<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996.
REGISTRATION NO. 333-03592
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TARGETED GENETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
WASHINGTON 2836 91-1549568
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1100 OLIVE WAY, SUITE 100
SEATTLE, WASHINGTON 98101
(206) 623-7612
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
H. STEWART PARKER
CHIEF EXECUTIVE OFFICER
1100 OLIVE WAY, SUITE 100
SEATTLE, WASHINGTON 98101
(206) 623-7612
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN M. GRAHAM CHARLES W. MULANEY, JR.
STEPHANIE G. DALEY-WATSON SKADDEN, ARPS, SLATE, MEAGHER & FLOM
PERKINS COIE 333 WEST WACKER DRIVE
1201 THIRD AVENUE, 40TH FLOOR CHICAGO, ILLINOIS 60606
SEATTLE, WASHINGTON 98101-3099 (312) 407-0700
(206) 583-8888
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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 of 1933, 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 of 1933, 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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
3,500,000 SHARES
TARGETED GENETICS LOGO
COMMON STOCK
All of the 3,500,000 shares of Common Stock offered hereby are being sold
by Targeted Genetics Corporation ("Targeted Genetics" or the "Company"). The
Company's Common Stock is quoted on the Nasdaq National Market under the symbol
"TGEN." On June 19, 1996, the last reported sale price for the Common Stock was
$4.94 per share. See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
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
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $4.00 $.25 $3.75
- ------------------------------------------------------------------------------------------------------------------
Total(3)..................................... $14,000,000 $875,000 $13,125,000
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $16,100,000, $1,006,250 and
$15,093,750, respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about June 25, 1996.
---------------------------
Vector Securities International, Inc. Genesis Merchant Group
Securities
June 20, 1996
<PAGE> 3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this Prospectus
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions; competition; technological
advances; ability to obtain rights to technology; ability to obtain and enforce
patents; ability to commercialize and manufacture products; results of clinical
studies; results of research and development activities; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or
failure to comply with, governmental regulations; ability to obtain adequate
financing in the future; and other factors referenced in this Prospectus. See
"Risk Factors."
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus,
including information under "Risk Factors." Except as otherwise noted, all
information in this Prospectus, including financial information and share and
per share data, assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting." Special Note: Certain statements set forth below constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page 2 for additional factors
relating to such statements.
THE COMPANY
Targeted Genetics is focused on the development of gene and cell therapies
for the treatment of certain acquired and inherited diseases. The Company is
developing a broad base of core technologies that it believes will allow it to
address a variety of such diseases. These technologies include proprietary viral
and non-viral gene delivery systems as well as novel techniques for cytotoxic T
lymphocyte ("CTL") immunotherapy. In order to expand its technology base with
respect to non-viral gene delivery systems and to enhance its product
development programs, on June 19, 1996, the Company acquired RGene Therapeutics,
Inc. ("RGene"), a company focused on the development and use of non-viral gene
delivery systems. The Company is using its core technology platform to develop
potential products for the treatment of various genetic disorders, cancer and
infectious diseases, and is currently conducting clinical trials in certain of
these indications.
The Company believes that in the area of gene therapy, different disease
targets will require different methods of gene delivery, depending on the target
cell to be modified, the duration of gene expression required and the need for
ex vivo or in vivo delivery. Accordingly, the Company is developing multiple
gene delivery systems based on three different vector technologies:
adeno-associated viral ("AAV"), retroviral and non-viral. The Company believes
these systems may provide it with the flexibility necessary to develop gene
therapies for a broader range of diseases than would be possible using a single
gene delivery system. Targeted Genetics was the first company to initiate
clinical trials using AAV vectors and is not aware of any other company
conducting clinical trials using these vectors. In addition, the Company has
exclusive rights to an improved type of retroviral vector which has been shown
in preclinical experiments to be more efficient than earlier retroviral vectors
at delivering genes into certain types of blood cells. The Company also is
developing non-viral gene delivery systems which may provide greater flexibility
relative to the size and sequence of transferred genes and allow targeted
delivery in vivo.
Through its acquisition of RGene (the "RGene Acquisition"), the Company
acquired rights to proprietary non-viral gene delivery technology based on the
use of cationic lipids that promote the uptake of DNA into cells. This
technology includes several formulations with the potential for increased
stability and improved transduction efficiency, as well as the potential ability
to deliver genes to specific target cells. The Company also acquired rights to
the E1A tumor suppressor gene which is currently in clinical trials for the
treatment of ovarian and breast cancer.
In the area of cell therapy, the Company's expertise with CTLs enables it
to isolate from patients and efficiently multiply antigen-specific CTLs, which
are immune cells that target and kill specific diseased cells. This expertise
forms the basis for a series of potential immunotherapies for the treatment of
cancer and infectious diseases. The CTL immunotherapy program is based on the
Company's proprietary Rapid Expansion Method ("REM") technology, which is used
to grow CTLs ex vivo prior to infusion into the patient. The Company has
demonstrated that REM enables it to grow billions of CTLs from individual cloned
cells over several weeks, while preserving the cells' specific disease-fighting
capabilities in vitro. Other methods of expanding CTL clones generally require
several months.
Targeted Genetics is currently conducting multiple clinical trials
utilizing its viral gene delivery systems as well as its CTL immunotherapy
technology and a non-viral gene delivery system acquired in the RGene
Acquisition. The Company is conducting a Phase I and a Phase I/II clinical trial
examining the use of AAV vectors to deliver in vivo the cystic fibrosis
transmembrane regulator
3
<PAGE> 5
("CFTR") gene for the treatment of cystic fibrosis. The Phase II part of the
latter trial is expected to begin in late 1996. RGene has initiated a Phase I
clinical trial of a non-viral system to deliver in vivo the E1A tumor suppressor
gene to patients with ovarian or breast cancer. In addition, the Company is
conducting a Phase I clinical trial examining the use of HIV-specific CTLs to
prevent the onset of full-blown AIDS in HIV-infected patients. The Company also
is collaborating on two physician-sponsored Phase I clinical trials examining
gene therapies for the treatment of Gaucher disease and melanoma. Patient
accrual for all these Phase I clinical trials is expected to be completed by the
end of 1996.
Effective May 1996, RGene and Laboratoires Fournier S.C.A. ("Fournier")
entered into a license, research and marketing agreement under which Fournier
received exclusive rights to develop and commercialize in Europe the E1A tumor
suppressor product candidate and any other product candidates based on the E1A
tumor suppressor gene and developed pursuant to the agreement. Under the
agreement, the parties will undertake a joint clinical program to coordinate
product development and clinical trials in the United States and Europe.
Fournier has paid RGene a $5 million upfront license fee, $2.5 million of which
was paid as an option fee prior to execution of the agreement. RGene may receive
additional payments if the parties achieve certain development milestones and
royalties on sales of resulting products, if any. In addition, if the parties
are able to negotiate a mutually acceptable supply agreement, RGene will be
entitled to manufacture products for Fournier in return for manufacturing fees.
The Company was incorporated in Washington in 1989 as a wholly owned
subsidiary of Immunex Corporation ("Immunex"), and commenced operations in 1992.
The Company's headquarters are located at 1100 Olive Way, Suite 100, Seattle,
Washington 98101. Its telephone number is (206) 623-7612.
All references to the Company after the date of the RGene Acquisition
include RGene as a wholly owned subsidiary.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................................. 3,500,000 shares
Common Stock to be outstanding after the Offering..... 19,533,848 shares (1)
Nasdaq National Market symbol......................... TGEN
Use of proceeds....................................... For research and development;
clinical testing; capital
expenditures, including expansion of
existing facilities; working capital;
and general corporate purposes.
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1996. Includes 3,636,364 shares
to be issued to RGene stockholders as a result of the RGene Acquisition.
Excludes (i) 1,177,014 shares issuable upon exercise of options outstanding
at March 31, 1996, with a weighted average exercise price of $3.20 per
share; (ii) 831,614 shares issuable upon exercise of warrants outstanding at
March 31, 1996, with a weighted average exercise price of $4.78 per share;
(iii) 281,686 shares reserved for issuance under the Company's stock option
plans at March 31, 1996; and (iv) an indeterminate number of additional
shares of Common Stock that may be issued to RGene stockholders in the event
certain milestones are achieved before December 31, 1998. See
"Management -- Benefit Plans" and "RGene Acquisition."
4
<PAGE> 6
SUMMARY ACTUAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 (1) 1995 1996 1996 (2)
------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 412 $ 449 $ 842 $ 1,195 $ 132 $ 183 $ 2,706
Expenses:
Research and
development........ 4,261 6,763 8,195 11,268 1,978 2,366 4,636
General and
administrative..... 1,217 1,892 2,267 3,020 701 617 888
Interest............. -- 193 302 302 75 92 92
------- ------- ------- -------- ------- ------- -------
Total expenses... 5,478 8,848 10,764 14,590 2,754 3,075 5,616
------- ------- ------- -------- ------- ------- -------
Net loss............... $(5,066) $(8,399) $(9,922) $(13,395 ) $(2,622) $(2,892) $ (2,910 )
======= ======= ======= ======== ======= ======= =======
Net loss per share..... $ (0.94) $ (0.95 ) $ (0.29) $ (0.23) $ (0.18 )
======= ======== ======= ======= =======
Shares used in
computation of net
loss per share....... 10,533 14,169 8,966 12,343 15,979
Pro forma, assuming
conversion of
Preferred Stock to
Common Stock (3):
Net loss per share... $ (1.03)
=======
Shares used in
computation of net
loss per share..... 8,152
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
-------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities available for sale.............. $ 11,878 $ 14,105 $ 26,880
Working capital....................................................... 10,408 11,017 23,792
Total assets.......................................................... 17,381 19,930 32,705
Long-term obligations................................................. 2,634 2,634 2,634
Deficit accumulated during development stage.......................... (30,481) (44,550) (44,550)
Total shareholders' equity............................................ 13,119 13,904 26,679
</TABLE>
- ------------------
(1) Gives effect to the RGene Acquisition as if it had occurred on January 1,
1995. See "Unaudited Pro Forma Consolidated Financial Statements."
(2) Gives effect to the RGene Acquisition as if it had occurred on January 1,
1996. See "Unaudited Pro Forma Consolidated Financial Statements."
(3) Computed on the basis described in Note 2 of Notes to Targeted Genetics
Financial Statements.
(4) Gives effect to the RGene Acquisition as if it had occurred on March 31,
1996. See "Unaudited Pro Forma Consolidated Financial Statements."
(5) Gives effect to the RGene Acquisition as if it had occurred on March 31,
1996, the sale by the Company of the 3,500,000 shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE> 7
RGENE ACQUISITION
In keeping with its strategy of building a broad-based technology platform,
in April 1996, the Company entered into a definitive merger agreement (the
"Merger Agreement") with RGene pursuant to which the Company agreed to acquire
RGene by merging a wholly owned subsidiary of the Company formed to facilitate
the transaction with and into RGene. The Company completed the RGene Acquisition
on June 19, 1996. RGene's operations will be integrated into the operations of
the Company.
Pursuant to the Merger Agreement, in exchange for all of the issued and
outstanding shares of capital stock of RGene, Targeted Genetics will issue
3,636,364 shares of the Common Stock (representing an aggregate value of $18.7
million, assuming a price of $5.13 per share, the closing price of the Common
Stock on the date of execution of the Merger Agreement) to the former RGene
stockholders. The Merger Agreement also provides that the former RGene
stockholders have the right to receive up to an additional $5 million of the
Common Stock if certain milestones relating to RGene's potential products and
technology are achieved prior to December 31, 1998. The first such milestone
(the "First Milestone") relates to the enrollment of at least one patient in a
Phase II clinical trial for the E1A tumor suppressor gene therapy in the United
States and the enrollment of at least one patient in a similar clinical trial in
a member country of the European Economic Union. Achievement of the First
Milestone would result in the issuance of $1 million, $2 million or $3 million
of the Common Stock, depending upon whether the First Milestone is achieved on
or before December 31, 1997 or December 31, 1998, and depending upon whether the
First Milestone is achieved in the United States only or in the United States
and Europe, as set forth in the following table:
<TABLE>
<CAPTION>
MILESTONE ACHIEVEMENT
GEOGRAPHIC TERRITORY DEADLINE COMMON STOCK ISSUABLE
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
United States only December 31, 1997 $2 million
Europe only December 31, 1997 $0
United States and Europe December 31, 1997 $3 million
United States only December 31, 1998 $1 million
Europe only December 31, 1998 $1 million(1)
United States and Europe December 31, 1998 $2 million(2)
</TABLE>
- ---------------
(1) To be issued only if the First Milestone is achieved in the United States
during calendar year 1998. If the First Milestone is achieved in the United
States prior to January 1, 1998, or if it is not achieved at all in the
United States, then no Common Stock will be issued for achieving the First
Milestone in Europe during 1998.
(2) The maximum amount of Common Stock that may be issued in the event that the
First Milestone is not achieved in the United States until 1998 is $2
million.
The second milestone (the "Second Milestone") is the execution on or before
December 31, 1997 of a definitive collaboration agreement with a third party for
the development of genetic vaccines using RGene's technology, which
collaboration agreement must provide minimum revenue to the Company of $2
million during the first year following its execution, of which at least $1.5
million may not be subject to any specific funding commitment under any license
or research agreement. Achievement of the Second Milestone would result in the
issuance of $2 million of the Common Stock.
The aggregate number of shares of Common Stock issued upon achievement of a
milestone will equal the applicable aggregate value of such shares issuable upon
achievement of such milestone divided by the milestone average trading price,
which is the average closing sale price for the Common Stock for the 30 trading
days preceding the date of achievement of the milestone. Such shares will be
issued pro rata, based upon the number of shares of RGene capital stock
outstanding on the closing of the RGene Acquisition, to the former RGene
stockholders as promptly as practicable, but in no event later than 20 days
after the achievement of the applicable milestone.
Assuming the milestone average trading price equals $4.94 (the closing sale
price per share of Common Stock as reported on the Nasdaq National Market on
June 19, 1996), achievement of both
6
<PAGE> 8
milestones would result in the issuance of a maximum of 1,012,146 shares of
Common Stock. Such shares representing the additional consideration would
represent approximately 6% of the outstanding Common Stock immediately after the
Offering. The shares of Common Stock issued to the former RGene stockholders are
subject to certain limitations on transfer and are covered by certain
registration rights. See "Risk Factors -- Shares Eligible for Future Sale;
Registration Rights" and "Description of Capital Stock -- Registration Rights."
Until June 18, 1997, the Company will hold in escrow 363,636 of the shares
issued to RGene stockholders upon the closing of the RGene Acquisition in order
to satisfy potential claims made by the Company against the former RGene
stockholders in connection with any breach of any representation or warranty, or
any failure to comply with any covenant or agreement, contained in the Merger
Agreement.
The Targeted Genetics Board of Directors will appoint Austin M. Long, III
and Martin P. Sutter as RGene's designees to the Targeted Genetics Board of
Directors. Messrs. Long and Sutter will stand for election at the next annual
meeting of shareholders.
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information in this Prospectus. Special
Note: Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Reform Act. See "Special Note Regarding
Forward-Looking Statements" on page 2 for additional factors relating to such
statements.
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY. The Company
has no commercial products and all of its potential products are in research,
development or early-stage clinical trials. As such, the Company cannot predict
when or if any of its products under development will be commercialized.
Products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for a number of years, if at all,
even if they are successfully developed and proven safe and effective.
While many approaches to gene therapy and cell therapy are being pursued by
pharmaceutical and biotechnology companies, there are currently no marketed gene
therapies and a limited number of marketed cell therapies. Existing preclinical
and clinical data relating to the Company's specific gene and cell therapy
approaches are very limited. Prior to any commercial use, the products and
technologies currently under development by the Company will require significant
additional research and development efforts, extensive preclinical and clinical
testing and regulatory approval. Clinical trials in humans are necessary to
determine product safety and efficacy. Product development involving new
therapies is highly uncertain and unanticipated developments, clinical and
regulatory delays, adverse or unexpected side effects or immune responses or
inadequate therapeutic efficacy could slow or prevent the successful completion
of the Company's product and technology development efforts and have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, gene and cell therapy products are subject to the risks of
failure inherent in the development of products based on innovative
technologies. There can be no assurance that Targeted Genetics will be permitted
to undertake additional or complete ongoing clinical trials of its potential
products within the time periods indicated in this Prospectus or otherwise, that
sufficient numbers of patients can be accrued for such trials or that clinical
trials will demonstrate that the products tested are safe and effective. Even if
clinical trials are successful, there can be no assurance that the Company will
obtain regulatory approval for any indication, that an approved product can be
produced in commercial quantities at reasonable costs or gain acceptance for use
by physicians and healthcare providers or that any potential products will be
successfully marketed at prices that would permit the Company to operate
profitably, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Development Programs."
HISTORY OF LOSSES AND UNCERTAINTY OF FUTURE RESULTS. Targeted Genetics is
a development stage company and has generated minimal revenues since inception.
At March 31, 1996, the Company had an accumulated deficit of approximately $30.5
million. On a pro forma basis, giving effect to the RGene Acquisition as if it
had occurred on March 31, 1996, the accumulated deficit would have been
approximately $44.6 million. Losses have resulted from expenses incurred in the
Company's research and development programs and, to a lesser extent, from
general and administrative and interest expenses. The Company expects to incur
substantial additional losses over at least the next several years and expects
cumulative losses to increase substantially as it continues or expands its
research and development activities. Payments from collaborative partners, if
any, and investment income are expected to be the only sources of revenue for
the foreseeable future and revenues from commercial sales of products are not
expected for a number of years, if at all. To achieve profitable operations,
Targeted Genetics, alone or with corporate collaborative partners, must
successfully develop, manufacture, obtain regulatory approvals and market
potential products, of which there can be no assurance. The time required to
reach sustained profitability is highly uncertain and there can be no assurance
that the Company will be able to achieve profitability on a sustained basis, if
at all. Moreover, if
8
<PAGE> 10
profitability is achieved, the level of profitability cannot be predicted and it
may vary significantly from quarter to quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
UNCERTAINTIES RELATING TO CLINICAL TRIALS AND PRODUCT
DEVELOPMENT. Existing data on the safety and efficacy of gene and cell therapy
treatments are very limited. The Company has performed only limited preclinical
and clinical testing of certain of its product candidates and technologies under
development. Preclinical studies of product candidates may not predict and do
not ensure safety or efficacy in humans and are not necessarily indicative of
the results that may be achieved in clinical trials with humans. Possible
serious side effects of retroviral vector-based gene transfer include viral
infections resulting from contamination with replication-competent retroviruses.
In addition, the development of cancer in a patient is theoretically a possible
side effect of all methods of gene transfer. Furthermore, as with most other
biopharmaceutical products, there is also a possibility of toxicity or decreased
efficacy associated with a host immune response toward any vector used in the
Company's treatments. The possibility of such response may be increased if there
is a need to deliver the vector frequently. There can be no assurance that
unacceptable side effects will not be discovered during preclinical and clinical
testing of the Company's potential products. Even after being cleared by the
United States Food and Drug Administration (the "FDA") or the regulatory
authorities of other countries, a product may later be shown to be unsafe or to
not have its purported effect, thereby preventing its widespread use or
requiring its withdrawal from the market. The rate of completion of the
Company's clinical trials depends on, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors, including the size
of the patient population, the nature of the clinical protocol, the proximity of
patients to clinical sites and the eligibility criteria for the trial. Delays in
planned patient enrollment may result in increased costs, delays or termination
of clinical trials, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company has a limited clinical staff and, as a result, will rely on third
parties to assist it in overseeing and monitoring clinical trials, which may
result in delays in completing, or failure to complete, clinical trials if such
third parties fail to perform under their agreements with the Company or fail to
meet regulatory standards in the performance of their obligations under such
agreements. See "Business -- Governmental Regulation."
NEED FOR ADDITIONAL CAPITAL. The Company expects negative cash flow from
operations to continue and to increase for the foreseeable future. The Company
will require substantial additional funds to continue research and development;
to conduct further preclinical studies and clinical trials; to establish
pilot-scale and commercial-scale manufacturing processes and facilities; and to
expand or establish quality-control, regulatory, marketing, sales and
administrative capabilities. The Company's future capital requirements will
depend on numerous factors, including the successful consolidation of RGene with
the Company; continued scientific progress in the Company's research and
development programs; the results of research and development activities;
preclinical studies and clinical trials; acquisition of products or technology,
if any; relationships with existing and future corporate collaborators, if any;
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. The Company estimates that, at
its planned rate of spending, adjusted to reflect the increased expenses
expected to result from the RGene Acquisition, its existing cash, cash
equivalents and securities available for sale, together with the projected
amount of cash or investments expected to be obtained as a result of the RGene
Acquisition, the net proceeds of the Offering and the interest income thereon,
will be sufficient to meet its capital requirements until the third quarter of
1997. There can be no assurance that the underlying assumed levels of revenue
and expense will prove to be accurate. Whether or not these assumptions prove to
be accurate, the Company will need to raise substantial additional capital to
fund operations. The Company intends to seek additional funding through public
or private financing, including equity financing, and through collaborative
arrangements. Adequate funds for these purposes, whether obtained through
financial markets or from collaborative or other arrangements with corporate
partners or other sources, may not be available when needed or may not
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be available on terms favorable to the Company. If additional funds are raised
by issuing equity securities, dilution to existing shareholders may result. In
addition, in the event that additional funds are obtained through arrangements
with collaborative partners, such arrangements may require the Company to
relinquish rights to certain of its technologies or potential products that it
would otherwise seek to develop or commercialize itself. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
EFFECT OF FAILURE TO OBTAIN ADEQUATE FUNDING. If funding is insufficient
at any time in the future, the Company may be required to delay, scale back or
eliminate some or all of its research and development programs or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. Furthermore, the terms of any such license
agreements might be less favorable than if the Company were negotiating from a
stronger position. Moreover, if funding is insufficient at any time in the
future, and the Company's existing funds are depleted, the Company may be
required to cease operations.
