<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
--------- ----------
Commission File Number: 0-23930
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TARGETED GENETICS CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1549568
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
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(Address of principal executive offices) (Zip Code)
(206) 623-7612
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 20,120,068
- ------------------------------------ --------------------------------------
(Class) (Outstanding at November 5, 1996)
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TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
September 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 3
b) Condensed Consolidated Statements of Operations - for the three
and nine months ended September 30, 1996 and 1995 4
c) Condensed Consolidated Statements of Cash Flows - for the nine
months ended September 30, 1996 and 1995 5
d) Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
* No information is provided due to inapplicability of the item.
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,209,936 $ 2,154,814
Securities available for sale 19,666,084 12,287,748
Deposits, prepaid expenses and other 310,493 196,150
------------ ------------
Total current assets 22,186,513 14,638,712
Property, plant and equipment, net 4,998,824 4,959,502
Other assets 581,305 362,246
------------ ------------
$ 27,766,642 $ 19,960,460
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,565,654 $ 564,403
Accrued payroll and other liabilities 249,150 336,713
Current portion of long-term obligations 1,087,747 881,210
------------ ------------
Total current liabilities 2,902,551 1,782,326
Long-term obligations 2,153,593 2,405,298
Shareholders' equity:
Preferred stock -- --
Common stock (20,119,268 and 12,317,183 shares
outstanding at September 30, 1996 and December 31,
1995, respectively) 73,114,702 43,295,436
Deficit accumulated during development stage (50,404,204) (27,522,600)
------------ ------------
Total shareholders' equity 22,710,498 15,772,836
------------ ------------
$ 27,766,642 $ 19,960,460
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 9, 1989
(date of
Three months ended Nine months ended inception)
September 30, September 30, through
------------------------------ ------------------------------ September 30,
1996 1995 1996 1995 1996
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Revenue under collaborative
agreements $ 752,980 $ 19,267 $ 827,980 $ 99,625 $ 1,002,605
Investment income 299,687 228,447 638,500 460,085 2,715,782
------------ ------------ ------------ ------------ ------------
Total revenues 1,052,667 247,714 1,466,480 559,710 3,718,387
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development 3,634,181 1,942,767 8,431,820 5,877,664 31,202,940
In-process research and development -- -- 13,517,911 -- 13,517,911
General and administrative 834,847 447,893 2,005,820 1,683,026 8,580,540
Interest 103,686 76,841 299,192 230,146 794,178
------------ ------------ ------------ ------------ ------------
Total expenses 4,572,714 2,467,501 24,254,743 7,790,836 54,095,569
------------ ------------ ------------ ------------ ------------
Net loss $ (3,520,047) $ (2,219,787) $(22,788,263) $ (7,231,126) $(50,377,182)
============ ============ ============ ============ ============
Net loss per share $ (0.18) $ (0.19) $ (1.50) $ (0.73)
============ ============ ============ ============
Shares used in computation of
net loss per share 20,048,355 11,823,320 15,160,884 9,931,965
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 9, 1989
(date of
Nine months ended inception)
September 30, through
-------------------------------- September 30,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net cash used in operating
activities $ (7,707,065) $ (6,661,323) $(31,675,330)
Investing activities:
Purchases of property, plant and equipment (1,320,552) (1,095,750) (8,491,149)
Purchases of securities available for sale (19,941,764) (9,816,766) (75,032,286)
Sales of securities available for sale 12,430,340 6,252,310 55,382,360
Net cash acquired in RGene acquisition 1,710,239 -- 1,710,239
Increase in other assets (115,000) (62,500) (689,179)
------------ ------------ ------------
Net cash used in investing activities (7,236,737) (4,722,706) (27,120,015)
Financing activities:
Advances from Immunex -- -- 2,807,316
Net proceeds from sale of capital stock 15,044,092 12,282,098 55,466,212
Proceeds from equipment financing 646,996 237,459 4,493,290
Payments under capital leases and
installment loans (692,164) (453,086) (1,761,537)
------------ ------------ ------------
Net cash provided by financing
activities 14,998,924 12,066,471 61,005,281
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 55,122 682,442 2,209,936
Cash and cash equivalents, beginning of period 2,154,814 2,306,979 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,209,936 $ 2,989,421 $ 2,209,936
============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by Targeted Genetics Corporation (the "Company"), without audit,
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The
financial statements reflect, in the opinion of management, all adjustments
(which consist solely of normal recurring adjustments) necessary to present
fairly the financial position and results of operations as of and for the
periods indicated.
