. HOEN
KENNETH L. WINTERS MARK A. EDWARDS
JEFFREY A. COOPER J.G. MULLINS
CARL R. WOODWARD, III MELISSA E. FLAX
__________ NABIL N. KASSEM
JOANNE C. GERBER
HERBERT M. RINALDI ROBERT A. KNEE
RICHARD K. MATANLE, II ELISSA MIZZONE
DONALD S. BROOKS MARK D. MILLER
PATRICIA M. TALBERT -MEMBER N.Y.-PA. & IN BARS ONLY
OF COUNSEL -MEMBER MD., D.C., VA., PA.
___________ BARS ONLY
JAMES D. CECCHI (1933-1995)
</TABLE>
C O N S E N T O F C O U N S E L
The undersigned hereby consents to the use of our name and the statement
with respect to our firm appearing under the heading "Experts" included in
the Registration Statement on Form S-1 for Osiris Therapeutics, Inc.
/s/ Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, P.A.
---------------------------------------------------------------------
CARELLA, BYRNE, BAIN, GILFILLAN, CECCHI, STEWART & OLSTEIN, P.A.
6 Becker Farm Road
Roseland, New Jersey 07068
Dated: November 25, 1997