UNCERTAINTY OF PATENT POSITION AND PROPRIETARY RIGHTS; ACCESS TO
PROPRIETARY GENES. The Company's success will depend in part on the ability of
the Company and its licensors to obtain and maintain patent protection for the
Company's technology and to preserve its trade secrets and operate without
infringing on the proprietary rights of others, both in the United States and in
other countries. The failure of the Company or its licensors to obtain and
maintain patent protection for the Company's technology could have a material
adverse effect on the Company. Patent positions in the biotechnology field are
highly uncertain and involve complex legal, scientific and factual questions. To
date, there has emerged no consistent policy regarding the breadth of claims
allowed in biotechnology patents, particularly in regard to human therapeutic
uses. There can be no assurance that patent applications relating to the
technology used by the Company will result in patents being issued or that, if
issued, the patent will not be subjected to further proceedings limiting the
scope of the rights under the patent or that such patent will provide a
competitive advantage or will afford protection against competitors with similar
technology, or will not be challenged successfully, invalidated or circumvented
by competitors. Moreover, because patent applications in the United States are
maintained in secrecy until patents issue and patent applications in certain
other countries generally are not published until more than 18 months after they
are filed, and since publication of discoveries in scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it or any licensor was the first creator of inventions covered by pending
patent applications or that it or such licensor was the first to file patent
applications for such inventions. The Company is currently involved in one
patent interference proceeding declared by the United States Patent and
Trademark Office (the "USPTO") to determine priority of invention relating to
certain components that may be useful in retroviral vectors, and may have to
participate in additional interference proceedings. Although the Company does
not anticipate that material expenditures will be made in connection with such
proceedings, participation could result in substantial cost to the Company, even
if the eventual outcome were favorable to it. In addition, although the Company
believes that the technology which is the subject of the current patent
interference proceeding is not material to its current product development
programs, there can be no assurance that such technology will not become
material in the future. If the outcome of the current or any additional
interference proceeding were unfavorable, the Company may be unable to obtain
rights to the invention involved. Through the RGene Acquisition, the Company
acquired rights to technology relating to certain novel cholesterol derivatives
("DC Chol"), which rights were granted to RGene through a license agreement with
the University of Tennessee Research Corporation ("UTRC"). UTRC is responding in
Europe, Japan and Australia to third-party observations based on prior-art
publications that question the patentability of the pending claims in the
respective patent applications relating to DC Chol. The possibility of an
adverse decision in these proceedings, or in a subsequent opposition proceeding
if the respective patents issue, cannot be excluded. In addition, the Company
may become involved in further proceedings before the USPTO concerning the
issued DC Chol patent. The costs associated with such proceedings or an
unfavorable outcome in any such proceedings may have a material adverse effect
on the Company's business, financial condition and results of operations.
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The Company's processes and potential products may conflict with patents
that have been or may be granted to competitors, universities or others. For
example, a U.S. patent directed to ex vivo gene therapy using human cells has
been issued to other parties. As the biotechnology industry expands and more
patents are issued, the risk increases that the Company's processes and
potential products may give rise to claims that they infringe the patents of
others. Such other persons could bring legal actions against the Company
claiming damages and seeking to enjoin clinical testing, manufacturing and
marketing of the affected product or use of the affected process. Litigation may
be necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company or to determine the enforceability, scope and
validity of proprietary rights of others. If the Company becomes involved in
such litigation, it could result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. In addition to any potential liability for significant damages, the
Company could be required to obtain a license to continue to manufacture or
market the affected product or use the affected process. Costs associated with
any licensing arrangement may be substantial and could include ongoing
royalties. There can be no assurance that any license required under any such
patent would be made available to the Company on acceptable terms, if at all. If
such licenses could not be obtained on acceptable terms, the Company could be
prevented from manufacturing and marketing its potential products. Accordingly,
an adverse determination in such litigation could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company also relies upon unpatented proprietary technology. There can
be no assurance that the Company can meaningfully protect its rights in such
unpatented proprietary technology, that any obligation to maintain the
confidentiality of such proprietary technology will not be breached by
employees, consultants, advisors or others, or that others will not
independently develop substantially equivalent technology.
The genes that the Company expects to deliver as part of any gene therapy
products are generally the subject of issued patents or patent applications. The
Company has entered into licenses granting it certain rights to the use of
certain genes currently required in the Company's product development programs.
Failure by the Company to obtain or maintain in effect a license to any genes it
may require to commercialize its potential products may have a material adverse
effect on its business, financial condition and results of operations.
Some of the vectors the Company currently produces for its product
development programs are based on technology in the public domain, as well as
nonexclusive licenses to patented technology. In addition, disputes may arise as
to the ownership of proprietary rights to the extent that outside collaborators
apply technological information developed independently by them or by others to
Company projects or apply Company technology to other projects. See
"Business -- Patents and Proprietary Rights" and "-- Research Collaborations and
Licensing Agreements."
UNCERTAINTY OF GOVERNMENTAL REGULATORY REQUIREMENTS; LENGTHY APPROVAL
PROCESS. The Company's potential products are subject to extensive regulation
by the FDA and foreign governmental authorities. The process of obtaining
regulatory approvals for clinical trials or for the manufacturing or marketing
of the Company's potential products is costly and time-consuming and is subject
to unanticipated delays. Because gene and cell therapy are relatively new
technologies and have not been extensively tested in humans, the regulatory
requirements governing gene and cell therapy products and related clinical
procedures are uncertain and are likely to be modified. There can be no
assurance as to the length of the clinical trial period or the number of
patients required to be enrolled in clinical trials in order to establish the
safety, efficacy and potency of therapeutic products. Accordingly, delays,
rejections or unexpected costs may be encountered based on changes in the policy
or regulations of the FDA or foreign governmental authorities during the period
of product development and regulatory review, which changes may result in
limitations or restrictions on the Company's ability to utilize its technology
or develop its product candidates. Regulatory requirements ultimately imposed
could also adversely affect the ability of the Company to clinically test,
manufacture or market products. In addition, many academic institutions and
companies conducting research in the gene and cell therapy
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fields are using a variety of approaches and technologies. Any adverse results
obtained by such researchers in preclinical studies or clinical trials could
materially adversely affect the regulatory environment for gene and cell therapy
products generally, possibly leading to delays in the regulatory review and
approval process for the Company's potential products. Furthermore, the Company
or governmental authorities may suspend clinical trials at any time if it is
determined that the subjects participating in such trials are exposed to
unacceptable health risks. There can be no assurance that the Company will not
encounter these or other problems in clinical trials that will cause the Company
or governmental authorities to delay or suspend such trials. Even if regulatory
approval of a potential product is obtained, such approval may entail
limitations on the indicated uses for which such product may be marketed, which
may restrict the patient population for which any product may be prescribed. In
addition, a marketed product is subject to continual FDA review. Later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on marketing a product or
withdrawal of the product from the market, as well as possible criminal or civil
sanctions.
To commercialize any product and prior to submitting the application for
marketing approval in the United States, the Company must sponsor and file an
Investigational New Drug application ("IND") for each proposed product and must
be responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA approval of such
product. Certain of the Company's current and planned Phase I clinical trials
are under investigator-sponsored INDs. Although the Company expects to be able
to use data from such clinical trials in proceeding with clinical trials in the
United States and in Europe, there can be no assurance that the FDA or foreign
governmental authorities will permit the Company to rely on such data. In
addition, there can be no assurance that the Company will be able to obtain the
necessary clearances for clinical trials or approvals for manufacturing or
marketing any of its product candidates.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. At that time, the Company must submit relevant data,
including the results of product development activities, preclinical studies and
clinical trials, in addition to detailed manufacturing information.
Notwithstanding the submission of relevant data, the FDA may withhold marketing
approval and may require additional clinical trials. All manufacturing
operations also are subject to the FDA's current Good Manufacturing Practice
("cGMP") requirements on an ongoing basis. There can be no assurance that the
Company will be able to attain or maintain compliance with cGMP requirements.
The Company is similarly subject to regulation by foreign governmental
authorities.
Failure to obtain regulatory approvals for its product candidates or to
either attain or maintain compliance with cGMP or other manufacturing
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulation."
INTENSE COMPETITION. The Company is experiencing intense competition from
companies developing gene and cell therapy technologies as well as those using
more traditional approaches to treating human diseases. The Company is aware of
a number of companies and institutions that are developing or considering the
development of potential gene and cell therapy treatments, including early-stage
gene therapy companies, fully integrated pharmaceutical companies, universities,
research institutions, governmental agencies and other healthcare providers. In
addition, the Company's potential products will be required to compete with
existing pharmaceutical products, or products developed in the future, that are
based on established technologies. Many of the Company's competitors have
substantially more financial and other resources, larger research and
development staffs, and more experience and capabilities in researching,
developing and testing products in clinical trials, in obtaining FDA and other
regulatory approvals, and in manufacturing, marketing and distribution than the
Company. In addition, the competitive positions of other early-stage companies
may be enhanced significantly through their collaborative arrangements with
large pharmaceutical companies or academic institutions. The Company's
competitors may succeed in developing, obtaining patent protection for,
receiving FDA and other regulatory approvals for, or commercializing products
more rapidly than the
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Company. If the Company is successful in commercializing its products, it will
be required to compete with respect to manufacturing efficiency and marketing
capabilities, areas in which it has no experience. The Company also competes
with others in acquiring products or technology from research institutions or
universities. The Company's competitors may develop new technologies and
products that are available for sale prior to the Company's potential products
or that are more effective than the Company's potential products. In addition,
competitive products may be manufactured and marketed more successfully than the
Company's potential products. Such developments could render the Company's
potential products less competitive or obsolete, and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGE. Gene and cell therapy are new and rapidly
evolving fields, and are expected to continue to undergo significant and rapid
technological change. Considerable experimentation and clinical testing must be
completed successfully before gene and cell therapies are used in practice.
Rapid technological development could result in actual and proposed
technologies, products or processes of the Company becoming obsolete prior to
successful commercialization. There can be no assurance that the Company's
research and development efforts will be successful.
DEPENDENCE ON REIMBURSEMENT. Successful commercial sales of the Company's
potential products will depend in part on the availability of reimbursement from
third-party payors, such as government and private insurance plans. There is
significant uncertainty concerning the reimbursement status of newly approved
healthcare products, and third-party payors are increasingly challenging the
prices charged for medical products and services. There can be no assurance that
adequate third-party reimbursement will be available for the Company's potential
products, or that any third-party reimbursement that is obtained will be
adequate to enable the Company to maintain price levels sufficient to realize an
adequate return on its investments in manufacturing and product development. If
adequate reimbursement is not provided by government and third-party payors for
the Company's potential products, the Company's business, financial condition
and results of operations would be materially adversely affected.
HEALTHCARE REFORM. The healthcare industry in the United States and in
Europe is undergoing fundamental changes as the result of political, economic
and regulatory influences. Reforms proposed from time to time include mandated
basic healthcare benefits, controls on healthcare spending through limitations
on the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups and fundamental
changes to the healthcare delivery system. The Company anticipates that
alternative healthcare delivery systems and methods of payment will continue to
be reviewed and assessed, and public debate of these issues will likely
continue. The Company cannot predict whether any reform initiatives will result
or, if adopted, what impact they might have on the Company, and there can be no
assurance that the adoption of reform proposals will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Announcements of reform proposals and the investment community's reaction to
such proposals, announcements by competitors and payors of their strategy in
responding to reform initiatives, and general industry conditions could produce
volatility in the trading and market price of the Common Stock.
DEPENDENCE ON KEY PERSONNEL AND SCIENTIFIC COLLABORATORS. The Company is
highly dependent on the principal members of its scientific and management
staff. Loss of any of these persons could materially adversely affect the
Company's business, financial condition and results of operations. The Company
does not have any employment contracts or key person life insurance. The
Company's success will depend in large part on its ability to attract and retain
key employees and scientific advisors. Competition among biotechnology and
pharmaceutical companies for highly skilled scientific and management personnel
is intense. There can be no assurance that the Company will be successful in
retaining its existing personnel or advisors, or in attracting additional
qualified employees. The Company's anticipated expansion of existing functions
and entry into new areas and activities requiring additional expertise, such as
clinical testing, regulatory compliance, manufacturing, marketing and
distribution, are expected to place increased demands on the Company's
resources. These
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activities are expected to require the addition of new personnel with expertise
in these areas and the development of additional expertise by existing
personnel. The failure to attract and retain such personnel, loss of existing
personnel or failure to develop such expertise could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also depends on the continued availability of outside
scientific collaborators who perform research, which may be funded by the
Company, in certain areas relevant to the Company's research. The Company's
scientific collaborators are not employees of the Company and generally may
terminate their relationship with the Company at any time. In addition, certain
of the Company's collaborators have consulting or other advisory relationships
with other entities that may conflict with their obligations to the Company. As
a result, the Company has limited control over their activities and can expect
that only limited amounts of their time will be dedicated to Company activities.
For these reasons, there can be no assurance that inventions or processes
developed by the Company's collaborators will become the property of the
Company. Although certain of the Company's scientific collaborators have agreed
not to engage in activities that would involve a conflict of interest with the
Company, there can be no assurance that this will not occur. The Company has
relied upon scientific, technical, clinical, commercial and other data supplied
and disclosed by outside collaborators and will rely in part on such data in
support of INDs and subsequent clinical trials for its potential products. There
can be no assurance that such information will not contain errors or omissions
of fact or will not otherwise prove inadequate to support the Company's research
and development efforts.
NO COMMERCIAL MANUFACTURING, DISTRIBUTION OR MARKETING CAPABILITY. The
Company's current facilities and staff will need to be expanded or supplemented
for large-scale clinical or commercial production of its potential products.
Large-scale manufacturing of gene and cell therapy products has not been
demonstrated by any third party. The Company will be required to contract with
others or to construct a production facility in order to complete all the
clinical trials necessary for product commercialization. Certain of the
Company's products under development may be delivered through the processing of
patient cells in specialized laboratories. The Company will be required to
construct its own commercial-scale laboratories or contract with others for such
processing. In addition, the Company has no experience in sales and marketing.
To market any products that may result from its development programs, Targeted
Genetics will have to develop marketing and sales capabilities, either on its
own or in conjunction with others. The Company will depend to a significant
extent on collaborative partners, licensees or other entities for development,
manufacturing and commercialization of its potential products. There can be no
assurance that the Company will be able to enter into any such arrangements on
acceptable terms, if at all. If the Company is unable to obtain or retain third-
party manufacturing on commercially acceptable terms, its ability to
commercialize potential products may be delayed or foreclosed. The Company's
dependence upon third parties for the manufacture, marketing and sale of its
potential products may materially adversely affect the Company's ability to
develop and deliver products on a timely and competitive basis. In addition, the
terms of the collaborative arrangement between RGene and Laboratoires Fournier
S.C.A. ("Fournier") contemplate that, upon the negotiation and execution of a
definitive supply agreement, RGene will have the right, subject to certain
conditions, to manufacture and supply to Fournier its requirements for RGene's
E1A tumor suppressor product candidate, for which RGene would receive
manufacturing fees. There can be no assurance that RGene, either independently
or with third parties, will be able to manufacture such product in compliance
with applicable regulatory requirements and in sufficient quantities on a timely
and cost-effective basis, if at all, or that any manufacturing fees will be
received. If the Company engages in commercial-scale manufacturing and marketing
of its or its collaborative partners' potential products, it will require
substantial additional funds, personnel and production facilities. See "-- Need
for Additional Capital," "-- Dependence on Corporate Collaborators" and
"Business -- Research Collaborations and Licensing Agreements -- RGene
Agreements."
UNCERTAINTY ASSOCIATED WITH INTEGRATION. Integration of the operations of
RGene into the operations of Targeted Genetics will require dedication of
significant management resources. Successful integration of RGene with Targeted
Genetics will distract Targeted Genetics' management from the
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day-to-day business of the Company. Accordingly, any delays in achieving
integration may have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON CORPORATE COLLABORATORS. The Company expects to rely in the
future on corporate collaborative partners to conduct clinical trials, obtain
regulatory approvals and manufacture and market any resulting products. Although
the Company believes that such collaborative partners would have an economic
motivation to commercialize products that result from the Company's research and
development efforts, the amount and timing of resources devoted to these
activities by such parties could depend on the achievement of technical and
research goals by the Company and generally would be controlled by such
partners. The sale of products may depend on the successful completion of
arrangements with future partners, licensees or distributors in each territory.
There can be no assurance that the Company will be successful in establishing
any such collaborative arrangements or that any such future partner would be
successful in commercializing products. Effective May 1996, RGene entered into a
collaborative arrangement with Fournier under which Fournier received exclusive
rights to develop and commercialize in Europe the E1A tumor suppressor product
candidate and any other product candidates based on the E1A tumor suppressor
gene and developed pursuant to the agreement. Fournier has agreed to coordinate
development of the E1A tumor suppressor product candidate in Europe by
conducting clinical trials, preparing and filing submissions for regulatory
approval in its territory and paying all associated costs, while RGene has
corresponding responsibilities with respect to development and commercialization
in the United States. The agreement provides that Fournier will make milestone
payments to RGene upon the achievement of specified goals by Fournier or RGene
and also will pay to RGene manufacturing fees if RGene manufactures products for
Fournier and royalties on sales of resulting products, if any. Because Fournier
has been granted exclusive development and commercialization rights with respect
to the E1A tumor suppressor product candidate in Europe, the success of the E1A
tumor suppressor product candidate and related products in Europe depends upon
the efforts of Fournier. There can be no assurance that Fournier will perform
its obligations under the agreement, that it or RGene will successfully develop
or market any products under the agreement, or that RGene will ever receive any
milestone payments, royalties or manufacturing fees under the agreement, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, there can be no assurance that
present or future collaborators will not pursue existing or alternative
technologies in preference to potential products being developed in
collaboration with the Company. See "Business -- Research Collaborations and
Licensing Agreements."
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development activities involve the controlled use of hazardous materials,
chemicals, biological materials and radioactive compounds. The Company is
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any resulting damages, and any such liability
could exceed the Company's resources. The Company may be required to incur
significant costs to comply with environmental laws and regulations in the
future. Current or future environmental laws or regulations may have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Governmental Regulation."
PRODUCT LIABILITY. The testing, manufacture, marketing and sale of human
healthcare products entail the inherent risk of liability claims or product
recalls and associated adverse publicity. The Company currently has a limited
amount of product liability insurance. Such insurance is expensive and there can
be no assurance that it will continue to be available in sufficient amounts and
on acceptable terms, if at all. In addition, pursuant to the terms of certain of
its collaborative arrangements, including RGene's agreement
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with Fournier, RGene has agreed to indemnify certain of its collaborative
partners with respect to certain losses incurred as a result of the manufacture,
supply or sale of potential product candidates. A product liability claim or
product recall could inhibit or prevent commercialization of products being
developed by the Company. Any product liability claim, including an
indemnification claim under the Fournier agreement or any other collaborative
agreement, or product recall could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE; ABSENCE OF DIVIDENDS. Since the
Company's initial public offering, the market price of the Common Stock has
fluctuated significantly. The stock market has experienced significant price and
volume fluctuations that are often unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock, similar
to that of securities of other biotechnology companies, may, at times, be highly
volatile. Factors such as the results of preclinical studies and clinical trials
by the Company or its competitors, other evidence of the safety or efficacy of
products of the Company or its competitors, announcements of technological
innovations or new products by the Company or its competitors, changes in
governmental regulation, developments in patent or other proprietary rights of
the Company or its competitors, including litigation, fluctuations in the
Company's operating results and changes in general market conditions for
biotechnology stocks could have a significant impact on the future price of the
Common Stock. The Company has never paid cash dividends on the Common Stock and
does not anticipate paying cash dividends in the foreseeable future. See "Price
Range of Common Stock" and "Dividend Policy."
CONCENTRATION OF OWNERSHIP AND ANTITAKEOVER CONSIDERATIONS. As of June 19,
1996, after giving effect to the issuance of 3,636,364 shares of Common Stock
issuable in connection with the RGene Acquisition, the Company's directors,
director nominees, executive officers and principal shareholders owned
beneficially approximately 45% of the outstanding shares of Common Stock. In
particular, Immunex owned beneficially approximately 16% of such outstanding
shares. Accordingly, these shareholders have significant influence over the
election of the Company's directors and most other shareholder actions. The
Company has the authority to issue up to 6,000,000 shares of Preferred Stock in
one or more series and to fix the powers, designations, preferences and relative
rights thereof without any further vote or action by the Company's shareholders.