The results of operations for the three and nine months ended September
30, 1996 are not necessarily indicative of the results to be expected for the
full year.
Note 2. Revenue Under Collaborative Agreements
Revenue under collaborative agreements is recognized as defined under
the terms of the respective collaborative agreements. Revenue related to
milestones is recognized upon the achievement of the related milestone and when
collection is probable. Royalty payments and other similar payments due as a
direct result of such revenues being earned or received are offset against and
recognized in the same period as such revenue.
Note 3. Subsequent Events
In October 1996, The Company adopted a Shareholder Rights plan under
which it distributed a dividend of one right for each outstanding share of
common stock. The issuance of these rights had no dilutive effect, did not
impact reported earnings per share, and is not taxable to the Company or the
Company's shareholders. These rights could cause substantial dilution to certain
persons or groups that attempt to acquire the Company on terms not approved by
the Board of Directors.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Risks and Uncertainties
The following discussion contains forward-looking statements that are
subject to certain risks and uncertainties that could cause the actual results
to differ materially from those projected. The Company's future cash
requirements and expense levels will depend on many factors, including the
successful consolidation of RGene with the Company; continued scientific
progress in its research and development programs; the results of research and
development, preclinical studies and clinical trials; acquisition of products or
technology, if any; relationships with corporate collaborators; competing
technological and market developments; the time and costs involved in obtaining
regulatory approvals; the costs involved in filing, prosecuting and enforcing
patent claims; the time and costs of manufacturing scale-up and
commercialization activities; and other factors. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
Financial Condition
The Company had cash, cash equivalents and securities available for
sale totaling $21.9 million as of September 30, 1996, compared to $14.4 million
at December 31, 1995. The increase was primarily attributable to net proceeds of
$15 million from the Company's June public offering and $1.7 million from the
acquisition of RGene Therapeutics, Inc. ("RGene"), offset by the use of $7.7
million to fund operations and $1.3 million to purchase property, plant and
equipment during the first nine months of 1996.
The Company is a development stage company conducting gene and cell
therapy research and development. Income earned from investments and, to a
lesser degree, revenues under collaborative agreements have been its only
sources of revenue, covering less than ten percent of expenses. Gene and cell
therapy products are subject to the risks of failure inherent in the development
of products based on innovative technologies. Although the Company's technology
appears promising, it is unknown whether any commercially viable products will
result from the research and development. It is not anticipated that the Company
will have any product-related revenues for a number of years. Accordingly, the
Company expects to incur substantial additional losses over the next several
years and to use its capital resources to fund preclinical and clinical research
programs, development of manufacturing capabilities and the preparation for
commercialization of its products under development.
On June 19, 1996, the Company completed a merger with RGene, a private
biotechnology firm located in The Woodlands, Texas. As a result of this
transaction, Targeted Genetics acquired proprietary non-viral gene delivery
technology that complements the viral technologies the Company currently has
under development, a potential gene therapy product for the treatment of cancer
and key consulting and collaborative relationships with other leading scientists
in the gene therapy field. Under
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Financial Condition (continued)
the terms of the merger agreement, the Company acquired all the outstanding
shares of RGene stock in exchange for approximately 3.64 million unregistered
shares of the Company's common stock. The transaction was accounted for using
the purchase method of accounting and the consideration issued by the Company
was allocated to the tangible and intangible assets acquired. The Company
acquired approximately $1,600,000 of cash and cash equivalents in the
transaction, net of liabilities assumed from RGene.
The Company raised $15 million through the completion of a public
offering of 4.025 million shares of common stock, including the underwriters'
overallotment option, at $4.00 per share. The net proceeds of the offering will
be used to fund continuing operations in research and development, clinical
testing and for capital expenditures. The Company currently estimates that, at
its planned rate of spending, adjusted to reflect the increased expenses
expected to result from the RGene merger, its existing cash, cash equivalents
and securities available for sale will be sufficient to meet its capital
requirements until at least late 1997. Such estimates include the impact of
future milestone payments potentially receivable under collaborative agreements.
There can be no assurance that the underlying assumed levels of revenue and
expense will prove to be accurate. In any event, substantial additional funds
will be needed to continue the development and commercialization of the
Company's products. Accordingly, the Company is seeking to establish additional
collaborative agreements with corporate partners that would provide research and
development funding and equity investment. The Company also may seek to raise
additional equity capital whenever conditions in the financial markets allow it
to do so. There can be no assurance, however, that adequate funds will be
available when needed or will be available on terms favorable to the Company.