The issuance of Preferred Stock could dilute the voting power of holders of
Common Stock and could have the effect of delaying, deferring or preventing a
change in control of the Company. Certain provisions of the Company's Restated
Articles of Incorporation (the "Articles of Incorporation"), the Amended and
Restated Bylaws (the "Bylaws") and employee benefit plans, as well as Washington
law, may operate in a manner that could discourage or render more difficult a
takeover of the Company, the removal of directors or the ability to call a
special meeting of the shareholders, or may limit the price certain investors
may be willing to pay in the future for shares of Common Stock. See
"Management -- Benefit Plans," "Principal Shareholders" and "Description of
Capital Stock -- Certain Charter Provisions and Washington Law."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of shares of
Common Stock in the public market following the Offering or the perception that
such sales could occur could have a material adverse effect on the price of the
Common Stock. Upon completion of the Offering, the Company will have 19,538,848
shares of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option), including the 3,636,364 shares of Common Stock issuable
in connection with the RGene Acquisition. Of these shares, the 3,500,000 shares
to be sold in the Offering and, as of June 19, 1996, approximately 8,311,173
additional shares of Common Stock (as well as an additional 769,598 shares
issuable upon exercise of warrants to purchase Common Stock) will be or are
freely tradable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"). The remaining 7,727,675 outstanding shares of Common
Stock (including the 3,636,364 shares issuable in connection with the RGene
Acquisition) are restricted shares ("Restricted Shares") under the Securities
Act and may only be sold if they are registered or qualify for an exemption from
registration under Rule 144 of the Securities Act ("Rule 144"). The Company's
current directors and executive officers and certain shareholders, who
immediately after the Offering will hold in the aggregate 4,088,850 shares of
Common Stock (all of which are Restricted Shares), have agreed not to sell any
of
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these shares for 90 days after the date of this Prospectus without the prior
written consent of Vector Securities International, Inc. Commencing 91 days from
the date of this Prospectus, all the shares of Common Stock subject to such
agreements will be available for immediate sale in the public market, subject to
certain volume, manner of sale and other limitations under Rule 144. In
addition, it is a condition to the issuance of shares of Common Stock to the
former RGene stockholders that such stockholders, who will hold 3,636,364 shares
of Common Stock, agree not to sell any such shares (or shares issued in
connection with the milestone payments) for the period ending 30 months
following the closing of such transaction, subject to the release of such shares
from the lock-up agreements in increments of 20% at the end of each six-month
period following the closing of the RGene Acquisition. Prior to the one-year
anniversary of the closing of the RGene Acquisition, the Company is obligated to
file a registration statement under the Securities Act in order to register for
sale in the public market 50% of the 3,636,364 shares of Common Stock issuable
to the former RGene stockholders, as well as shares issued in connection with
the milestone payments. The Company has agreed to cause such registration
statement, which the Company may defer under certain circumstances, to remain
effective for a period ending 24 months after the completion of the RGene
Acquisition. Following the closing of the Offering, the holders of 3,806,775
shares of Common Stock (as well as 62,016 shares issuable upon exercise of
outstanding warrants) will be entitled to certain rights with respect to
registration of such shares for sale in the public market. See "Description of
Capital Stock -- Registration Rights."
DILUTION. The public offering price in the Offering is substantially
higher than the book value per share of Common Stock. Investors purchasing
shares of Common Stock in the Offering will incur immediate and substantial
dilution. Additional dilution is likely to occur upon the exercise of
outstanding warrants and stock options. See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby (after deducting the underwriting discounts and
commissions and estimated offering expenses) are estimated to be approximately
$12.8 million (approximately $14.7 million if the Underwriters' over-allotment
option is exercised in full). The Company anticipates that the net proceeds of
the Offering will be used principally to fund research and development; clinical
testing; capital expenditures, including expansion of existing facilities;
working capital; and for general corporate purposes. Research and development
activities to be funded by the net proceeds will involve hiring additional
scientific staff and conducting clinical trials. Net proceeds may also be used
to acquire technology, products or businesses that complement the Company's
business. No such transactions involving a material amount of cash consideration
are being negotiated as of the date of this Prospectus. The amounts actually
expended for each purpose will depend on numerous factors, including the
successful consolidation of RGene with the Company; continued scientific
progress in the Company's 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,
if any; 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. The Company
estimates that, at its planned rate of spending, adjusted to reflect the
increased expenses expected to result from the RGene Acquisition, the net
proceeds of the Offering and the interest income thereon, together with existing
cash, cash equivalents, securities available for sale and the projected amount
of cash or investments expected to be obtained as a result of the RGene
Acquisition, will be sufficient to meet its capital requirements until the third
quarter of 1997. In the event that all outstanding warrants with an exercise
price of $4.68 per share and expiring in July 1997 are exercised, the Company
will receive an additional $3.6 million, which amount should enable the Company
to fund its capital requirements until late 1997. There can be no assurance that
the underlying assumed levels of revenue and expense will prove to be accurate
or that any warrants will in fact be exercised. If the Company is successful in
its efforts to establish one or more collaborative research and development
arrangements with corporate partners, funding received under such arrangements
would extend the period during which the net offering proceeds, together with
existing resources, would fund the Company's capital requirements. See "Risk
Factors -- History of Losses and Uncertainty of Future Results" and "-- Need for
Additional Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Pending the above uses, the net proceeds of the Offering will be invested
in investment grade, interest-bearing securities.
18
<PAGE> 20
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on May 20, 1994. The
Common Stock is quoted on the Nasdaq National Market under the symbol "TGEN." On
June 19, 1996, the last reported sale price for the Common Stock on the Nasdaq
National Market was $4.94 per share. The following table sets forth, for the
periods indicated, the high and low sale prices for the Common Stock as reported
by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1994
Second Quarter (beginning May 20, 1994).................. $7.13 $5.63
Third Quarter............................................ 6.13 3.81
Fourth Quarter........................................... 5.75 3.75
1995
First Quarter............................................ $6.38 $3.88
Second Quarter........................................... 5.63 3.50
Third Quarter............................................ 6.50 3.63
Fourth Quarter........................................... 5.63 3.75
1996
First Quarter............................................ $7.25 $4.00
Second Quarter (through June 19, 1996)................... 6.25 3.88
</TABLE>
As of June 19, 1996, there were approximately 1,500 holders of the Common
Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock. The Company
currently intends to retain any future earnings to finance the growth and
development of its business and therefore does not anticipate paying cash
dividends on the Common Stock in the foreseeable future.
19
<PAGE> 21
DILUTION
At March 31, 1996, the Company had a pro forma net tangible book value of
approximately $13.7 million, or $0.85 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities divided by the number of shares of Common Stock
outstanding and gives effect to the RGene Acquisition. Without taking into
account any other changes in pro forma net tangible book value after March 31,
1996, other than to give effect to the receipt of the estimated net proceeds
from the sale of the 3,500,000 shares of Common Stock offered hereby, the pro
forma net tangible book value of the Company at March 31, 1996 would have been
approximately $26.5 million, or $1.35 per share. This represents an immediate
increase in pro forma net tangible book value of $0.50 per share to existing
shareholders and an immediate dilution of $2.65 per share to purchasers of
shares of Common Stock in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Offering price per share............................................. $4.00
Pro forma net tangible book value per share at March 31, 1996...... $0.85
Increase per share attributable to new investors................... 0.50
-----
Pro forma net tangible book value per share after the Offering....... 1.35
-----
Dilution per share to new investors.................................. $2.65
=====
</TABLE>
The foregoing table assumes no exercise of outstanding stock options or
warrants. The Company has reserved 1,520,000 shares of Common Stock for issuance
pursuant to its stock option plans, 1,177,014 of which were issuable upon the
exercise of stock options outstanding as of March 31, 1996, at exercise prices
ranging from $0.50 to $6.25 per share, with a weighted average exercise price of
$3.20 per share. In addition, the Company has reserved 831,614 shares of Common
Stock for issuance upon exercise of outstanding warrants, at exercise prices
ranging from $4.68 to $8.75 per share, with a weighted average exercise price of
$4.78 per share. To the extent these options or warrants are exercised, there
will be further dilution to new investors. The table does not take into account
the issuance of an indeterminate number of shares of Common Stock that may be
issued to former RGene stockholders in the event certain milestones are achieved
by December 31, 1998. See "Management -- Benefit Plans," "Description of Capital
Stock -- Warrants," "RGene Acquisition" and Note 6 of Notes to Targeted Genetics
Financial Statements.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1996; (ii) such capitalization after giving pro forma effect to
the RGene Acquisition; and (iii) such pro forma capitalization as adjusted to
reflect the receipt of the estimated net proceeds from the sale of the 3,500,000
shares of Common Stock offered hereby. The information set forth in this table
should be read in conjunction with the Company's Financial Statements and Notes
thereto included elsewhere herein. See "Unaudited Pro Forma Consolidated
Financial Statements."
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------------
PRO FORMA
ACTUAL(1) PRO FORMA(2) AS ADJUSTED(3)
--------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations................................. $ 2,634 $ 2,634 $ 2,634
Shareholders' equity:
Preferred Stock, $.01 par value; 6,000,000 shares
authorized: no shares outstanding................ -- -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized: 12,397,484 shares issued and
outstanding, actual; 16,033,848 shares issued and
outstanding, pro forma; and 19,533,848 shares
issued and outstanding, pro forma as adjusted.... 43,605 58,459 71,234
Unrealized losses on securities available for
sale............................................. (5) (5) (5)
Deficit accumulated during development stage........ (30,481) (44,550) (44,550)
-------- -------- --------
Total shareholders' equity....................... 13,119 13,904 26,679
-------- -------- --------
Total capitalization........................... $ 15,753 $ 16,538 $ 29,313
======== ======== ========
</TABLE>
- ------------------
(1) Excludes 1,177,014 shares issuable upon exercise of options outstanding at
March 31, 1996, with a weighted average exercise price of $3.20 per share,
and 831,614 shares issuable upon exercise of warrants outstanding at March
31, 1996, with a weighted average exercise price of $4.78 per share. See
"Management -- Benefit Plans," "Description of Capital Stock -- Warrants"
and Note 6 of Notes to Targeted Genetics Financial Statements.
(2) Includes the 3,636,364 shares to be issued upon completion of the RGene
Acquisition. Excludes an indeterminate number of shares of Common Stock to
be issued to RGene stockholders in the event certain milestones are achieved
before December 31, 1998. See "RGene Acquisition."
(3) Gives effect to the RGene Acquisition as if it had occurred on March 31,
1996, the sale by the Company of the 3,500,000 shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom. See
"Use of Proceeds."
21
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995 and balance sheet at December 31, 1994 and 1995 are derived
from the Company's financial statements that have been audited by Ernst & Young
LLP, independent auditors, which are included elsewhere herein, and are
qualified by reference to such Financial Statements and Notes related thereto.
The selected financial data with respect to the Company's statements of
operations for the years ended December 31, 1991 and 1992 and the balance sheets
at December 31, 1992 and 1993 are derived from the audited financial statements
of the Company that have been audited by Ernst & Young LLP, independent
auditors, which are not included herein. The financial data at March 31, 1996
and for the three months ended March 31, 1995 and 1996 are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for those periods. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Prospectus. The pro forma financial statement
data at March 31, 1996 and for the year ended December 31, 1995 and the three
months ended March 31, 1996 are unaudited.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996(2)
-------- ------- ------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ -- $ 549 $ 412 $ 449 $ 842 $ 1,195 $ 132 $ 183 $ 2,706
Expenses:
Research and
development.......... 1,084 1,477 4,261 6,763 8,195 11,268 1,978 2,366 4,636
General and
administrative....... 299 466 1,217 1,892 2,267 3,020 701 617 888
Interest............... -- -- -- 193 302 302 75 92 92
------- ------- ------- ------- ------- -------- ------- ------- -------
Total expenses..... 1,383 1,943 5,478 8,848 10,764 14,590 2,754 3,075 5,616
------- ------- ------- ------- ------- -------- ------- ------- -------
Net loss................. $(1,383) $(1,394) $(5,066) $(8,399) $(9,922) $(13,395) $(2,622) $(2,892) $(2,910)
======= ======= ======= ======= ======= ======== ======= ======= =======
Net loss per share....... $ (0.94) $ (0.95) $ (0.29) $ (0.23) $ (0.18)
======= ======== ======= ======= =======
Shares used in
computation of net loss
per share.............. 10,533 14,169 8,966 12,343 15,979
Pro forma, assuming
conversion of Preferred
Stock to Common Stock
(3):
Net loss per share..... $ (1.03)
=======
Shares used in
computation of net
loss per share....... 8,152
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------
------------------------------------------- PRO FORMA
1992(4) 1993 1994 1995 1996 1996(5)
-------- ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities available for
sale.................................................. $ 15,266 $ 6,797 $ 11,475 $ 14,443 $ 11,878 $ 14,105
Working capital......................................... 14,776 6,021 10,178 12,856 10,408 11,017
Total assets............................................ 15,877 12,115 17,046 19,960 17,381 19,930
Long-term obligations................................... 15 1,015 2,253 2,405 2,634 2,634
Deficit accumulated during development stage............ (4,202) (9,267) (17,667) (27,589) (30,481) (44,550)
Total shareholders' equity.............................. 15,297 10,231 13,242 15,773 13,119 13,904
</TABLE>
- ------------------
(1) Gives effect to the RGene Acquisition as if it had occurred on January 1,
1995. See "Unaudited Pro Forma Consolidated Financial Statements."
(2) Gives effect to the RGene Acquisition as if it had occurred on January 1,
1996. See "Unaudited Pro Forma Consolidated Financial Statements."
(3) Computed on the basis described in Note 2 of Notes to Targeted Genetics
Financial Statements.
(4) Prior to 1992, the Company was a wholly owned subsidiary of Immunex and,
accordingly, balance sheet data did not exist.
(5) Gives effect to the RGene Acquisition as if it had occurred on March 31,
1996. See "Unaudited Pro Forma Consolidated Financial Statements."
22
<PAGE> 24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Consolidated Financial Statements as of March 31,
1996, for the year ended December 31, 1995 and for the three months ended March
31, 1996 are unaudited. The Unaudited Pro Forma Consolidated Balance Sheet was
prepared as if the RGene Acquisition was effective at March 31, 1996. The
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995 was prepared as if the RGene Acquisition was effective as of
January 1, 1995. The Unaudited Pro Forma Statement of Operations for the three
months ended March 31, 1996 was prepared as if the RGene Acquisition was
effective as of January 1, 1996. The Unaudited Pro Forma Consolidated Financial
Statements do not purport to represent what the Company's financial position or
results of operations would actually have been if the RGene Acquisition had in
fact occurred on such dates or to project the Company's financial position or
results of operations as of any future date or for any future period. The
Unaudited Pro Forma Consolidated Financial Statements are based on the
historical financial statements of the Company and RGene and give effect to the
RGene Acquisition under the purchase method of accounting. The Unaudited Pro
Forma Consolidated Balance Sheet, as adjusted, reflects the application of the
net proceeds from the sale of 3,500,000 shares of Common Stock offered by the
Company hereby (after deducting the underwriting discounts and commissions and
estimated offering expenses). The Unaudited Pro Forma Consolidated Financial
Statements should be read in conjunction with the Targeted Genetics and RGene
audited Financial Statements and Notes thereto included elsewhere herein.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
TARGETED PRO FORMA ADJUSTMENTS PRO FORMA,
GENETICS RGENE ADJUSTMENTS PRO FORMA FOR OFFERING AS ADJUSTED
-------- ------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 1,526 $1,677 $ 550(1) $ 3,753 $ 12,775(6) $ 16,528
Securities available for sale............ 10,352 -- -- 10,352 -- 10,352
Deposits, prepaid expenses and other..... 158 146 -- 304 -- 304
-------- ------- ------- -------- -------- --------
Total current assets................... 12,036 1,823 550 14,409 12,775 27,184
Property, plant and equipment, net......... 4,991 176 -- 5,167 -- 5,167
In-process research and development........ -- -- 14,069(1) -- -- --
(14,069)(2)
Other assets............................... 354 -- -- 354 -- 354
-------- ------- ------- -------- -------- --------
$17,381 $1,999 $ 550 $ 19,930 $ 12,775 $ 32,705
======== ======= ======= ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 403 $ 264 $ -- $ 667 $ -- $ 667
Notes payable to related parties......... -- 1,000 (1,000)(3) -- -- --
Accrued payroll and other liabilities.... 229 -- -- 229 -- 229
Payable to related parties............... -- 1,500 -- 1,500 -- 1,500
Current portion of long-term
obligations............................ 996 -- -- 996 -- 996
-------- ------- ------- -------- -------- --------
Total current liabilities.............. 1,628 2,764 (1,000) 3,392 -- 3,392
Long-term obligations...................... 2,634 -- -- 2,634 -- 2,634
Shareholders' equity (deficit):
Preferred stock.......................... -- 4,000 (4,000)(4) -- -- --
Common stock............................. 43,605 360 1,000(3) 58,459 12,775(6) 71,234
(1,360)(4)
14,854(5)
Unrealized losses on securities available
for sale............................... (5 ) -- -- (5 ) -- (5)
Deficit accumulated during development
stage.................................. (30,481 ) (5,125 ) (14,069)(2) (44,550 ) -- (44,550)
5,125(4)
-------- ------- ------- -------- -------- --------
Total shareholders' equity (deficit)... 13,119 (765 ) 1,550 13,904 12,775 26,679
-------- ------- ------- -------- -------- --------
$17,381 $1,999 $ 550 $ 19,930 $ 12,775 $ 32,705
======== ======= ======= ======== ======== ========
</TABLE>
23
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TARGETED PRO FORMA
GENETICS RGENE ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Investment income................................... $ 668 $ 53 $ -- $ 721
Other............................................... 174 300 -- 474
------- ------- ---- --------
Total revenues................................... 842 353 -- 1,195
------- ------- ---- --------
Expenses:
Research and development............................ 8,195 3,073 -- 11,268
General and administrative.......................... 2,267 753 -- 3,020
Interest............................................ 302 22 (22)(3) 302
------- ------- ---- --------
Total expenses................................... 10,764 3,848 (22) 14,590
------- ------- ---- --------
Net loss.............................................. $(9,922) $(3,495) $ 22 $(13,395)
======= ======= ==== ========
Net loss per share.................................... $ (0.94) $ (0.95)
======= ========
Shares used in computation of net loss per share...... 10,533(7) 14,169 (8)
======= ========
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TARGETED PRO FORMA
GENETICS RGENE ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
License and other fees.............................. $ -- $ 2,500 $ -- $ 2,500
Investment income................................... 183 23 -- 206
------- ------- ---- --------
Total revenues................................... 183 2,523 -- 2,706
------- ------- ---- --------
Expenses:
Research and development............................ 2,366 2,270 -- 4,636
General and administrative.......................... 617 271 -- 888
Interest............................................ 92 32 (32)(3) 92
------- ------- ---- --------
Total expenses................................... 3,075 2,573 (32) 5,616
------- ------- ---- --------
Net loss.............................................. $(2,892) $ (50) $ 32 $ (2,910)
======= ======= ==== ========
Net loss per share.................................... $ (0.23) $ (0.18)
======= ========
Shares used in computation of net loss per share...... 12,343 (7) 15,979 (8)
======= ========
</TABLE>
24
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Unaudited Pro Forma Consolidated Financial Statements give
effect to the RGene Acquisition using the purchase method of accounting. The
allocation of the purchase price in the accompanying Unaudited Pro Forma
Consolidated Financial Statements is based on the Company's estimates. Amounts
allocated to RGene assets and liabilities will be based on the estimated fair
values at the actual time of the RGene Acquisition. The consideration paid for
RGene consists of 3,636,364 shares of Common Stock. These shares are
unregistered and, accordingly, cannot be freely traded until such shares are
registered or an exemption from registration is available. The Company is
obligated to register 50% of such shares for resale under the Securities Act
prior to the one-year anniversary of the effective date of the RGene
Acquisition. Additionally, all of such shares are restricted pursuant to lock-up
agreements under which the shares are released in 20% increments every six
months beginning six months after the effective date of the RGene Acquisition.
For purposes of the Unaudited Pro Forma Consolidated Financial Statements, the
shares have been valued at an average price of approximately $4.08 per share.
This valuation was calculated using the closing price of the Common Stock on
April 16, 1996, the date the Merger Agreement was signed, discounted at rates
that reflect the varying periods of restriction. The resulting total
consideration of $16,618,000 includes liabilities assumed totaling $1,764,000.
Such liabilities include $1.5 million payable to related parties under the
existing terms of certain license agreements. Under the terms of the Merger
Agreement, prior to the closing of the RGene Acquisition, RGene was required to
negotiate changes to a license agreement such that this liability and future
payments under the agreement will be substantially reduced. As a result of an
amendment to such license agreement completed in the second quarter of 1996, the
aforementioned $1.5 million payable to related parties was reduced to $500,000.
The total consideration does not reflect the additional $5 million of Common
Stock which may be issuable to former RGene stockholders upon the achievement of
certain milestones. At the time any such Common Stock becomes issuable, the
Company will be required to record additional noncash expense, representing
in-process research and development, equal to the value of such Common Stock.
See "RGene Acquisition."
The pro forma adjustments are described in the following notes:
(1) Allocates the estimated purchase price to identifiable assets acquired
and liabilities assumed as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
TOTAL RGENE BALANCE SHEET
PURCHASE PRICE BALANCE SHEET ADJUSTMENTS
-------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 2,227 $ 1,677 $ 550
Deposits, prepaid expenses and other.......... 146 146 --
Property, plant and equipment, net............ 176 176 --
In-process research and development........... 14,069 -- 14,069
------- ----- -------
$ 16,618 $ 1,999 $14,619
======= ===== =======
</TABLE>
The amount allocated to cash and cash equivalents reflects $550,000 of
additional capital being contributed by RGene's existing investors under the
terms of the Merger Agreement.
(2) Records the write-off of in-process research and development acquired
by the Company. This adjustment has not been reflected in the Unaudited Pro
Forma Statement of Operations as the charge is considered nonrecurring.
(3) Reflects the conversion of notes payable into shares of RGene common
stock prior to the merger and eliminates interest expense thereon.
(4) Eliminates the historical stockholders' equity accounts of RGene.
(5) Reflects the issuance of 3,636,364 shares of Common Stock to the former
stockholders of RGene, valued as described above.
(6) Reflects the receipt of the estimated net proceeds of the Offering. See
"Use of Proceeds."
(7) Computed on the basis described in Note 2 of Notes to Targeted Genetics
Financial Statements.
(8) Reflects the issuance of 3,636,364 shares of Common Stock to the former
stockholders of RGene.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include the factors discussed below as well as the factors discussed
in "Risk Factors" and elsewhere in this Prospectus. Special Note: Certain
statements set forth below constitute "forward-looking statements" within the
meaning of the Reform Act. See "Special Note Regarding Forward-Looking
Statements" on page 2 for additional factors relating to such statements.
OVERVIEW
Targeted Genetics, a development stage company, was incorporated in March
1989 as a wholly owned subsidiary of Immunex. The Company's activities were
carried out as a project within Immunex through December 31, 1991. In 1992, the
Company began to operate independently of Immunex and raised $16.6 million, net
of expenses, in a private placement of Preferred Stock. The Company subsequently
raised an additional $23.8 million in two public offerings of Common Stock.
Currently, the Company has no significant revenue sources other than interest
income earned on investments, and it has generated an accumulated deficit of
approximately $30.5 million through March 31, 1996.
It is not anticipated that the Company will have any product-related
revenues for a number of years. Accordingly, the Company expects to generate
substantial additional losses in the future attributable to the continuation of
preclinical and clinical research programs, development of manufacturing
capabilities and the preparation for commercialization of its products under
development. The Company's ability to achieve profitability depends in part on
its ability alone and/or with others to complete the development of product
candidates, obtain regulatory approvals, comply with applicable regulatory
requirements and manufacture and market such products, of which there can be no
assurance.
In June 1996, the Company acquired RGene pursuant to the Merger Agreement.
The effect of the RGene Acquisition on the Company's results of operations is
discussed in "-- Results of Operations -- RGene Acquisition." The effect of the
RGene Acquisition on the Company's liquidity and capital resources is also
discussed below. See "Unaudited Pro Forma Consolidated Financial Statements."
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 and 1996
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 the areas of manufacturing, quality control,
clinical and regulatory affairs. 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 an arrangement providing
research and development funding, the net loss will continue to increase as
well.
For the three months ended March 31, 1996, interest income increased to
$183,000 compared to $132,000 during the three months ended March 31, 1995. The
increase was attributable to a higher average investment balance and higher
rates of return on those balances compared to the same period in 1995.
Research and development expenses were $1,978,000 and $2,366,000 for the
three-month periods ended March 31, 1995 and 1996, respectively. Factors that
contributed to this increase were: additional employees and related expenses in
preclinical immunology and clinical affairs; a moderate increase in
26
<PAGE> 28
the level of expenses related to development, manufacturing, quality control and
regulatory activities; and increased employee benefits costs.
General and administrative expenses were $701,000 and $617,000 for the
three months ended March 31, 1995 and 1996, respectively. The decrease reflects
a one-time expense of $185,000 related to certain corporate development
activities in the quarter ended March 31, 1995. Otherwise, during the first
quarter of 1996, higher expenses related to corporate communications,
shareholder reporting and employee benefits contributed to the increase compared
to the first quarter of 1995.
Interest expense was $75,000 and $92,000 for the three months ended March
31, 1995 and 1996, respectively. The increase was attributable to additional
equipment leases entered into by the Company.
Years Ended December 31, 1993, 1994 and 1995
Revenues were $412,000, $449,000 and $842,000 for the years ended December
31, 1993, 1994 and 1995, respectively. The significant increase in 1995 was
attributable to a higher average investment balance during the year and higher
rates of return on those balances. In 1995, the Company earned other income of
$175,000 from research and development arrangements.
Research and development expenses were $4,261,000, $6,763,000 and
$8,195,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
For the year ended December 31, 1994, the increase in research and development
expenses was largely due to the increased emphasis on supporting the advancement
of clinical, manufacturing process development and regulatory programs. The
increase in research and development expenses in 1995 was largely attributable
to the continued expansion of manufacturing process development expertise and
other nominal increases in research, clinical and regulatory expenses, including
staffing. Research and development expenses will continue to increase in the
future, especially as related to clinical trials. Continued growth in expenses,
however, is dependent on the availability of capital.
General and administrative expenses were $1,217,000, $1,892,000 and
$2,267,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The increase in general and administrative expenses in 1994 was attributable to
the addition of administrative staff in the areas of business development,
finance, human resources and facility management to support research and
development activities. During 1994, the Company also experienced an increase in
expenses associated with being a publicly traded company. For the year ended
December 31, 1995, the Company experienced modest growth in general and
administrative expenses compared with 1994. The growth was related to an
increase in corporate development activities and, to a lesser extent, additional
administrative staffing. Over the three years presented, the increase in general
and administrative expenses has roughly tracked the rate of increase in research
and development spending. The Company expects this relationship to continue in
future years.
The Company began incurring interest expense in 1994 related to equipment
financing transactions. The substantial increase for the year ended December 31,
1995 versus 1994 is due to an increased level of equipment financing. It is
expected that the Company will continue to finance equipment purchases if
favorable terms are available.
RGene Acquisition
On a pro forma basis, after giving effect to the RGene Acquisition as if it
had occurred on January 1, 1995, the net loss for the year ended December 31,
1995 would have been $13.4 million. The increase over the Company's actual net
loss of $9.9 million for such period is primarily attributable to added research
and development expenses of $3.1 million and general and administrative expenses
of $753,000, offset by $300,000 of license fee revenues. The Company expects
that such 1995 expense additions are generally indicative of the increases in
the Company's operating expenses that, going forward, will result from the RGene
Acquisition, in that (i) RGene's research and clinical programs,
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and the related costs, are expected to be maintained and (ii) there are no
significant savings expected from the elimination of duplicative expenses. There
can be no assurance, however, that future expenses will be consistent with 1995
expenses. The pro forma results of operations for the three months ended March
31, 1996 reflect operating expense levels higher than what are expected to
result from the RGene Acquisition due to the inclusion of (i) $157,000 of
noncash compensation expense related to RGene stock purchase agreements and
stock options, all of which will be exercised prior to the closing of the RGene
Acquisition, and (ii) $1.5 million payable to related parties related to option
fees received by RGene during the quarter. Additional payments to related
parties are only anticipated to be payable in the future in the event RGene or
the Company receives additional license-related fees. Furthermore, the amount of
any such payments will be substantially less as a result of an amendment to an
existing license agreement completed in the second quarter of 1996. In addition,
this amendment reduces the aforementioned $1.5 million payable to related
parties to $500,000. For both the year ended December 31, 1995 and the three
months ended March 31, 1996, the pro forma results of operations include
revenues from license and option fees. Future license and related milestone
revenues under an existing RGene license agreement or any other agreements under
negotiation cannot be predicted.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash, cash equivalents and securities
available for sale totaling $14.4 million, compared to $11.5 million at December
31, 1994. The increase was primarily attributable to the completion of a
self-managed stock and warrant offering, which resulted in net proceeds of $12.2
million in July 1995. The Company also completed equipment financing
transactions totaling $1.1 million during 1995. Offsetting these increases, the
Company used $8.5 million to fund its operations, $1.4 million for purchases of
equipment, laboratory expansion and acquisition of technology and patent rights
and $657,000 for payments under equipment leases and notes.
The Company had cash, cash equivalents and securities available for sale
totaling $11.9 million at March 31, 1996, compared to $14.4 million at December
31, 1995. The decrease was primarily attributable to the Company's use of $2.6
million to fund its operations during the first three months of 1996.
The Company expects that its cash needs will continue to increase in future
periods, in part because of the RGene Acquisition, due to expansion of research
and development programs, increased clinical trial activity, growth of
administrative staff and expansion of its facilities to accommodate increased
numbers of employees. Accordingly, the Company will need to raise substantial
additional funds to continue development and commercialization of its products.
The Company's future cash requirements 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.
The Company estimates that, at its planned rate of spending, adjusted to
reflect the increased expenses expected to result from the RGene Acquisition,
its existing cash, cash equivalents and securities available for sale, together
with the projected amount of cash or investments expected to be obtained as a
result of the RGene Acquisition, the net proceeds of the Offering and the
interest income thereon will be sufficient to meet its capital requirements
until the third quarter of 1997. In the event that all outstanding warrants with
an exercise price of $4.68 per share and expiring in July 1997 are exercised,
the Company will receive an additional $3.6 million, which amount should enable
the Company to fund its capital requirements until late 1997. There can be no
assurance that the underlying assumed levels of revenue and expense will prove
to be accurate or that any warrants will in fact be exercised. In order to
further strengthen its cash position, the Company is aggressively pursuing
agreements with corporate partners that would provide research and development
funding and equity investment. If the Company is successful in these efforts,
funding received under such arrangements could extend the period during which
the aforementioned resources would fund the Company's
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capital requirements. The Company also intends to seek additional funding
through public or private financing, including equity financing. There can be no
assurance, however, that adequate funds will be available when needed or will be
available on terms favorable to the Company. See "Risk Factors -- Effect of
Failure to Obtain Adequate Funding."
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<PAGE> 31
BUSINESS
Targeted Genetics is focused on the development of gene and cell therapies
for the treatment of certain acquired and inherited diseases. The Company is
developing a broad base of core technologies that it believes will allow it to
address a variety of such diseases. These technologies include proprietary viral
and non-viral gene delivery systems as well as novel techniques for cytotoxic T
lymphocyte ("CTL") immunotherapy. In order to expand its technology base with
respect to non-viral gene delivery systems and to enhance its product
development programs, the Company recently acquired RGene Therapeutics, Inc.
("RGene"), a privately held company focused on the development and use of
non-viral gene delivery systems. The Company is using its core technology
platform to develop potential products for the treatment of various genetic
disorders, cancer and infectious diseases, and is currently conducting clinical
trials in certain of these indications.
The Company believes that in the area of gene therapy, different disease
targets will require different methods of gene delivery, depending on the target
cell to be modified, the duration of gene expression required and the need for
ex vivo or in vivo delivery. Accordingly, the Company is developing multiple
gene delivery systems based on three different vector technologies:
adeno-associated viral ("AAV"), retroviral and non-viral. The Company believes
these systems may provide it with the flexibility necessary to develop gene
therapies for a broader range of diseases than would be possible using a single
gene delivery system. Targeted Genetics was the first company to initiate
clinical trials using AAV vectors and is not aware of any other company
conducting clinical trials using these vectors. In addition, the Company has
exclusive rights to an improved type of retroviral vector which has been shown
in preclinical experiments to be more efficient than earlier retroviral vectors
at delivering genes into certain types of blood cells. The Company also is
developing non-viral gene delivery systems which may provide greater flexibility
relative to the size and sequence of transferred genes and allow targeted
delivery in vivo.
Through its acquisition of RGene (the "RGene Acquisition"), the Company has
acquired rights to proprietary non-viral gene delivery technology based on the
use of cationic lipids that promote the uptake of DNA into cells. This
technology includes several formulations with the potential for increased
stability, and improved transduction efficiency as well as the potential ability
to deliver genes to specific target cells. The Company has also acquired rights
to the E1A tumor suppressor gene which is currently in clinical trials for the
treatment of ovarian and breast cancer.
In the area of cell therapy, the Company's expertise with CTLs enables it
to isolate from patients and efficiently multiply antigen-specific CTLs, which
are immune cells that target and kill specific diseased cells. This expertise
forms the basis for a series of potential immunotherapies for the treatment of
cancer and infectious diseases. The CTL immunotherapy program is based on the
Company's proprietary Rapid Expansion Method ("REM") technology, which is used
to grow CTLs ex vivo prior to infusion into the patient. The Company has
demonstrated that REM enables it to grow billions of CTLs from individual cloned
cells over several weeks, while preserving the cells' specific disease-fighting
capabilities in vitro. Other methods of expanding CTL clones generally require
several months.
Targeted Genetics is currently conducting multiple clinical trials
utilizing its viral gene delivery systems, its CTL immunotherapy technology and
a non-viral gene delivery system acquired in the RGene Acquisition. The Company
is conducting a Phase I and a Phase I/II clinical trial examining the use of AAV
vectors to deliver in vivo the cystic fibrosis transmembrane regulator ("CFTR")
gene for the treatment of cystic fibrosis. The Phase II part of the latter trial
is expected to begin in late 1996. RGene has initiated a Phase I clinical trial
of a non-viral system to deliver in vivo the E1A tumor suppressor gene to
patients with ovarian or breast cancer. In addition, the Company is conducting a
Phase I clinical trial examining the use of HIV-specific CTLs to prevent the
onset of full-blown AIDS in HIV-infected patients. The Company also is
collaborating on two physician-sponsored Phase I clinical trials examining gene
therapies for the treatment of Gaucher disease and melanoma. Patient accrual for
all these Phase I clinical trials is expected to be completed by the end of
1996. There can be no assurance that these clinical trials will proceed or will
be completed as indicated or that any products or technologies being tested will
prove safe and effective, meet applicable regulatory standards or be
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<PAGE> 32
successfully marketed. See "Risk Factors -- Early Stage of Product Development;
Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and
Product Development."
DEVELOPMENT PROGRAMS
Targeted Genetics is utilizing its core technologies to develop potential
products for the treatment of single-gene disorders, cancer and infectious
diseases. As part of its product development strategy, Targeted Genetics is
using early clinical trials to assess product opportunities and determine the
effectiveness of using its vector technologies to administer genes to patients,
as well as to support its overall development activities. The most advanced
product-directed development programs are the AAV gene therapy for the treatment
of cystic fibrosis, the E1A non-viral gene therapy for the treatment of ovarian
and breast cancer and CTL immunotherapy for HIV infection. The following table
summarizes the Company's and RGene's development programs and related
technologies:
<TABLE>
<CAPTION>
TECHNOLOGY
----------------------------------------------------
DEVELOPMENT PROGRAM TYPE OF THERAPY DELIVERY SYSTEM GENE STATUS
- --------------------- --------------------- ----------------- ---------- -----------
<S> <C> <C> <C> <C>
SINGLE-GENE DISORDERS
Cystic Fibrosis Gene Therapy AAV Vector CFTR Phase I/II
Gaucher Disease Stem Cell Gene Retroviral Vector GC Phase I
Therapy
CANCER
Ovarian/Breast* Gene Therapy Non-Viral Vector E1A Tumor Phase I
Suppressor
Melanoma Tumor Vaccine Retroviral Vector IL-7 Phase I
Breast/Colon CTL Immunotherapy -- -- Preclinical
(Tumor-Specific CTLs)
INFECTIOUS DISEASES
HIV CTL Immunotherapy -- -- Phase I
(HIV-Specific CTLs)
</TABLE>
- ------------------
* Acquired through the RGene Acquisition.
SINGLE-GENE DISORDERS
CYSTIC FIBROSIS. Cystic fibrosis is the most common single-gene deficiency
affecting the Caucasian population, afflicting approximately 30,000 people in
the United States and 60,000 people worldwide. The disease is caused by a
dysfunctional CFTR gene, which results in a build up of mucus in the lungs,
infections and early death. Current treatments for cystic fibrosis offer only
symptomatic relief and cannot cure or halt the progression of the disease.
Based on preclinical findings by the Company and its scientific
collaborators, the Company believes that the persistence of expression and lack
of toxicity obtained with its AAV-based gene delivery vector potentially make it
better suited for delivery of the CFTR gene to the lung than other vectors. In
preclinical studies in rabbits, the Company and its collaborators at The Johns
Hopkins University ("Johns Hopkins") were able to detect expression of the CFTR
gene for periods of up to six months with no observed side effects when single
doses of an AAV-CFTR vector were instilled directly into the right lower lobe of
the rabbit lung with a bronchoscope. These results were confirmed in similar
studies in rhesus monkeys, in which gene transfer occurred in up to 50% of
target airway cells, and gene expression, which was confirmed in all animals,
persisted for up to six months. In these
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studies, there was no evidence of toxicity, as indicated by the absence of any
significant changes in clinical parameters and levels of inflammatory cytokines.
Furthermore, histopathology examination showed no evidence of any cellular
immune response. In addition, the monkeys used in the study were seropositive
for AAV, and thus a preexisting humoral immune response did not prevent gene
transfer. The studies compare favorably to preclinical studies known to the
Company with other delivery systems in which only short-term gene expression was
observed in the lung. Based on these preclinical data, the Company began two
clinical trials in late 1995 to evaluate the safety and feasibility of in vivo
gene therapy for the treatment of cystic fibrosis by direct delivery of the CFTR
gene using an AAV vector.
The first clinical trial, which began in November 1995, is a Phase I
clinical trial at Johns Hopkins in which an AAV vector containing the CFTR gene
is being delivered to the nose and lung of adult cystic fibrosis patients having
mild lung disease. The trial is designed as an interpatient dose escalation
trial and will enroll a total of 12 patients. Two patients are being treated at
each of six escalating dose levels. An AAV-CFTR vector will be administered in
an open-label single dose to the right lower lobe of the lung via bronchoscopy.
Additionally, each patient will be randomized to receive a single dose of an
AAV-CFTR vector administered to one nostril and a placebo to the other. Patients
will be monitored for, among other things, safety and assessment of gene
transfer and expression. The nasal administration is intended to determine if
physiologic measurement of CFTR function can be obtained in the nasal
epithelium. The Company expects to complete this clinical trial in late 1996. If
the results of the trial confirm the Company's preclinical findings of safety
and gene transfer, the Company intends to conduct subsequent clinical trials in
1997 involving aerosol delivery of an AAV-CFTR vector to the whole lung. The
Company is currently developing aerosol formulations for testing in preclinical
models.
The second clinical trial began in December 1995 at Stanford University.
This trial is designed as a Phase I/II trial, pursuant to which an AAV-CFTR
vector will be administered to the maxillary sinuses of cystic fibrosis patients
with chronic sinusitis. The Phase I part of this trial is designed as a dose
escalation study. Six patients will be enrolled, and each patient will initially
receive one dose in one maxillary sinus and a subsequent dose in the
contralateral maxillary sinus approximately one to two months later. The trial
will assess safety and efficacy of gene transfer and also may provide an initial
assessment of the effect of repeat delivery on gene transfer and expression.
Additionally, the dose level will be established for the Phase II part of the
trial, in which up to 50 patients will receive an AAV-CFTR vector in one sinus
and a placebo in the other. Patients in the Phase II trial will be monitored to
assess the ability of an AAV-CFTR vector to prevent the relapse of chronic
sinusitis. The Company expects to complete patient accrual for the Phase I trial
in mid-1996 and to initiate the Phase II trial in late 1996.
There can be no assurance that clinical trials will proceed or be completed
as indicated, or that the AAV-CFTR gene therapy will prove safe and effective,
receive applicable regulatory approvals or be successfully developed or
marketed. See "Risk Factors -- Early Stage of Product Development; Technological
Uncertainty" and "-- Uncertainties Relating to Clinical Trials and Product
Development."
GAUCHER DISEASE. Gaucher disease results from the deficiency of a gene
that produces an enzyme called glucocerebrosidase ("GC"), which normally
metabolizes a lipid called glucocerebroside. The enzyme deficiency results in
accumulation of this lipid in cells in the spleen, liver and bone marrow.
Symptoms of the disease include hematologic disorders, enlargement of the liver
and spleen, bone erosion and pain. The estimated annual incidence of Gaucher
disease in the United States is 5,000 severe cases and 15,000 mild to moderate
cases. Current therapies for Gaucher disease include bone marrow transplantation
from sibling-matched donors and enzyme replacement therapy. Only 25% of patients
are candidates for bone marrow transplantation due to lack of appropriate
donors. Furthermore, the risk of transplant-related morbidity and mortality
restricts this therapy to severely affected individuals. Although enzyme
replacement therapy appears to be effective, this therapy is currently extremely
expensive.
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Targeted Genetics selected Gaucher disease as an initial disease target for
the assessment of its stem cell gene therapy technology based on the scientific
theory that genetic correction in as little as 5% of a Gaucher disease patient's
blood cells may be adequate to achieve reversal of the disease. The Company
believes that although stem cell transduction techniques, including its own, may
not provide adequate levels of gene transfer and expression, current clinical
trials will provide baseline data that are necessary to facilitate the
development of improved methods for stem cell transduction. The Company is
collaborating on a physician-sponsored Phase I clinical trial at the Fred
Hutchinson Cancer Research Center (the "Hutchinson Center") in which peripheral
blood stem cells are being reinfused into Gaucher disease patients after ex vivo
transduction with a retroviral vector containing the GC gene. Patients
undergoing this therapy will be monitored for safety and long-term persistence
of the genetically modified cells. The Company believes that a series of Phase I
trials to test potentially improved techniques for stem cell gene transfer will
be required prior to initiation of a Phase II Gaucher disease clinical trial.
See "-- Core Technologies -- Retroviral Vectors."
CANCER
Cancer is the second leading cause of death in the United States, with over
one million new cases diagnosed each year. The Company is pursuing two primary
approaches for the treatment of cancer. In the first approach, the Company and
its collaborators are investigating the uses of CTL-based immunotherapy to
enhance the immune system's natural ability to eliminate cancer cells
selectively. The second approach, which was acquired by the Company through the
RGene Acquisition, utilizes a proprietary non-viral system to deliver in vivo an
E1A tumor suppressor gene to cancer cells.
E1A TUMOR SUPPRESSOR GENE THERAPY. This program is designed to test the
feasibility of treating certain cancers by introducing the proprietary E1A tumor
suppressor gene into cancer cells using RGene's proprietary non-viral delivery
system. Overexpression of the Her-2/neu oncogene occurs in approximately 30% of
a number of cancers, including ovarian, breast, head and neck, stomach,
pancreatic, liver, cervical and prostate cancer, and has been associated with
enhanced metastatic potential, drug resistance and poor survival rates. The E1A
tumor suppressor gene has been shown to inhibit the overexpression of the
Her-2/neu oncogene in certain tumor cells in vitro. In addition, in preclinical
mouse studies the E1A tumor suppressor gene was shown to inhibit the
intraperitoneal growth of ovarian cancer cells that were overexpressing the
Her-2/neu oncogene, and significantly increase the long-term survival of the
mice. A Phase I clinical trial of the E1A tumor suppressor gene therapy in
patients with metastatic ovarian or breast cancer that overexpresses the
Her-2/neu oncogene is now open for enrollment at M.D. Anderson Cancer
Center/University of Texas ("M.D. Anderson").