Results of Operations
Over the past several years, the Company's net loss has grown,
consistent with the growth in the Company's scope and size of operations. In the
near term, the Company plans additional moderate growth in employee headcount
necessary to address increasing requirements in areas such as clinical research,
manufacturing and quality control. Assuming capital is available to finance such
growth, the Company's operating expenses will continue to increase as a result.
At least until such time as the Company enters into a collaborative arrangement
providing a significant amount of research and development funding, the net loss
will continue to increase as well.
For the three and nine months ended September 30, 1996, revenue under
collaborative agreements increased to $753,000 and $828,000 compared to $19,000
and $100,000 during the three and nine months ended September 30, 1995. The
increase was largely attributable to the receipt of a $1,000,000 milestone
payment, offset by royalties and other such payments due as a result of
receiving
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (continued)
the milestone payment. The milestone was earned through the enrollment of
patients in a U.S. clinical trial for treatment of breast and ovarian cancer.
For the three and nine months ended September 30, 1996, investment
income increased to $300,000 and $639,000 compared to $228,000 and $460,000
during the three and nine months ended September 30, 1995. The increases in both
periods were largely attributable to higher average cash balances for investment
and higher rates of return on those balances compared to the same periods in
1995.
Research and development expenses were $3,634,000 and $8,432,000 for
the three and nine months ended September 30, 1996, and $1,943,000 and
$5,878,000 for the three and nine months ended September 30, 1995. Expenses that
resulted directly from the RGene acquisition and the continuation of its
research, development and clinical programs were $1,024,000 and $1,085,000 for
the three and nine months ended September 30, 1996. Approximately $304,000 of
non-recurring termination payments and other payroll-related expenses were
included in the third quarter expenses. Additional factors that contributed to
the increases in both the three- and nine-month periods were a moderate increase
in the level of expenses for development, manufacturing, and quality control as
well as additional employees and related expenses in preclinical immunology.
A one-time expense resulting from the acquisition of RGene was charged
against income in the second quarter of 1996. The RGene purchase price exceeded
the fair value of tangible assets acquired by $13,518,000. This amount was
allocated to RGene's existing in-process technology and was written off in the
second quarter to in-process research and development expense.
General and administrative expenses were $835,000 and $2,006,000 for
the three and nine months ended September 30, 1996, and $448,000 and $1,683,000
for the three and nine months ended September 30, 1995. The Company incurred
expenses resulting directly from the RGene acquisition of $300,000 and $312,000
for the three- and nine-month periods ended September 30, 1996. Such expenses
are not expected to continue in future periods due to the closure of RGene's
offices and transfer of all administration functions to Targeted Genetics. In
addition to the RGene expenses, the Company experienced a moderate expense
increase related to corporate development activities.
Interest expense was $104,000 and $299,000 for the three and nine
months ended September 30, 1996, and $77,000 and $230,000 for the three and nine
months ended September 30, 1995. The increases in both periods were attributable
to additional equipment leases entered into by the Company.
9
<PAGE> 10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule
(a) A Current Report on Form 8-K, dated July 3, 1996, was filed with the
Securities and Exchange Commission reporting that Targeted Genetics Corporation
had completed the acquisition or merger with RGene Therapeutics, Inc.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARGETED GENETICS CORPORATION
-------------------------------------------------
(Registrant)
Date November 11, 1996 /s/ H. STEWART PARKER
------------------ -------------------------------------------------
H. Stewart Parker, Chief Executive Officer
(Principal Executive Officer)
Date November 11, 1996 /s/ JAMES A. JOHNSON
------------------ -------------------------------------------------
James A. Johnson, Vice President, Finance
(Principal Financial and Accounting Officer)
11
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EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,209,936
<SECURITIES> 19,666,084
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,186,513
<PP&E> 9,208,719
<DEPRECIATION> (4,209,895)
<TOTAL-ASSETS> 27,766,642
<CURRENT-LIABILITIES> 2,902,551
<BONDS> 0
0
0
<COMMON> 73,114,702
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,766,642
<SALES> 0
<TOTAL-REVENUES> 1,466,480
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (24,254,743)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299,192
<INCOME-PRETAX> (22,788,263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,788,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,788,263)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