In the Phase I trial, 12 patients with ovarian cancer and 12 patients with
breast cancer that overexpress the Her-2/neu oncogene will be administered
weekly doses of the E1A tumor suppressor gene for a six-month period. The doses
will be administered using RGene's proprietary non-viral delivery system. This
trial will be conducted as an interpatient, ascending dose study with doses of
the E1A tumor suppressor gene delivered intraperitoneally in the ovarian cancer
patients and intrapleurally in the breast cancer patients. The objectives of the
trial are to assess safety, levels of gene transfer and expression and tumor
response. It is expected that this clinical trial will be completed in 1997.
Effective May 1996, RGene entered into a license, research and marketing
agreement with Fournier under which Fournier received exclusive rights to
develop and commercialize in Europe RGene's E1A tumor suppressor product
candidate. See "-- Research Collaborations and Licensing Agreements" and "Risk
Factors -- Dependence on Corporate Collaborators."
There can be no assurance that the clinical trials of the E1A tumor
suppressor gene will proceed or be completed as indicated or that the E1A tumor
suppressor gene therapy will prove safe and effective, receive applicable
regulatory approvals or be successfully developed or marketed. See "Risk
Factors -- Early Stage of Product Development; Technological Uncertainty" and
"-- Uncertainties Relating to Clinical Trials and Product Development."
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<PAGE> 35
CTL IMMUNOTHERAPY. The objective of the Company's cancer CTL immunotherapy
program is to restore an effective immune response through the infusion of large
numbers of antigen-specific CTLs, immune cells that target and kill specific
tumor cells. The CTL immunotherapy program is based on the Company's proprietary
REM technology, which is used to grow CTLs prior to infusion. The program
involves isolating antigen-specific CTLs, multiplying them ex vivo and
reinfusing them into the patient. The Company believes that therapies based on
antigen-specific CTLs may be more effective and have fewer side effects than
other types of cell therapies that utilize broader classes of T cells or
lymphocytes.
The first clinical trial using antigen-specific CTLs was conducted by the
Company's scientific collaborators at the Hutchinson Center in an examination of
a CTL immunotherapy for the prevention of cytomegalovirus ("CMV") disease in
patients undergoing bone marrow transplants for the treatment of certain
cancers. CMV is a virulent infection that occurs frequently in immunocompromised
patients and causes severe illness that may lead to death. In this trial, 14
patients were administered donor-derived CMV-specific CTLs. None of the patients
who received the CTLs developed CMV viremia or disease. Based on this Hutchinson
Center trial, the Company believes that CTL immunotherapy may be useful in
treating or preventing a number of diseases, such as cancer, that may occur due
to a lack of adequate T cell response.
The Company is conducting preclinical studies directed to the isolation and
ex vivo multiplication of tumor-specific CTLs against certain types of cancer,
including breast and colon cancers. The Company plans to use the data generated
by these preclinical studies to design clinical trials of CTL immunotherapy for
the treatment of these cancers. To date, the Company has been able to generate
CTLs specific to peptides associated with human prostate and melanoma tumors,
multiply these CTLs in the REM process and use them to kill cancer cells in
vitro.
IL-7 TUMOR VACCINE. The Company is collaborating with clinicians at the
University of California at Los Angeles on an investigator-sponsored Phase I
clinical trial involving the administration of an IL-7 gene to nine patients
with metastatic melanoma in an attempt to stimulate CTL responses against the
tumor. The Company is collaborating in this investigator-sponsored study to
determine whether antigen-specific CTLs can be isolated and then multiplied
using the Company's REM process and retain their potency. IL-7 is an
immunomodulatory protein that has been demonstrated to activate antigen-specific
CTLs in in vivo preclinical studies and cause them to infiltrate tumor cells. In
connection with this trial, a melanoma tumor cell line was genetically modified
to produce IL-7. These modified cells are mixed with the patient's own tumor
cells and the cell mixture is injected into the patient. These modified tumor
cells may act to enhance the immune system's ability to recognize cancer cells
as foreign and to generate a potent CTL response against the tumor. As part of
this trial the Company has been able to isolate melanoma-specific CTLs from
blood samples of patients who have received the therapy and is currently
examining these CTLs to assess their ability to kill cancer cells.
INFECTIOUS DISEASES: HUMAN IMMUNODEFICIENCY VIRUS ("HIV")
CTL IMMUNOTHERAPY. HIV is a retrovirus that is the cause of AIDS, a
condition that is characterized by loss of CD4 cells and progressive immunologic
impairment and death. Currently there is no effective treatment for AIDS, and no
effective way to prevent an HIV-infected person from developing AIDS. According
to the Centers for Disease Control and Prevention, approximately one million
people in the United States have been infected with HIV. The World Health
Organization estimates that approximately 17 million people worldwide have been
infected with HIV and projects that the worldwide incidence of HIV infection
will grow to 30 million to 40 million people by the end of the century.
The Company and certain other researchers believe that the key to
successful HIV therapy may lie in manipulating and harnessing the cell-mediated
arm of the immune response. Researchers have found that HIV-infected people who
remain symptom-free for prolonged periods have high levels of CTLs that suppress
viral proliferation in CD4 cells. In addition, uninfected partners of
HIV-infected
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<PAGE> 36
people, and uninfected infants born to HIV-infected mothers, have been found to
have high levels of HIV-specific CTLs, which appear to have kept them HIV-free.
The Company believes that the provision of large quantities of cloned
HIV-specific CTLs may provide a means of allowing HIV-infected people to
maintain an effective immune response, thereby delaying the onset of full-blown
AIDS.
In 1995, the Company completed a Phase I clinical trial of HIV-specific
CTLs modified with a HyTK safety gene at the Hutchinson Center. Individual
clones of these CTLs specific for the HIV gag protein were isolated, modified
with a retroviral vector containing the HyTK gene and multiplied to more than
one billion cells. The HyTK gene was used to mark the cells and allow for
ablation of the cells by administration of ganciclovir if undesirable side
effects resulted from the therapy. After ex vivo expansion, the autologous
HyTK-transduced gag-specific CTL clones were reinfused intravenously in four
ascending doses administered at 14-day intervals. Based on the six patients
tested, the CTLs were shown to engraft, and the therapy appeared to be safe and
well tolerated, with no significant side effects. No patients required ablation
with ganciclovir. Once reinfused, the HIV-specific CTLs did not persist as long
as anticipated, apparently because of a primary CTL response directed against
the HyTK gene. Since the CTL immunotherapy appears to be safe, the use of the
HyTK gene for the original reason of safety will no longer be required.
In early 1996, the Company began a follow-up Phase I clinical trial, also
at the Hutchinson Center, in which up to eight HIV-infected patients are being
administered five escalating doses of HIV gag-specific CTLs. The first three
doses will consist of unmarked cells and the last two will consist of cells
modified with a retroviral vector containing the neo gene, a marking gene that
has not been shown to be immunogenic. Patients in the trial will be monitored
for safety, persistence of the infused CTLs and changes in viral burden. Patient
accrual in this trial is expected to be complete in late 1996.
There can be no assurance that the clinical trials will proceed or be
completed as indicated or that the CTL immunotherapy will prove safe and
effective, receive applicable regulatory approvals, or be successfully developed
or marketed. See "Risk Factors -- Early Stage of Product Development;
Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and
Product Development."
INTRACELLULAR VACCINE IN CD4 CELLS. As a complementary approach to its CTL
immunotherapy for the treatment of HIV, the Company is collaborating on the
preclinical and clinical development of intracellular vaccines for HIV with Dr.
Philip Greenberg of the Hutchinson Center. In the planned physician-sponsored
Phase I trial, HIV-infected patients will be treated with genetically modified
CD4 helper cells. Two subgroups of these CD4 cells will be modified with
retroviral vectors expressing two different intracellular vaccine candidates for
which preclinical data indicate potential utility as protective agents against
HIV replication. These candidates are genes that express RNA molecules that can
act as decoys to bind HIV proteins essential for HIV replication. A third
subgroup of CD4 cells will be unmodified except for a marking gene. The trial's
goal is to provide general safety data and comparative data as to which of the
intracellular vaccine constructs may be more promising, based on length of cell
persistence in vivo versus the marked cells.
Since only a small fraction of the patient's CD4 cells will be modified to
resist HIV in this trial, it is unlikely that long-term therapeutic benefit will
result. To generate larger numbers of HIV-resistant CD4 cells, it will be
necessary to introduce the intracellular vaccine gene into stem cells from which
CD4 cells are derived. The Company believes that continued improvement in the
efficiency of stem cell gene transfer and expression will be necessary to
provide the rationale for future clinical testing of intracellular vaccines for
HIV in stem cells. See "-- Core Technologies -- Gene Therapy -- Retroviral
Vectors."
OTHER THERAPEUTIC AREAS
In addition to the development program for cystic fibrosis, the Company is
conducting research to assess the potential for delivery of genes to other
target cells using AAV vectors. Also, as a result of the RGene Acquisition, the
Company expects to begin investigating the treatment of cancer using antisense
molecules to inhibit the activity of certain oncogenes.
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<PAGE> 37
CARDIOVASCULAR. The Company is collaborating with researchers at the
Bowman Gray School of Medicine in Winston-Salem, North Carolina to examine, in
animal models, the ability of AAV vectors to deliver genes in vivo to certain
cardiovascular cells. These studies are investigating in vivo delivery of AAV
vectors in monkeys exhibiting arteriosclerotic disease. AAV vectors are being
used to deliver genes via a balloon catheter inserted into a monkey artery. To
date, these studies have demonstrated that certain vascular endothelial cells
can be targeted for gene expression with AAV vectors, indicating that AAV
vectors may be feasible delivery systems for gene therapy treatments directed at
various cardiovascular disorders, including the inhibition of cell growth
associated with restenosis or the treatment of vascular disease with angiogenic
factors.
MUCOSAL IMMUNITY. The Company is evaluating the feasibility of using AAV
vectors to deliver genes for applications relating to mucosal immunity. Certain
inflammatory and immune-related diseases may be treated by delivery of
anti-inflammatory or immune stimulating genes to mucosal surfaces such as the
gastrointestinal tract. In initial studies using in vivo animal models, the
Company is assessing the ability of AAV vectors to deliver genes directly to
cells of the intestinal epithelium.
ANTISENSE OLIGONUCLEOTIDES. RGene is investigating the potential treatment
of cancer by using antisense molecules to inhibit the activity of certain
oncogenes. Antisense molecules can prevent expression of the protein product of
a gene by binding to the messenger RNA copied from the DNA coding for that gene.
These antisense molecules are composed of oligonucleotides, which are short
pieces of DNA. Antisense molecules can be incorporated into liposomes for
delivery to target cells.
Chronic myelogenous leukemia ("CML") is a cancer associated with the
presence of an aberrant chromosome, the Philadelphia chromosome, which results
in generation of an oncogene, the bcr-abl fusion gene. The protein product of
the bcr-abl oncogene is believed to be involved in the pathogenesis of CML by
promoting selective proliferation of myeloid cells. The bcr-abl gene is present
only in leukemia cells and may be specifically targeted with antisense
oligonucleotides.
RGene plans to test a proprietary liposomal anti-bcr-abl oligonucleotide
for treatment of CML, in collaboration with Dr. Gabriel Lopez-Berestein at M.D.
Anderson. In in vitro experiments this formulation was shown to selectively
inhibit proliferation of the cancer cells. An initial Phase I/II dose escalation
study to test the safety and efficacy of repeated intravenous injections of the
liposomal/antisense complex is being planned in chronic-phase CML patients who
are not candidates for bone marrow transplants and who have received no benefit
from standard therapy. There can be no assurance that these clinical trials will
proceed or will be completed as indicated or that any products or technologies
being tested will prove safe and effective, meet applicable regulatory standards
or be successfully marketed. See "Risk Factors -- Early Stage of Product
Development; Technological Uncertainty" and "-- Uncertainties Relating to
Clinical Trials and Product Development."
CORE TECHNOLOGIES
The Company is developing a broad range of core technologies that it
believes will allow it to address issues specific to a variety of diseases. The
Company believes that in the area of gene therapy, different disease targets
will require different methods of gene delivery, depending on the target cell to
be modified, the duration of gene expression required and the need for ex vivo
or in vivo delivery. Accordingly, the Company is developing multiple gene
delivery systems based on three different vector technologies: AAV, retroviral
and non-viral. In certain treatments, for which in vivo modification of slowly
dividing or nondividing target cells is required or preferred, such as
modification of lung cells to treat cystic fibrosis, the Company is utilizing
its AAV vector technology. The Company uses its retroviral vector technology in
therapeutic areas where permanent modification of rapidly dividing cells may be
necessary. In therapeutic indications where the use of AAV and retroviral
vectors is not desirable or feasible, the Company is utilizing its non-viral
delivery systems. The Company believes that non-viral vectors may provide
greater flexibility relating to the size and sequence of transfer genes and may
also allow targeted delivery in vivo. The Company's non-viral technology
platform has been significantly enhanced as a result of the RGene Acquisition.
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In the area of cell therapy, the Company's CTL immunotherapy expertise
enables it to efficiently isolate and multiply CTLs, immune cells that target
and kill only specific diseased cells, and forms the basis for a series of
potential immunotherapies.
GENE THERAPY
OVERVIEW. Gene therapy is an approach to the treatment and prevention of
genetic and acquired diseases that involves the insertion of genetic information
into target cells to produce specific proteins needed to correct or modulate
disease conditions. Proteins are the fundamental components of all living cells
and are essential to cellular structure, growth and function. Proteins are
produced by cells from a set of genetic instructions encoded in DNA, which
contains all the information necessary to control cellular biological processes.
DNA is organized into segments called genes, with each gene containing the
information required to express, or produce, a specific protein.
An alteration in the function of, or absence of, specific genes is
responsible for causing some diseases, including inherited diseases such as
cystic fibrosis and Gaucher disease and certain types of cancer. Gene therapy
may be used to treat such diseases by replacing a missing or defective gene to
facilitate the normal protein production capabilities of cells. In addition,
gene therapy may be used to enable cells to perform additional roles in the
body, such as enhancing the function of the immune system to fight infectious
diseases or cancer. Gene therapy may also be used to inhibit production of
undesirable proteins or viruses within cells.
A key factor in the progress of gene therapy is the development of safe and
efficient methods of transferring genes into cells. For transfer into cells, the
gene is incorporated into a delivery system called a vector. Vectors may be
derived from either viral or non-viral systems. The most common gene delivery
approach to date relies on viral gene transfer, whereby modified viruses are
used to transfer the desired genetic material into host cells. The process of
gene transfer can be accomplished ex vivo (outside the body), in which cells are
removed from the patient, genetically modified, and then reinfused into the
patient, or in vivo (inside the body), in which vectors are introduced directly
into the patient's body.
The use of viruses takes advantage of their natural ability to introduce
genes into host cell and use the host's metabolic machinery to produce proteins
essential for the survival and function of the virus. In gene therapy
applications, viruses are genetically modified to contain the desired genes and
to inhibit the ability of the virus to reproduce. Successful application of
viral gene transfer to indications requiring long-term gene expression entails a
number of essential technical requirements, including the ability of the viral
vector to carry desired segments of genes, to transfer genes into a sufficient
number of target cells and to enable genes contained in the viral vector to
persist in the host cell. A number of different viral vectors, including AAV and
retroviral vectors, are being used for potential gene therapy applications
requiring long-term gene expression.
Current non-viral vector systems generally consist of DNA incorporating the
desired gene, combined with various compounds aimed at enabling the DNA to be
taken up by the host cell. These in vivo gene delivery approaches include
encapsulating genes into lipid carriers such as liposomes, which facilitate the
entry of DNA into cells; ionically binding negatively charged DNA to the surface
of cationic lipids which are positively charged prior to infusion; injecting
pure plasmid or "naked" DNA in an aqueous solution; and directing DNA to
receptors on target cells by combining the gene with protein carriers that are
taken up by the cell.
AAV VECTORS. Targeted Genetics and its scientific collaborators have
developed significant expertise with respect to the design and use of AAV
vectors in gene therapy. The Company believes that certain features of AAV
vectors make them particularly well suited for the treatment of a number of
diseases: (i) AAV has never been associated with causing any human disease; (ii)
AAV generally cannot replicate without the presence of a helper virus; (iii) AAV
vectors contain no viral genes that, if present, might produce unwanted immune
responses leading to side effects or reduced efficacy; (iv) unlike some other
types of viral systems, AAV vectors can introduce genes into nondividing or
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slowly dividing cells, such as cells lining the airway of the lung; (v) AAV
vectors may persist in the host cell to provide relatively long-term expression;
and (vi) AAV vectors can be purified and concentrated, and thereby may allow for
more efficient manufacturing.
The Company is building a proprietary position in AAV through the
development or acquisition of exclusive rights to inventions that (i) provide
important enhancements to AAV vectors; (ii) demonstrate novel approaches to the
use of AAV vectors for gene therapy; and (iii) establish new and improved
methods for large-scale production of AAV vectors. The Company has exclusive
rights from the National Institutes of Health (the "NIH") to a patent for use of
a novel AAV vector for cystic fibrosis. Notice of allowance has been granted
with respect to this patent. See "-- Patents and Proprietary Rights" and "Risk
Factors -- Uncertainty of Patent Position and Proprietary Rights; Access to
Proprietary Genes."
NON-VIRAL VECTORS. As a result of the RGene Acquisition, the Company
acquired rights to a significant body of non-viral gene delivery technology
based on the use of cationic lipids to promote the uptake of DNA into cells. The
Company believes that non-viral vectors may have several characteristics that
may make them particularly well suited for the treatment of certain diseases,
including (i) the ability to target such vectors to a specific cell type; (ii)
relative ease of manufacture; and (iii) the ability to transfer relatively large
segments of DNA in a single vector. RGene's vectors are formulated by complexing
negatively charged DNA with cationic lipids which are positively charged to
promote DNA uptake by cells. Such complexes appear to have good safety profiles
and can be used ex vivo as well as in vivo. For in vivo use, these complexes can
potentially be delivered topically, intravenously, intraperitoneally,
intrapleurally or by aerosol.
The Company will be utilizing a series of these non-viral delivery
technologies developed by Dr. Leaf Huang of the University of Pittsburgh. His
original DC Chol system, which appears to have a favorable clinical toxicity
profile, has been used in two previous clinical trials by other unaffiliated
investigators for other disease indications and is now being used in the E1A
tumor suppressor gene clinical trial. The Company has acquired an exclusive
license to an issued U.S. patent for the original DC Chol system for the
treatment of certain cancers, including, among others, breast, ovarian and lung
cancers. Dr. Huang is developing a series of non-viral delivery systems for
which RGene has exclusive worldwide rights in the field of cancer. RGene is
currently engaged in negotiations with the University of Pittsburgh of the
Commonwealth System of Higher Education ("Pittsburgh") to expand the license to
additional fields and technologies. See "-- Research Collaborations and
Licensing Agreements -- RGene Agreements -- University of Pittsburgh." One type
of system under development employs additional analogs of DC Chol that may have
a more favorable toxicity profile. In another system, the DNA is condensed into
particles of defined size that have transduction efficiency that is fifty- to
eighty-fold higher than the original DC Chol system. An alternate version of
this system is being developed that includes specific ligands to enhance
delivery to specific target cells and to increase stability when delivered
intravenously. An additional system being developed also has increased
efficiency of gene transduction and higher stability in serum for intravenous
delivery. Specific formulations will be chosen for various applications based on
the type of target cell, desired mode of administration and biology of the
disease.
RETROVIRAL VECTORS. The Company is using retroviral vectors to modify T
cells and stem cells. These cells multiply to generate large numbers of progeny
(daughter) cells and are well suited as targets for retroviral vectors that can
modify only rapidly dividing cells. The Company believes that it has positioned
itself at the forefront of retroviral gene delivery technology through its
exclusive relationship with Dr. A. Dusty Miller, a leader in the development of
packaging cell lines for retroviral vectors. One of Dr. Miller's more recent
inventions in this area is a new type of retroviral vector packaging cell line
called PG13, which the Company has licensed exclusively from the Hutchinson
Center. Vectors produced in this cell line have been shown to have improved
efficiency for ex vivo transduction of human blood cells such as T cells and
stem cells. Hematopoietic stem cells are the progenitor cells from which all
circulating blood cells are derived. Thus, a large number of genetic diseases
might be treated using stem cell gene therapy. However, Targeted Genetics
believes that many
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of these diseases cannot be successfully treated using currently available gene
delivery technologies. Increased efficiency of gene transfer and expression will
be required to achieve the level of genetically modified cells necessary to
result in modulation of many such diseases. Accordingly, the Company's effort in
stem cell gene therapy is directed to improving the efficiency of gene transfer
and expression in stem cells using the PG13 retroviral vector together with an
internally developed proprietary stem cell transduction protocol.
CTL IMMUNOTHERAPY
OVERVIEW. The immune system is the body's major defense mechanism
responsible for protecting against disease. It functions through a complex
interplay of components and allows the body to detect foreign agents and thereby
defend against infections and diseases. The immune system recognizes parts of
proteins called antigens that are present on the surface of diseased cells but
are not present on normal cells. The immune response to an antigen involves the
integrated action of various classes of white blood cells, including
lymphocytes. Lymphocytes comprise two major classes: B cells, which produce
antibodies that mediate humoral immunity, and T cells, which direct
cell-mediated immunity.
T cells direct cell-mediated immunity by recognizing antigens on diseased
cells. The two main classes of T cells are CD4 cells and CD8 cells. In general,
CD8 cells are CTLs that recognize, contact and kill the diseased cells. CD4
cells are primarily helper cells that coordinate the function of other immune
cells, including CTLs, by secreting growth factors known as cytokines. CTLs are
disease-specific, i.e., they individually recognize and bind to only a single,
specific antigen. Furthermore, only in the presence of CD4 helper cells do these
specific CTLs proliferate to produce the large population of antigen-specific
CTLs required to elicit an effective immune response.
In some disease states, the immune system fails to mount or maintain an
effective immune response. For certain diseases, including HIV and cancer, it is
believed such failure may be associated with an inadequate CTL response. For
example, HIV infects and kills CD4 cells, which leads to subsequent loss of CTL
function and, thus, to destruction of the immune system by the virus. One
approach to the treatment of immune deficiencies, adoptive immunotherapy, has
been demonstrated in animal models to be effective against certain cancers and
infectious diseases. Adoptive immunotherapy is designed to harness and bolster
the body's natural immune capabilities to fight or prevent disease. In adoptive
immunotherapy, cells are harvested from the patient, multiplied ex vivo and
reinfused. However, the efficacy of adoptive immunotherapies has been limited to
date, due in part to the lack of uniform antigen specificity in the expanded
cell population and side effects resulting from the activation of a broad-based
immune response. Targeted Genetics believes that the more uniform specificity
obtained by expanding individual clones of antigen-specific CTLs may potentially
enhance the efficacy and reduce the side effects of adoptive immunotherapies.
THE COMPANY'S CTL IMMUNOTHERAPY PROGRAM. Targeted Genetics is working to
develop a highly targeted form of cell therapy, which is intended to produce a
powerful, disease-specific immune response through the infusion of large numbers
of antigen-specific CTLs. The Company's CTL immunotherapy program involves
isolating antigen-specific CTLs from a small sample of the patient's blood,
multiplying them to large numbers ex vivo and reinfusing them into the patient.
In essence, the Company's CTL immunotherapy is intended to amplify the natural
disease-fighting function of the immune system relating to specific infected or
cancerous cells.
The Company believes that its CTL immunotherapy represents an improvement
over other approaches to immunotherapy because it is based on cloned,
antigen-specific CTLs. The Company believes that the efficacy of its CTL
immunotherapy may be more effective than other immunotherapy approaches because
virtually all of the reinfused cells will be CTLs targeting the specific
diseased cells. The Company also believes that the safety and side effect
profile may be improved over other immunotherapy approaches because of the
uniformity and consistency of the reinfused cells.
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The Company's focus on antigen-specific CTLs as a basis for immunotherapy
originated from research conducted by its collaborators at the Hutchinson
Center, Drs. Philip Greenberg and Stanley Riddell. These researchers conducted a
Phase I clinical trial to evaluate the safety of infusing donor-derived,
CMV-specific CTLs to bone marrow transplant patients, and the potential of this
approach for providing an immune response against CMV during the short period in
which transplant patients have a high probability of developing CMV. This trial,
which was published in The New England Journal of Medicine in October 1995, was
the first clinical trial in which cloned, antigen-specific CTLs had been used in
a clinical trial. None of the 14 patients receiving the CTLs developed CMV
viremia or disease. See "-- Development Programs -- Cancer -- Infectious
Diseases: Human Immunodeficiency Virus ("HIV") -- CTL Immunotherapy."
RAPID EXPANSION METHOD. The CTL immunotherapy program is based on the
Company's proprietary REM technology, which is used to rapidly grow CTLs prior
to infusion into the patient. REM represents a significant improvement over
other methods of multiplying T cell clones. Using REM, CTL clones can be
multiplied over a thousandfold in less than two weeks. The Company has
demonstrated that REM enables it to grow billions of CTLs from individual cloned
cells over several weeks, while preserving the cells' disease-fighting
capabilities in vitro. The Company has seen consistent results from REM in both
CD8 and CD4 T cells and for all disease specificities tested to date. The
Company has shown that REM is effective for growing CTLs specific for HIV, CMV,
malignant melanoma and prostate tumor peptides. Clinical testing will be
required to determine whether cloned cells maintain their disease-fighting
capabilities and are effective after being reinfused into humans, as to which
there can be no assurance. See "-- Development Programs -- Cancer -- CTL
Immunotherapy" and "-- Development Programs -- Infectious Diseases: Human
Immunodeficiency Virus ("HIV") -- CTL Immunotherapy." The Company has filed
patent applications, on a worldwide basis, relating to the original process and
to process improvements. See "-- Patents and Proprietary Rights" and "Risk
Factors -- Uncertainty of Patent Position and Proprietary Rights; Access to
Proprietary Genes."
GENETIC MODIFICATION OF CTLS. The Company believes that, on a long-term
basis, the effectiveness of CTL immunotherapy may be further improved through
genetic modification of the CTL clones. Currently, the Company is developing
methods to genetically modify CTLs to give them the capability of producing
their own cytokines, which are required for CTL proliferation and activation.
TUMOR SUPPRESSOR GENES
Many pathways of gene regulation control cell growth and division, and
cancer arises from disruption of these pathways. Certain of these pathways are
regulated by cellular oncogenes or tumor suppressor genes. Cancer may result
from the structural alteration and abnormal expression of cellular oncogenes or
from mutation or deletion of tumor suppressor genes. Certain genes, including
Her-2/neu, abl, bcr, crkl, and bcl-2, function as parts of signal transduction
pathways that promote cell growth and division. Tumor suppressor genes function
by inhibiting cell growth and the expression of cellular growth factors.
Malfunctioning oncogenes and tumor suppressor genes represent targets through
which the growth of malignant cancer cells may be regulated. Thus, introduction
of tumor suppressor genes may be a viable approach to down-regulate the
expression of oncogenes or to replace functions lost by mutation or deletion of
a tumor suppressor gene.
Some viruses have evolved genes that may mimic functions normally exhibited
by cellular genes. One such example is the E1A gene of the adenovirus type 5.
The E1A gene was shown by Dr. Mien-Chie Hung, in experiments conducted at M.D.
Anderson, to function as a tumor suppressor and to suppress expression of the
Her-2/neu oncogene, which is known to be overexpressed in certain cancers. As a
result of the RGene Acquisition, the Company has worldwide rights to use the E1A
gene as a tumor suppressor. An open Phase I clinical trial is evaluating the
ability of the E1A tumor suppressor gene to down-regulate the Her-2/neu oncogene
in ovarian and breast cancers. Preclinical research is also being conducted to
assess the feasibility of using non-viral delivery systems to deliver a
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variety of other cellular tumor suppressor genes to treat certain cancers. See
"-- Development Programs -- Cancer -- E1A Tumor Suppressor Gene Therapy."
RESEARCH COLLABORATIONS AND LICENSING AGREEMENTS
Targeted Genetics and RGene have entered into a number of research
collaboration and licensing agreements. Generally, under the license agreements,
the Company and RGene have agreed to pay (i) an initial fee upon execution of
the agreement; (ii) annual maintenance or royalty fees; (iii) milestone payments
upon realization of certain benchmarks; and (iv) royalties on sublicense fees
and sales of products, if any, incorporating the underlying technology. Under
the research collaboration agreements, the companies are generally obligated to
pay research fees, and receive options to obtain exclusive licenses to
technology developed under these agreements. There can be no assurance that any
of the research collaborations and licensing agreements will result in the
Company's acquisition of valuable rights. In addition, RGene has entered into
licensing agreements with Pasteur Merieux Serums & Vaccins S.A. ("Pasteur
Merieux") and Fournier in which RGene has received upfront payments comprised of
license and other fees and is entitled to receive payments upon the achievement
of certain development milestones and royalties on sales of resulting products,
if any. The following is a summary of the principal agreements of both Targeted
Genetics and RGene.
TARGETED GENETICS AGREEMENTS
FRED HUTCHINSON CANCER RESEARCH CENTER -- ADOPTIVE TRANSFER OF IMMUNE
CELLS. Between January 1994 and February 1995, Targeted Genetics entered into
research and license agreements with the Hutchinson Center and the University of
Washington in connection with the Company's CTL-based immunotherapy product
development program. The Company agreed to pay the Hutchinson Center and the
University of Washington annual research support until December 1996 and July
1996, respectively, for research to be conducted by Drs. Philip Greenberg and
Stanley Riddell at the University of Washington and the Hutchinson Center,
respectively, in the area of methods of conferring immunity in humans by
adoptive transfer of genetically modified CTLs. These agreements replaced other
contractual arrangements that had been entered into by Targeted Genetics with
the Hutchinson Center and the University of Washington between 1991 and 1993 in
this area. Pursuant to these agreements, Targeted Genetics has acquired an
exclusive worldwide license to inventions previously licensed by Targeted
Genetics or developed under these prior agreements, and has a continuing right,
effective until termination of this program, to incorporate and add new
inventions arising from this program to the research and license agreements.
FRED HUTCHINSON CANCER RESEARCH CENTER -- RETROVIRAL VECTORS. In November
1991, the Company entered into an agreement with the Hutchinson Center pursuant
to which the Company obtained a nonexclusive license to develop and market
products utilizing the PG13 packaging cell line technology for retroviral
vectors. In addition, in March 1994, Targeted Genetics entered into an agreement
with the Hutchinson Center pursuant to which the Company obtained an exclusive
license to develop and market products utilizing a second packaging cell line
technology for retroviral vectors. A patent covering this technology was issued
by the USPTO in November 1995.
THE JOHNS HOPKINS UNIVERSITY. In April 1993, Targeted Genetics entered
into a sponsored research agreement with Johns Hopkins pursuant to which the
Company agreed to pay Johns Hopkins an annual fee for a one-year period for
research to be conducted under the direction of Dr. Terence Flotte in the area
of developing AAV vectors for in vivo gene delivery. In March 1994, Targeted
Genetics entered into an agreement with Johns Hopkins for technology relating to
methods for producing AAV vectors co-invented by scientists at Johns Hopkins and
Targeted Genetics under this research program, pursuant to which Johns Hopkins
granted the Company an exclusive license to its interest in such technology.
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MEDICAL COLLEGE OF OHIO. In March 1994, Targeted Genetics entered into an
agreement with the Medical College of Ohio pursuant to which the Company
obtained an exclusive worldwide license to develop and market products utilizing
technology relating to methods for producing AAV vectors.
NATIONAL INSTITUTES OF HEALTH. In March 1994, Targeted Genetics entered
into an agreement with the NIH pursuant to which the Company obtained an
exclusive worldwide license to a patent application covering an AAV vector
capable of expression from a novel promoter for the field of viral vector-based
gene therapy for the treatment of cystic fibrosis. In February 1996, the USPTO
issued a notice of allowance for this patent application.
UNIVERSITY OF MICHIGAN. In March 1994, the Company entered into a
nonexclusive license agreement with the University of Michigan and HSC (Hospital
for Sick Children) Research and Development Limited Partnership for a patent
application covering the CFTR gene used in the Company's AAV therapy for the
treatment of cystic fibrosis.
RGENE AGREEMENTS
In connection with the RGene Acquisition, the Company has assumed all the
rights and obligations of the following agreements previously entered into by
RGene.
LABORATOIRES FOURNIER S.C.A. Effective May 1996, RGene and Fournier entered
into a license, research and marketing agreement under which Fournier received
exclusive rights to develop and commercialize in Europe RGene's E1A tumor
suppressor product candidate and any other product candidates based on the E1A
tumor suppressor gene and developed pursuant to the agreement. Fournier has
agreed to coordinate development of RGene's E1A tumor suppressor product
candidate in Europe by conducting clinical trials, preparing and filing
submissions for regulatory approval in its territory and paying all associated
costs, while RGene has corresponding responsibilities with respect to
development and commercialization in the United States.
Fournier has paid RGene a $5 million upfront license fee, $2.5 million of
which was paid as an option fee prior to completion of the agreement. The
agreement provides that Fournier will make milestone payments to RGene upon the
achievement of specified goals by Fournier or RGene and royalties on sales of
resulting products, if any. In addition, if the parties are able to negotiate a
mutually acceptable supply agreement, RGene will be entitled to manufacture
products for Fournier in return for manufacturing fees. Pursuant to the
agreement, RGene has agreed to indemnify Fournier with respect to claims
incurred as a result of the manufacture, supply or sale of the E1A tumor
suppressor product candidate. The agreement may be terminated if the parties
mutually agree on or about the second anniversary of the agreement that the
results of the collaboration are unsatisfactory. There can be no assurance that
RGene and Fournier will be successful in developing or commercializing any
products using RGene's E1A tumor suppressor product candidate or that such
agreement will not terminate prior to its expiration. As such, there can be no
assurance that any milestones will be achieved or that any royalties or other
payments contemplated by the agreement will ever be made. See "Risk
Factors -- Dependence on Corporate Collaborators."
ARONEX PHARMACEUTICALS, INC. In April 1994, RGene and Argus
Pharmaceuticals, Inc. (now Aronex Pharmaceuticals, Inc. ("Aronex")) entered into
a Development Agreement, an Assignment and Assumption Agreement and a Sublicense
Agreement. As part of the exchange for 642,307 shares of RGene's common stock,
Aronex licensed to RGene, on a nonexclusive, royalty-free basis, certain of
Aronex's technology, including technology in the area of liposomal drug delivery
and manufacturing, which may be useful or necessary in the development of
certain products. Aronex also assigned to RGene certain rights in an exclusive
license agreement between the University of Texas Board of Regents, M.D.
Anderson and Aronex for a patent relating to liposomal methylphosphonate
oligonucleotides for the treatment of cancer. In addition, Aronex granted to
RGene an exclusive worldwide sublicense to patent applications and technology
relating to delivery of genes into cells using novel cationic cholesterol
derivatives for use in certain fields, including lung, colon, breast, ovarian
and
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hematological cancers. This technology was licensed exclusively by Aronex from
the University of Tennessee Research Corporation ("UTRC") for use in certain
fields in November 1993.
Under the Development Agreement, Aronex and RGene agreed to conduct certain
research and experiments and to develop certain products incorporating Aronex
technology, the costs of which are borne by RGene. The patent rights to jointly
conduct research are governed by the Assignment and Assumption Agreement and the
Sublicense Agreement. The Development Agreement expires in April 1997, and can
be extended by mutual agreement of the parties.
M.D. ANDERSON CANCER CENTER/UNIVERSITY OF TEXAS. In March 1994, RGene
entered into a license agreement with the University of Texas Board of Regents
and M.D. Anderson pursuant to which RGene obtained an exclusive worldwide
license to develop and market products utilizing the E1A tumor suppressor gene
for Her-2/neu targeted cancer therapy. This agreement was amended in December
1994 to provide RGene an exclusive worldwide license to develop and market
products utilizing lipid technology to deliver oligonucleotides for the
treatment of CML.
In addition to the license agreement, in March 1994, RGene entered into a
sponsored research agreement with M.D. Anderson pursuant to which RGene agreed
to pay M.D. Anderson an annual fee for three years for research to be performed
under the supervision of Dr. Mien-Chie Hung in the area of Her-2/neu targeted
cancer therapy. RGene entered into a second sponsored research agreement with
M.D. Anderson in March 1994 pursuant to which RGene agreed to pay M.D. Anderson
an annual fee for two years for research to be performed under the supervision
of Dr. Lopez-Berestein in the area of targeting and delivery of oligonucleotides
to leukemic cells.
UNIVERSITY OF TENNESSEE RESEARCH CORPORATION. In October 1995, RGene
entered into an agreement with UTRC, as amended in June 1996, pursuant to which
RGene obtained an exclusive worldwide license to develop and market products
utilizing technology relating to delivery of genes into cells using certain
novel cholesterol derivatives.
UNIVERSITY OF PITTSBURGH. In October 1994, RGene entered into an exclusive
worldwide license agreement with Pittsburgh to develop and market products
utilizing technology related to non-viral delivery systems for cancer treatment
(the "Field of Research") developed by Dr. Leaf Huang. Also in October 1994,
RGene entered into a sponsored research agreement with Pittsburgh pursuant to
which RGene agreed to pay Pittsburgh an annual fee for four years for research
to be performed under the supervision of Dr. Huang in the area of developing
gene therapy products to treat cancer. Dr. Huang's research program includes
developing novel cationic lipids and the bacteriophage T-7-based expression
system. Any inventions made under this agreement in the Field of Research will
be incorporated into the October 1994 exclusive license agreement. In addition,
RGene has a right of first refusal to acquire an exclusive license to any
inventions developed under the sponsored research agreement outside of the Field
of Research. RGene is currently engaged in negotiations with Pittsburgh to
expand the Field of Research to other areas of interest to RGene. There can be
no assurance that such negotiations will be successful. See "-- Core
Technologies -- Non-Viral Vectors."
PASTEUR MERIEUX. In December 1995, RGene entered into an agreement with
Pasteur Merieux pursuant to which RGene granted to Pasteur Merieux an exclusive
worldwide license and sublicense to certain technology and patent rights
relating to DC Chol as an immunoadjuvant in traditional vaccines. In
consideration of such grant, RGene was paid a process development fee and an
upfront license fee. In addition, it may receive milestone payments upon
realization of certain benchmarks and a royalty on sales of the products, if
any, incorporating the underlying technology.
PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to the Company's business. The Company's
policy is to file patent applications to protect technology, inventions and
improvements to inventions that are considered important to the development of
its business. The Company also relies on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its
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competitive position. To date, the Company has filed or exclusively licensed 24
patent applications relating to its product and vector development programs with
the USPTO, as well as foreign counterparts of certain of these applications in
Europe, Japan and certain other countries, as follows: CTL immunotherapy
program, nine; AAV vector program, seven; other vector development programs,
eight. Of the 24 patent applications, four patents licensed exclusively to the
Company have been issued or allowed by the USPTO. No U.S. or foreign patent has
been issued directly to the Company to date. One of the issued patents, in the
CTL immunotherapy field, covers a method for generating helper-independent CTLs.
With respect to the Company's AAV program, a notice of allowance has been
received for the patent application covering the vector being used in the
Company's cystic fibrosis program. Two patents have issued relating to Targeted
Genetics' other vector development programs, including one covering PG13, the
novel retrovirus packaging cell line exclusively licensed from the Hutchinson
Center.
Among Targeted Genetics' 24 patent applications relating to development
programs are three key patent applications relating to the Company's proprietary
REM technology. In addition, the Company has filed or exclusively licensed three
patent applications relating to proprietary methods for manufacturing AAV
vectors. A patent application has also been filed by Targeted Genetics relating
to an improved method of delivering genes to hematopoietic stem cells.
In addition to the intellectual property that Targeted Genetics owns or has
exclusively licensed, the Company has licensed several issued and pending
patents that relate to its development programs on a nonexclusive basis. Among
these are the two key patents that relate to the use of AAV vectors for gene
therapy licensed from the NIH and the University of Florida Research Foundation.
In addition, the Company has acquired nonexclusive rights to the cystic fibrosis
gene being delivered in an AAV vector.
Through the RGene Acquisition, Targeted Genetics acquired rights and an
exclusive license with respect to eight patent applications filed with the
USPTO, as well as foreign counterparts of certain of these applications. Five of
these patent applications, two of which have issued, relate to non-viral gene
delivery technology covering the use of DC Chol and other cholesterol-based
systems for delivering genes into cells and the use of liposomal antisense
oligonucleotides. With respect to the patent applications relating to DC Chol in
Europe, Australia and Japan, prior art has been brought to the attention of
UTRC, the party from whom RGene licenses the technology. UTRC is presently
responding to such prior art in the foreign patent offices. With respect to the
two U.S. pending patent applications, that and other prior art has been brought
by UTRC to the attention of the USPTO. There can be no assurance that such prior
art will not result in further proceedings in the USPTO with respect to one of
the issued patents.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to human therapeutic uses. In addition, the coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any patent applications will
result in the issuance of patents or, if any patents are issued, whether the
patents will be subjected to further proceedings limiting their scope, whether
they will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue and patent applications in certain other countries
generally are not published until more than 18 months after they are filed, and
since publication of discoveries in scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it or any licensor
was the first creator of inventions covered by pending patent applications or
that it or such licensor was the first to file patent applications for such
inventions. Moreover, the Company is currently involved in one patent
interference proceeding declared by the USPTO to determine priority of invention
relating to certain components that may be useful in retroviral vectors, and may
have to participate in additional interference proceedings. Although the Company
does not anticipate that material expenditures will be made in connection with
such proceedings, participation could result in substantial cost to the Company,
even if the eventual outcome were favorable to it. In addition, although the
Company believes that the
44
<PAGE> 46
technology which is the subject of the current patent interference proceeding is
not material to its current product development programs, there can be no
assurance that such technology will not become material in the future. If the
outcome of the current or any additional interference proceeding were
unfavorable, the Company may be unable to obtain rights to the invention
involved. There can be no assurance that the Company's patents, if issued, would
be held valid or enforceable by a court or that a competitor's technology or
product would be found to infringe such patents. Litigation, which could result
in substantial cost to the Company, may be necessary to enforce the Company's
patents or to determine the scope and validity of other parties' proprietary
rights. If the outcome of any such litigation were adverse, the Company's
business could be materially adversely affected. The Company is unable to
predict how courts will resolve any future issues relating to the validity and
scope of its patents should they be challenged.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that the Company may be able to obtain or result
in denial of the Company's patent applications. In addition, if patents that
cover the Company's activities are issued to other companies, there can be no
assurance that the Company would be able to develop or obtain alternative
technology.
Furthermore, as the biotechnology industry expands and more patents are
issued, the risk increases that the Company's processes and potential products
may give rise to claims that they infringe the patents of others. Such other
persons could bring legal actions against the Company claiming damages and
seeking to enjoin clinical testing, manufacturing and marketing of the affected
product or use of the affected process. Litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of proprietary
rights of others. If the Company becomes involved in such litigation, it could
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. If there were an adverse
outcome of any such litigation, the Company's business could be materially
adversely affected. In addition to any potential liability for significant
damages, the Company could be required to obtain a license to continue to
manufacture or market the affected product or use the affected process. Costs
associated with any licensing arrangement may be substantial and could include
ongoing royalties. There can be no assurance that any license required under any
such patent would be made available to the Company on acceptable terms, if at
all.
In addition to patent protection, the Company also relies upon trade secret
protection for its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology. To protect its trade secrets, the
Company requires its employees, consultants, scientific advisors and parties to
collaborative agreements to execute confidentiality agreements upon the
commencement of employment, the consulting relationship or the collaboration
with the Company. In the case of employees, the agreements also provide that all
inventions resulting from work performed by them while in the employ of the
Company will be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection of
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information. See "Risk Factors -- Uncertainty of
Patent Position and Proprietary Rights; Access to Proprietary Genes."
COMPETITION
The Company is aware of a number of companies and institutions that are
developing or considering the development of potential gene therapy and cell
therapy treatments, including early-stage gene therapy companies, fully
integrated pharmaceutical companies, universities, research institutions,
governmental agencies and other healthcare providers. In addition, the Company's
potential products will be required to compete with existing pharmaceutical
products, or products developed in the
45
<PAGE> 47
future, that are based on established technologies. Many of the Company's
competitors have substantially more financial and other resources, larger
research and development staffs, and more experience and capabilities in
researching, developing and testing products in clinical trials, in obtaining
FDA and other regulatory approvals, and in manufacturing, marketing and
distribution than the Company. In addition, the competitive positions of other
early-stage companies may be enhanced significantly through their collaborative
arrangements with large pharmaceutical companies or academic institutions. The
Company's competitors may succeed in developing, obtaining patent protection
for, receiving FDA and other regulatory approvals for, or commercializing
products more rapidly than the Company. If the Company is successful in
commercializing its products, it will be required to compete with respect to
manufacturing efficiency and marketing capabilities, areas in which it has no
experience. The Company also competes with others in acquiring products or
technology from research institutions or universities. The Company's competitors
may develop new technologies and products that are available for sale prior to
the Company's potential products or that are more effective than the Company's
potential products. In addition, competitive products may be manufactured and
marketed more successfully than the Company's potential products. Such
developments could render the Company's potential products less competitive or
obsolete, and could have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENTAL REGULATION
All of the Company's potential products will require regulatory approval by
U.S. and foreign governmental agencies prior to commercialization in such
countries. Human therapeutic products are subject to rigorous preclinical and
clinical testing and other premarket approval procedures administered by the FDA
and similar authorities in foreign countries. The FDA exercises regulatory
authority over the development, testing, formulation, manufacture, labeling,
storage, record keeping, reporting, quality control, advertising, promotion,
export and sale of the Company's potential products. Similar requirements are
imposed by foreign regulators. In some cases, state requirements also apply. See
"Risk Factors -- Uncertainty of Governmental Regulatory Requirements; Lengthy
Approval Process."
Gene therapy and cell therapy are relatively new technologies and have not
been extensively tested in humans. The regulatory requirements governing gene
and cell therapy products and related clinical procedures are uncertain and are
subject to change. Obtaining approval from the FDA and other regulatory
authorities for a new therapeutic product is likely to take several years, if
ever, and involve substantial expenditures. Moreover, ongoing compliance with
applicable requirements can entail the expenditure of substantial resources.
Difficulties or unanticipated costs may be encountered by the Company in its
efforts to secure necessary governmental approvals, which could delay or
preclude the Company from marketing its products.
The activities required before a new therapeutic agent may be marketed in
the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation and may require animal studies to assess the product's
potential safety and efficacy. Animal safety studies must be conducted in
accordance with the FDA's Good Laboratory Practice regulations. The results of
these studies must be submitted to the FDA as part of an IND, which must be
reviewed and cleared by the FDA before proposed clinical testing can begin.
Clinical trials must be conducted in accordance with Good Clinical Practices
under protocols that detail the objectives of the trial, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. The FDA's review or approval of
a study protocol does not necessarily mean that, if the trial is successful, it
will constitute proof of efficacy or safety. Further, each clinical trial must
be approved by and conducted under the auspices of an independent Institutional
Review Board ("IRB") at the institution at which the trial will be conducted.
The IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution. The IRB is also
responsible for continuing oversight of the approved protocols in active trials.
An IRB may require changes in a protocol, and there can be no assurance that an
IRB will permit any given trial to be initiated or completed.
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<PAGE> 48
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, gene therapy clinical trials
generally are conducted with a small number of patients, who may or may not be
afflicted with a specific disease, to determine the preliminary safety profile.
In Phase II, clinical trials are conducted with larger groups of patients
afflicted with a specific disease in order to determine preliminary efficacy and
optimal dosages and to obtain expanded evidence of safety. In Phase III,
large-scale, multicenter, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others for
market approval. The FDA receives reports on the progress of each phase of
clinical testing, and it may require the modification, suspension or termination
of clinical trials if an unwarranted risk is presented to patients. Because gene
therapy products are a new category of therapeutics, there can be no assurance
as to the length of the clinical trial period or the number of patients the FDA
will require to be enrolled in the clinical trials in order to establish to its
satisfaction the safety and efficacy of such products.
FDA marketing approval must be obtained after completion of clinical trials
of a new product. The Company expects that its products will be regulated as
biologic drugs. According to the FDA's 1993 notice outlining its regulatory
approach to somatic and gene therapy products, these products are also subject
to the drug provisions of the Federal Food, Drug and Cosmetic Act. This notice
also stated, however, that the FDA's regulatory approach may evolve as
scientific knowledge increases in the area of somatic and gene therapy. Current
regulations relating to biologic drugs will require the Company to submit to the
FDA both a Product License Application ("PLA") and an Establishment License
Application ("ELA"), which must be approved by the FDA before commercial
marketing is permitted. The PLA/ELA must include results of product development
activities, preclinical studies and clinical trials, in addition to detailed
manufacturing information. FDA approval of PLA/ELAs generally takes at least one
year. The process may take substantially longer if the FDA has questions or
concerns about a product. The FDA may also request additional data relating to
safety or efficacy. Notwithstanding the submission of relevant data, the FDA may
ultimately decide that a PLA/ELA does not satisfy its regulatory criteria for
approval. The FDA may also modify the scope of the desired claims or require the
addition of warnings or other safety-related information and require additional
clinical tests following approval to confirm product safety and efficacy (Phase
IV trials). Even if FDA regulatory clearances are obtained, a marketed product
is subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on marketing a product or in withdrawal of the product
from the market, as well as possible civil or criminal sanctions.
The FDA recently amended its regulations to eliminate the ELA requirement
for therapeutic DNA plasmid products, therapeutic synthetic peptide products of
40 or fewer amino acids, monoclonal antibody products for in vivo use, and
therapeutic recombinant DNA-derived products. Manufacturers of these products
will instead be required to submit a biologics license application, which will
include, among other information, nonclinical and clinical data demonstrating
that the manufactured product meets prescribed standards for safety, purity and
potency, and information pertaining to manufacturing methods. It is unclear
whether any of the Company's products will fall within the category of products
for which the ELA requirement has been eliminated, or what effect such
elimination may have on product development and FDA review.
The FDA requires that manufacturers of a product comply with cGMP
requirements, both as a condition of product approval and on a continuing basis.
In complying with cGMP requirements, manufacturers must expend time, money and
effort on a continuing basis in production, record keeping and quality control.
Manufacturing facilities are subject to periodic inspections by the FDA to
ensure compliance. Failure to pass such inspections may subject the manufacturer
to possible FDA action such as the suspension of manufacturing, seizure of the
product, withdrawal of approval or other regulatory sanctions. The FDA may also
require the manufacturer to recall a product.
In addition to regulations enforced by the FDA, the Company is also subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances
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<PAGE> 49
Control Act, the Resource Conservation and Recovery Act and other federal, state
and local regulations. The Company's research and development activities involve
the controlled use of hazardous materials, chemicals, biological materials and
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any
resulting damages, and any such liability could exceed the Company's resources.
See "Risk Factors -- Uncertainty of Governmental Regulatory Requirements;
Lengthy Approval Process" and "-- Hazardous Materials; Environmental Matters."
HUMAN RESOURCES
At March 31, 1996, Targeted Genetics had 79 employees; 63 of these
employees were directly involved in research and development, of whom 18 had
Ph.D. or M.D. degrees. A significant number of the Company's management and
professional employees have prior experience with other biotechnology or
pharmaceutical companies. The Company considers its relations with its employees
to be good.
The Company's success will depend in large part on its ability to attract
and retain key employees and scientific advisors. Competition among
biotechnology and pharmaceutical companies for highly skilled scientific and
management personnel is intense. There can be no assurance that the Company will
be successful in retaining its existing personnel or advisors, or in attracting
additional qualified employees. See "Risk Factors -- Dependence on Key Personnel
and Scientific Collaborators."
FACILITIES
Targeted Genetics currently occupies approximately 33,000 square feet of
laboratory and office space in a single facility in Seattle, Washington. Rental
payments in 1995 totaled $396,220. The lease expires on April 1, 1999 and
includes options to extend the lease term for three consecutive five-year
periods. The Company believes this facility, together with approximately 2,000
square feet of expansion space and space available in an adjoining office
complex, will be adequate to meet its projected needs for the next two to three
years. Within that time frame, the Company may be required to locate alternative
facilities, depending on the Company's growth and development.
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<PAGE> 50
MANAGEMENT
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
The following are the directors, director nominees and executive officers
of Targeted Genetics, and their ages as of March 31, 1996, each of whom will
serve in the capacities noted until their successors are duly appointed and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -------------------------------------------------
<S> <C> <C>
H. Stewart Parker.................... 40 President, Chief Executive Officer and Director
Barrie J. Carter, Ph.D............... 51 Executive Vice President and Director of Research
and Development
Richard Daifuku, M.D., Ph.D.......... 43 Vice President, Clinical Affairs
James A. Johnson..................... 39 Vice President, Finance, Chief Financial Officer,
Treasurer and Secretary
Jeremy Curnock Cook.................. 47 Director
Stephen A. Duzan..................... 54 Director
James D. Grant....................... 63 Director
Donald E. O'Neill.................... 70 Director
Austin M. Long, III.................. 51 Director Nominee
Martin P. Sutter..................... 41 Director Nominee
</TABLE>
The Company's directors are divided into three classes and will serve for
terms of three years, with one class being elected by the shareholders each
year. The terms of the current directors expire as follows: Stephen A. Duzan and
James D. Grant in 1996, H. Stewart Parker in 1997 and Donald E. O'Neill in 1998.
Jeremy Curnock Cook was elected to the Board of Directors in July 1995 to fill a
vacancy and has been nominated for election at Targeted Genetics' 1996 annual
shareholders meeting for a term expiring in 1998.
Pursuant to the Merger Agreement, the Company's Board of Directors will
appoint Austin M. Long, III and Martin P. Sutter as RGene's designees to the
Company's Board of Directors. The Company has agreed to cause Messrs. Long and
Sutter to be nominated for election at the Company's 1997 annual meeting of
shareholders.
H. STEWART PARKER managed the formation of Targeted Genetics as a wholly
owned subsidiary of Immunex and has been President, Chief Executive Officer and
a director since the Company's inception in 1989. She served in various
capacities at Immunex from August 1981 through December 1991, most recently as
Vice President, Corporate Development. Ms. Parker also served as President and a
director of Receptech Corporation, a company formed by Immunex in 1989 to
accelerate the development of soluble cytokine receptor products, from February
1991 to January 1993, and was Chairperson of the Washington State Biotechnology
Association. She received her B.A. and M.B.A. from the University of Washington.
BARRIE J. CARTER, PH.D. is Executive Vice President and Director of
Research and Development of Targeted Genetics. He joined the Company in August
1992. For the previous 22 years he was employed by the NIH in Bethesda, Maryland
where he was Chief of the Laboratory of Molecular and Cellular Biology in the
National Institute for Diabetes, Digestive and Kidney Diseases from 1982 to
1992. He spent a period of postdoctoral training at the Imperial Cancer Research
Fund Laboratories in London, England before joining the NIH. His long-term
research interests are in molecular biology of viruses, development of AAV
vectors and gene therapy. Dr. Carter serves on the Editorial Boards of Journal
of Virology, Gene Therapy Newsletter and Human Gene Therapy, and as an Associate
Editor of Virology. He is an Affiliate Professor of Medicine at the University
of Washington Medical School. Dr. Carter received his B.Sc. (Honors) from the
University of Otago, Dunedin, New Zealand and his Ph.D. in the Biochemistry
Department of the University of Otago Medical School.
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<PAGE> 51
RICHARD DAIFUKU, M.D., PH.D. joined the Company in January 1995 as Vice
President, Clinical Affairs. From January 1992 to January 1995, Dr. Daifuku
served in a variety of positions at Amgen Corporation, a biotechnology company,
including Associate Director, Infectious Diseases and Product Development Team
Leader. From June 1990 to January 1992, he was Associate Medical Director at
Cetus Corporation, a biotechnology company, and a Clinical Instructor at the
University of California at San Francisco. Dr. Daifuku is board-certified in
internal medicine and, from 1987 to 1990, completed his fellowship in infectious
disease at the UCLA Center for Health Sciences. Dr. Daifuku received his B.A. in
biology from Boston University, his M.S. in Environmental Health Sciences from
Harvard School of Public Health and his M.D. and Ph.D. in Epidemiology from the
University of Washington.
JAMES A. JOHNSON joined the Company in March 1994 as Vice President,
Finance, Chief Financial Officer, Treasurer and Secretary. He was employed by
Immunex from January 1988 to February 1994, initially as Director of Finance and
as Vice President, Finance beginning in February 1990. Mr. Johnson has served as
Treasurer of Targeted Genetics from its inception in 1989 to the present. From
November 1989 to January 1993, he also served as Treasurer and Assistant
Secretary of Receptech Corporation. He received his B.A. from the University of
Washington.
JEREMY CURNOCK COOK has been a director of the Company since 1995. Mr. Cook
is a director of Rothschild Asset Management Limited and has been responsible
for the Rothschild Bioscience Unit since 1987. Mr. Cook founded the
International Biochemicals Group in 1975, which he subsequently sold to Royal
Dutch Shell in 1985, remaining as Managing Director until 1987. He currently
serves on the board of directors of Cell Therapeutics Inc., Creative
BioMolecules Inc. and Ribozyme Pharmaceuticals Inc., as well as several public
and privately held companies outside the United States, including International
Biotechnology Trust plc ("IBT").
STEPHEN A. DUZAN has been a director of the Company since its inception in
1989. He is currently Chairman of the Board and Chief Executive Officer of Key
Computer Systems, Inc. He was a co-founder of Immunex, and served as its Chief
Executive Officer and as a director from its formation in 1981 until his
retirement in September 1993. He also served as President of Immunex from 1981
through 1990. He currently serves as a consultant to Immunex and is on the board
of directors of IBT, Ergo Science Corporation and a number of private companies
and nonprofit organizations.
JAMES D. GRANT has been a director of the Company since February 1993. He
is a business consultant in addition to serving as the Chairman of the Board of
T Cell Sciences, Inc., a biotechnology company ("T Cell"). Mr. Grant previously
served as Chairman and Chief Executive Officer of T Cell from 1986 until his
retirement in 1992. Previously, he was Vice President of CPC International,
Inc., a multinational food and industrial products company, from 1972 to 1986.
Mr. Grant served as Deputy Commissioner of the FDA from 1969 to 1972, and was
Vice Chairman of the Advisory Committee of the FDA from 1990 to 1991. Mr. Grant
currently serves on the board of directors of Biocompatibles, Ltd. (U.K.) and
IBT.
DONALD E. O'NEILL has been a director of the Company since November 1992.
From March 1971 to March 1991, he held various positions at Warner-Lambert
Company, a healthcare company, most recently as Executive Vice President,
Chairman of International Operations and as a director. He currently serves on
the board of directors of Alliance Pharmaceutical Corp., Cytogen Corporation,
Immunogen, Inc., New Jersey Resources Corporation, Scios Nova, Inc., MDL
Information Systems, Inc. and Fuisz Technologies.
AUSTIN M. LONG, III will be nominated by the Board of Directors to become a
director of the Company in connection with the RGene Acquisition. Mr. Long has
been the Director of Private Investments at the University of Texas since 1987.
MARTIN P. SUTTER will be nominated by the Board of Directors to become a
director of the Company in connection with the RGene Acquisition. Mr. Sutter has
been a General Partner of The Woodlands/Essex Management Partners, L.P., a
venture capital firm, since September 1994. He has also been the Managing
General Partner of The Woodlands Venture Partners, L.P. since October 1988. Mr.
Sutter is currently a member of the Biomedical Advisory Board of the Houston
Advanced Research Center, Chairman of the Board of Aronex and Zonagen, Inc. and
a director of LifeCell Corporation.
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SCIENTIFIC ADVISORY BOARD
The Company has retained a group of scientific advisors to serve on its
Scientific Advisory Board. The Scientific Advisory Board provides Targeted
Genetics with specific expertise in areas of molecular biology, immunology, cell
biology and clinical medicine relevant to the product and technology development
efforts now underway at the Company. The Company's scientific advisors are Drs.
David Cosman, Philip Greenberg, A. Dusty Miller, Richard Palmiter and George
Stamatoyannopoulos. In connection with the RGene Acquisition, Dr. Leaf Huang has
joined, and, upon receiving the consent of the University of Texas, Dr.
Mien-Chie Hung is expected to join, the Company's Scientific Advisory Board.
The Scientific Advisory Board meets bimonthly with the Company's scientific
personnel and management to discuss the Company's present research and
development activities and long-term strategies. The members of the Scientific
Advisory Board are employed by entities other than Targeted Genetics and may
have commitments to or consulting contracts with other entities that may limit
their availability to the Company. With the exception of Dr. Cosman, who is a
member of the Scientific Advisory Board in connection with the Company's
relationship with Immunex, each member of the Scientific Advisory Board has
agreed not to perform services for another person or entity that would create a
conflict of interest with the services provided to the Company, although there
can be no assurance that such a conflict will not arise. Under such agreements,
inventions or processes discovered by members of the Scientific Advisory Board
in their capacity as such will not, unless invented or discovered in the course
of providing consulting services to Targeted Genetics, including pursuant to the
collaborative agreements provided in this Prospectus, become the property of the
Company, but will remain the property of such members or their employers. See
"Business -- Research Collaborations and Licensing Agreements."
DR. COSMAN has been a member of the Scientific Advisory Board since 1995.
Since 1988, Dr. Cosman has been Vice President, Molecular Biology at Immunex. In
1980, Dr. Cosman received his Ph.D. in Microbiology from the Pennsylvania State
University College of Medicine.
DR. GREENBERG has been a member of the Scientific Advisory Board since
February 1992. He joined the University of Washington School of Medicine in
1976, and since 1988 has been a Professor of Immunology and Oncology. He has
been a member of the Hutchinson Center since 1976, where he has pioneered
techniques for adoptive immunotherapy as a cancer treatment. He has served on
various National Cancer Institute and NIH committees and study sections,
including the Clinical Cancer Program Project Review Committee, the Special
Study Section for the Biological Response Modifiers Program, the Immunobiology
Study Section and the U.S.-Japan Cancer Research Cooperation Program. He has
served as an editor for various journals, including Journal of Immunology,
Journal of the National Cancer Institute, Journal of Gene Therapy, Human Gene
Therapy and Therapeutic Immunology. Dr. Greenberg received his B.A. from
Washington University and his M.D. from the State University of New York.
DR. MILLER has been a member of the Scientific Advisory Board since
February 1992. He is a leading researcher in the field of retroviral vectors,
and has developed certain packaging cell lines utilized by the Company in its
gene therapy systems. Dr. Miller joined the Hutchinson Center in 1984, where he
is a full member of the Department of Molecular Medicine. He is also an
Affiliate Professor of Pathology at the University of Washington. The Hutchinson
Center has patented several of Dr. Miller's inventions. He currently serves on
the editorial boards of several journals, including Somatic Cell and Molecular
Genetics and Journal of Virology, and is an associate editor of Human Gene
Therapy. He is also a former member of the NIH Recombinant DNA Advisory
Committee. Dr. Miller received his B.S. from Brown University and his Ph.D. in
pharmacology from Stanford University.
DR. PALMITER has been a member of the Scientific Advisory Board since
February 1992. Since 1981, he has been a Professor of Biochemistry at the
University of Washington. Since 1976, Dr. Palmiter has also been an Investigator
at the Howard Hughes Medical Institute. Dr. Palmiter is a leading researcher on
gene regulation and expression. He is a Fellow of the American Association for
the Advancement of
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<PAGE> 53
Science, a member of the National Academy of Sciences, and a member of the
American Academy of Arts and Sciences. He received his A.B. from Duke University
and his Ph.D. from Stanford University.
DR. STAMATOYANNOPOULOS has been a member of the Scientific Advisory Board
since February 1992. He is a leader in the field of hemoglobin gene regulation.
He has been a Professor of Medicine and Genetics at the University of Washington
since 1975 and has served as head of the Division of Medical Genetics,
Department of Medicine of the University of Washington. Dr. Stamatoyannopoulos
also currently serves as the Director of the Lucille P. Markey Molecular
Medicine Center. He is the past-president of the American Society of Hematology.
He has served on various NIH committees and international scientific panels. Dr.
Stamatoyannopoulos received his M.D. from the University of Athens, Greece.
DR. HUANG has joined the Company's Scientific Advisory Board in connection
with the RGene Acquisition. Prior to the RGene Acquisition, Dr. Huang served as
a member of the RGene scientific advisory board. He is a leader in the area of
lipid-based gene delivery. Dr. Huang is a Professor in the Department of
Pharmaceutical Sciences and Director of Liposome Vector Core, Pittsburgh Center
for Human Gene Therapy at the University of Pittsburgh. Dr. Huang has been
affiliated with the University of Pittsburgh since 1991. Dr. Huang was at the
University of Tennessee from 1985 to 1991 and is a founder of RGene.
DR. HUNG is expected to join the Company's Scientific Advisory Board upon
receiving the consent of the University of Texas. Prior to the RGene
Acquisition, Dr. Hung served as a member of the RGene scientific advisory board.
He is a leader in the fields of tumor biology and oncogenes. Dr. Hung is
Professor of Virology in the Department of Tumor Biology, Section of Virology,
at M.D. Anderson and Director of Breast Cancer Basic Research. Dr. Hung has been
affiliated with M.D. Anderson since 1986. He is one of the original scientists
involved in cloning the Her-2/neu oncogene and is a founder of RGene.
With the exception of Drs. Cosman and Huang, each existing member of the
Scientific Advisory Board has been issued Common Stock in consideration for
service to the Company. Drs. Huang and Hung received shares of common stock of
RGene in consideration for service to RGene. Drs. Greenberg and Miller also
receive annual consulting fees pursuant to agreements with the Company. Dr.
Huang will also receive fees in connection with a consulting agreement entered
into in connection with the RGene Acquisition. Dr. Hung will receive fees in
connection with a consulting agreement to be entered into upon receiving the
consent of the University of Texas. There can be no assurance, however, that
such consent will be given.
DIRECTOR COMPENSATION
Directors who are employees of Targeted Genetics do not receive any fee for
their services as directors. Directors who are not employees of Targeted
Genetics are compensated pursuant to the Targeted Genetics Corporation Stock
Option Plan for Nonemployee Directors (the "Directors Plan"). Additionally,
nonemployee directors are reimbursed for travel expenses incurred in connection
with attendance at meetings. See "-- Benefit Plans -- Directors Plan."
COMMITTEES OF THE BOARD AND MEETINGS
Targeted Genetics has established standing committees of the Board,
including Audit and Compensation Committees. Each of these committees is
responsible to the full Board, and its activities are therefore subject to
approval of the Board. The functions performed by these committees can be
summarized as follows:
AUDIT COMMITTEE. The Audit Committee reviews the corporate accounting and
reporting practices, internal accounting controls, audit plans and results,
investment policies, and financial reports of Targeted Genetics in order to
ensure that Targeted Genetics' assets are appropriately safeguarded and to
ensure the quality and integrity of its financial records. Additionally, the
Audit Committee
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<PAGE> 54
recommends to the Board the independent auditors to be retained by Targeted
Genetics. The original members of this committee during 1995 were James D. Grant
and Donald L. Murfin. After Mr. Murfin's resignation from the Board, the Board
appointed Donald E. O'Neill to fill the vacancy on the committee. On October 11,
1995, Jeremy Curnock Cook was appointed to be the third member of this
committee.
COMPENSATION COMMITTEE. The Compensation Committee establishes salaries,
incentives and other forms of compensation for directors, officers and other
executives of Targeted Genetics. This committee also administers Targeted
Genetics' various incentive compensation and benefit plans, including stock
option plans, and recommends the establishment of policies relating to such
incentive compensation and benefit plans. The members of this committee are
Stephen A. Duzan, James D. Grant and Donald E. O'Neill.
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information with respect to
compensation paid by the Company for the fiscal year ended December 31, 1995 and
for the two prior fiscal years to (i) the Company's Chief Executive Officer and
(ii) the Company's most highly compensated executive officers whose salary and
bonus exceeded $100,000 for services performed during the fiscal year ended
December 31, 1995 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- ----------------------------------- ----- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
H. Stewart Parker.................. 1995 $ 165,000 $ 41,250 39,186 $ 235
President and Chief Executive 1994 154,000 45,000 50,000 137
Officer 1993 140,000 -- -- 119
Barrie J. Carter, Ph.D............. 1995 140,000 28,000 26,982 6,018
Executive Vice President and 1994 132,550 30,000 40,000 5,975
Director of Research and 1993 120,500 -- -- 44,262
Development
Richard Daifuku, M.D., Ph.D. (2)... 1995 150,974 -- 40,000 65,303
Vice President, Clinical Affairs 1994 -- -- -- --
1993 -- -- -- --
James A. Johnson (3)............... 1995 128,000 19,200 25,038 103
Vice President, Finance, Chief 1994 102,500 -- 60,000 96
Financial Officer, Treasurer and 1993 -- -- -- --
Secretary
</TABLE>
- ------------------
(1) For Ms. Parker and Mr. Johnson, consists of excess life insurance premiums;
for Dr. Carter, consists of reimbursement for relocation expenses of $38,517
in 1993, extinguishment of debt associated with initial purchases of Common
Stock of $5,500 in each of 1993, 1994 and 1995, and excess life insurance
premiums of $245, $475 and $518 in 1993, 1994 and 1995, respectively; and
for Dr. Daifuku, consists of reimbursement for relocation expenses of
$53,079, extinguishment of debt associated with relocation costs of $12,000,
and excess life insurance premiums of $224.
(2) Dr. Daifuku began his employment with Targeted Genetics on January 23, 1995.
(3) Mr. Johnson began his employment with Targeted Genetics on March 1, 1994.
53
<PAGE> 55
OPTION GRANTS
The following table sets forth certain information regarding stock options
granted during the fiscal year ended December 31, 1995 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
---------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SHARES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) FISCAL YEAR(1)(2) ($/SHARE) DATE 5%($) 10%($)
- ---------------------------- ------------- ----------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
H. Stewart Parker........... 39,186 17.6% $4.00 1/27/2005 $ 98,575 $249,810
Barrie J. Carter, Ph.D. .... 26,982 12.1% 4.00 1/27/2005 67,875 172,009
Richard Daifuku, M.D.,
Ph.D. .................... 40,000 17.9% 4.00 1/27/2005 100,623 254,999
James A. Johnson............ 25,038 11.2% 4.00 1/27/2005 62,985 159,616
</TABLE>
- ------------------
(1) Options are granted at the fair market value on the date of grant and
generally vest over five years with 20% of each grant becoming exercisable
annually beginning on the first anniversary of the date of grant. Certain
changes in control of Targeted Genetics can trigger accelerated vesting of
stock options and rights to related payments.
(2) Options to purchase 223,237 shares of Common Stock were granted by the
Company to its employees during 1995.
(3) The dollar amounts under these columns are the result of calculations at
assumed rates of 5% and 10% and are not intended to forecast future
appreciation. No value will be realized if the stock price does not exceed
the exercise price of the options.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth certain information as of December 31, 1995,
regarding options held by the Named Executive Officers. None of such individuals
exercised any options during the fiscal year ended December 31, 1995.
AGGREGATED FISCAL 1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
H. Stewart Parker.............................. 34,000 95,186 $ 128,220 $ 170,353
Barrie J. Carter, Ph.D......................... 8,000 58,982 5,040 64,141
Richard Daifuku, M.D., Ph.D.................... -- 40,000 -- 65,200
James A. Johnson............................... 12,000 73,038 27,560 151,052
</TABLE>
- ------------------
(1) Represents the aggregate number of outstanding options multiplied by the
difference between $5.63 (the closing price of the Common Stock as reported
on the Nasdaq National Market on December 29, 1995) and the exercise price
of such options.
BENEFIT PLANS
1992 RESTATED STOCK OPTION PLAN
The Company's 1992 Restated Stock Option Plan (the "1992 Option Plan"),
which was amended and restated in March 1994, provides for the grant of options
to acquire a maximum of 1,400,000 shares of Common Stock. The Company's Board of
Directors has adopted a proposal, subject to approval by the Company's
shareholders at the 1996 annual shareholders meeting, to increase such option
pool to 2,000,000 shares of Common Stock. As of March 31, 1996, options to
purchase 61,300 shares of
54
<PAGE> 56
Common Stock granted under the 1992 Option Plan had been exercised, options to
purchase 1,138,014 shares of Common Stock were outstanding and options to
purchase 200,686 shares of Common Stock remained available for grant. The
outstanding options were held by 77 individuals and were exercisable at a
weighted average exercise price of $3.15 per share. Outstanding options to
purchase an aggregate of 683,129 shares were held by employees who are not
officers or directors of the Company.
The 1992 Option Plan permits the granting of incentive stock options
("ISOs") to employees or nonqualified stock options ("NSOs") to employees,
directors, officers, agents, consultants, advisors and independent contractors
(any such person, an "Optionee") at the discretion of the administrator of the
1992 Option Plan (the "Plan Administrator"). The Compensation Committee of the
Board of Directors is currently the Plan Administrator. Subject to the terms of
the 1992 Option Plan, the Plan Administrator determines the terms and conditions
of options granted under the 1992 Option Plan, including the exercise price. The
maximum number of shares with respect to which an option or options may be
granted to any Optionee in any taxable year may not exceed 200,000 shares.
Additionally, the 1992 Option Plan provides that the Plan Administrator must
establish an exercise price for ISOs that is not less than the fair market value
per share at the date of grant. Each option must expire within ten years of the
date of grant. However, if ISOs are granted to persons owning more than 10% of
the voting stock of the Company, the 1992 Option Plan provides that the exercise
price shall not be less than 110% of the fair market value per share on the date
of grant and that the ISOs' term shall not exceed five years. NSOs generally
expire ten years from the date of grant. Unless otherwise provided by the Plan
Administrator, options granted under the 1992 Option Plan vest at a rate of 20%
per year over a five-year period.
During an Optionee's lifetime, an option is exercisable only by the
Optionee and no option may be transferred by the Optionee other than by will or
the laws of descent and distribution or, in the case of NSOs, pursuant to a
qualified domestic relations order (as defined in the Internal Revenue Code of
1986, as amended); provided, however, that to the extent permitted by Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Plan Administrator may permit a recipient of an option to transfer such option
or designate, by giving written notice to the Plan Administrator, a person who
may exercise the option after such Optionee's death. An Optionee whose
relationship with the Company or any related corporation ceases for any reason
(other than termination for cause, death or total disability, as such terms are
defined in the 1992 Option Plan) may exercise, in the three-month period
following such cessation (unless such options terminate or expire sooner by
their terms), or such longer period as determined by the Plan Administrator,
that portion of the Optionee's options that is exercisable at the time of such
cessation. In the event the Optionee is terminated for cause, the options
terminate upon the Company's discovery of such cause. In the event the Optionee
dies or becomes totally disabled, the options vested as of the date of death or
total disability may be exercised prior to the earlier of the option's specified
expiration date or one year from the date of the Optionee's death or disability.
Unexercised options granted under the 1992 Option Plan terminate upon the
occurrence of certain events, including certain mergers. In a stock merger, the
options would convert into options to purchase shares of the other corporation
involved in the merger, unless the Company and such other corporation, in their
sole discretion, determine that such options shall terminate. The converted
options would continue to vest in accordance with the vesting requirements of
the 1992 Option Plan. Upon the occurrence of a consolidation, reorganization or
sale of assets of the Company other than a stock merger, Optionees may exercise
such options immediately prior to such transaction without regard to whether the
vesting requirements have been satisfied.
Shares subject to options granted under the 1992 Option Plan that have
lapsed or terminated may again be subject to options granted under the 1992
Option Plan. Furthermore, the Plan Administrator may offer to exchange new
options for existing options, with the shares subject to the existing options
being again available for grant under the 1992 Option Plan. Unless sooner
terminated by the Board of Directors, the 1992 Option Plan terminates on January
21, 2002.
55
<PAGE> 57
DIRECTORS PLAN
The Directors Plan was approved by the Board of Directors and by the
Company's shareholders in March 1994. An aggregate of 120,000 shares of Common
Stock may be issued under the Directors Plan. The Directors Plan provides for
automatic grants of NSOs to nonemployee directors of Targeted Genetics at an
exercise price equal to the fair market value per share on the date of grant. On
June 1, 1994, the effective date of the Directors Plan, an option to purchase
3,000 shares of Common Stock was automatically awarded to each nonemployee
director. In the future, each nonemployee director who is initially elected or
appointed to the Board will, upon such election or appointment, be automatically
granted an option to purchase 15,000 shares of Common Stock. In addition, the
Directors Plan provides for the annual grant of options to purchase 5,000 shares
of Common Stock to each continuing nonemployee director. Any options granted
after the effective date of the Directors Plan vest in three equal annual
installments beginning one year after the date of grant. The options that were
granted on the effective date of the Directors Plan became fully exercisable on
June 1, 1995, 12 months after such effective date. As of March 31, 1996, options
to purchase 39,000 shares of Common Stock had been granted under the Directors
Plan. Messrs. Duzan, Grant and O'Neill each received options in 1995 to purchase
5,000 shares of Common Stock. Mr. Cook received an option to purchase 15,000
shares of Common Stock upon his appointment to the Board in July 1995.
During a nonemployee director's lifetime, an option granted under the
Directors Plan may be exercised only by such optionee and is nontransferable
other than by will or the laws of descent and distribution; provided, however,
that to the extent permitted by Rule 16b-3 under the Exchange Act, the Plan
Administrator, which is currently the Board of Directors, may permit a recipient
of an NSO to designate, by giving written notice to the Plan Administrator, a
person who may exercise the option after such optionee's death. Options expire
within ten years of the date of grant or, if earlier, three months after a
nonemployee director's termination of service as a director or 12 months after a
nonemployee director's death.
Unexercised options granted under the Directors Plan terminate upon the
occurrence of certain events, including mergers. In a stock merger, the options
would convert into options to purchase shares of the other corporation involved
in the merger, unless Targeted Genetics and such other corporation, in their
sole discretion, determine that such options shall terminate. Optionees may
exercise options immediately prior to the occurrence of a consolidation,
reorganization or sale of assets of Targeted Genetics other than a stock merger
without regard to whether the vesting requirements have been satisfied.
Unless sooner terminated by either the Board of Directors or the
shareholders of Targeted Genetics, the Directors Plan will terminate on March 2,
2004.
56
<PAGE> 58
CERTAIN TRANSACTIONS
Targeted Genetics was formed in 1989 as a subsidiary of Immunex, a
biotechnology company that develops immunoregulatory proteins as therapeutics.
Immunex owns 2,613,122 shares of Targeted Genetics' Common Stock.
Subject to availability of resources, Immunex has agreed to provide certain
services to Targeted Genetics in areas such as immunology, clinical and
regulatory affairs, quality control, administration and consulting by specific
Immunex employees. Targeted Genetics reimburses Immunex for these services on a
fully burdened cost basis. During the years ended December 31, 1994 and 1995,
Targeted Genetics incurred expenses of $83,915 and $29,249, respectively, for
such services.
Between July 13, 1995 and July 17, 1995, Targeted Genetics issued an
aggregate of 830,598 units (the "Units"), consisting of four shares of Common
Stock and one warrant ("Warrant") to purchase one share of Common Stock, in a
self-managed public offering at a price of $15 per Unit. The Warrants are
convertible into shares of Common Stock. The purchasers of the Units included,
among others, the following greater-than-5% shareholders of the Company:
<TABLE>
<CAPTION>
NAME NO. OF UNITS
------------------------------------------------------------------------ ------------
<S> <C>
International Biotechnology Trust plc................................... 300,000
State of Wisconsin Investment Board..................................... 100,000
</TABLE>
See "Description of Capital Stock -- Warrants -- 1995 Unit Offering."
57
<PAGE> 59
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 19, 1996, certain information
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known by Targeted Genetics to own beneficially more than 5% of the shares
of Common Stock, (ii) each director and director nominee of Targeted Genetics,
(iii) each of the Named Executive Officers, and (iv) all directors and executive
officers of Targeted Genetics as a group. The information in the following table
reflects the issuance of 3,636,364 shares of Common Stock to be issued in
connection with the RGene Acquisition. In addition, except as otherwise noted,
Targeted Genetics believes that the beneficial owners of the shares of Common
Stock listed below, based on information furnished by such owners, have sole
voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NUMBER OF OWNED
SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------ ------------ -------- -----------
<S> <C> <C> <C>
5% OWNERS:
Immunex Corporation................................. 2,613,122 16.3% 13.4%
51 University Street
Seattle, WA 98101
International Biotechnology Trust plc............... 1,500,000(1) 9.2% 7.6%
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithin's Lane
London, EC4N 8NR England
State of Wisconsin Investment Board................. 1,112,500(2) 6.9% 5.7%
121 East Wilson Street
P.O. Box 7842
Madison, WI 53707
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS:
H. Stewart Parker................................... 188,502(3) 1.2% *
Barrie J. Carter, Ph.D. ............................ 148,061(4) * *
Richard Daifuku, M.D., Ph.D. ....................... 8,000(5) * *
James A. Johnson.................................... 32,008(6) * *
Jeremy Curnock Cook................................. 1,505,000(1)(7) 9.2% 7.6%
Stephen A. Duzan.................................... 17,797(8) * *
James D. Grant...................................... 11,867(5) * *
Donald E. O'Neill................................... 21,867(9) * *
Austin M. Long, III................................. 206,255(10) 1.3% 1.1%
Martin P. Sutter.................................... 1,573,248(11) 9.8% 8.1%
All directors, director nominees and executive
officers as a group (10 persons)................. 3,712,605 22.5% 18.6%
</TABLE>
- ------------------
* Less than 1%.
(1) Includes 1,200,000 shares of Common Stock and warrants to purchase 300,000
shares of Common Stock owned by International Biotechnology Trust plc
("IBT"), an investment trust the shares of which are traded on the London
Stock Exchange. Mr. Cook is a managing director of Rothschild Asset
Management Limited, the investment manager and secretary of IBT, and
thereby has power to direct IBT's investments. Mr. Cook disclaims
beneficial ownership of the securities owned by IBT.
(2) Includes warrants to purchase 100,000 shares of Common Stock.
(3) Includes warrants to purchase 3,333 shares of Common Stock and 51,837
shares subject to options that may be exercised within 60 days.
58
<PAGE> 60
(4) Includes warrants to purchase 1,333 shares of Common Stock and 21,396
shares subject to options that may be exercised within 60 days.
(5) Represents shares subject to options that may be exercised within 60 days.
(6) Includes warrants to purchase 600 shares of Common Stock and 29,008 shares
subject to options that may be exercised within 60 days.
(7) Includes 5,000 shares subject to options that may be exercised within 60
days.
(8) Includes warrants to purchase 1,666 shares of Common Stock and 9,467 shares
subject to options that may be exercised within 60 days.
(9) Includes warrants to purchase 2,000 shares of Common Stock and 11,867
shares subject to options that may be exercised within 60 days.
(10) Represents 206,255 shares of Common Stock issuable to the University of
Texas Board of Regents as a result of the RGene Acquisition. Mr. Long is
the Director of Private Investments at the University of Texas and thereby
has power to vote the securities. Although for purposes of the Exchange Act
Mr. Long is deemed to be the beneficial owner of such securities, Mr. Long
expressly disclaims that he is, in fact, the beneficial owner of such
securities.
(11) Represents 440,520 shares of Common Stock issuable to Aronex as a result of
the RGene Acquisition, 367,452 shares of Common Stock to be issued to The
Woodlands Venture Fund, L.P. in the RGene Acquisition and 765,276 shares of
Common Stock to be issued to The Woodlands/Essex Venture Partners III, L.P.
in the RGene Acquisition. Mr. Sutter is Chairman of the Board of Aronex. In
addition, he is (i) a General Partner of The Woodlands/Essex Management
Partners, L.P., which is the General Partner of The Woodlands/Essex Venture
Partners III, L.P., and (ii) the Managing General Partner of The Woodlands
Venture Partners, L.P., which is the General Partner of The Woodlands
Venture Fund, L.P., and thereby has the power to vote the securities.
Although for purposes of the Exchange Act Mr. Sutter is deemed to be the
beneficial owner of such securities, Mr. Sutter expressly disclaims that he
is, in fact, the beneficial owner of such securities.
59
<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, par value $.01 per share, and 6,000,000 shares of Preferred
Stock, par value $.01 per share. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Articles of Incorporation and the Bylaws of the Company, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus forms a
part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders and are not entitled to cumulative
voting rights with respect to the election of directors. Holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor, subject to preferences
that may be applicable to any outstanding Preferred Stock. In the event of
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All the outstanding shares of Common Stock are, and all
shares of Common Stock to be outstanding upon completion of the Offering will
be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 6,000,000 shares of
Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting each such series,
without any further vote or action by the Company's shareholders. The issuance
of Preferred Stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company. No shares of Preferred Stock are currently outstanding.
The Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
Equipment Financing Transactions
In conjunction with equipment financing transactions completed in December
1993 through October 1995, the Company issued warrants (the "Equipment Financing
Warrants") to purchase an aggregate of 62,016 shares of Common Stock at an
average exercise price of $6.00 per share, expiring through December 2003. The
Equipment Financing Warrants may be exercised for cash or on a cashless basis,
whereby the holder tenders the number of shares necessary to satisfy the
exercise price. Holders of the Equipment Financing Warrants are entitled to
certain rights with respect to registration under the Securities Act of the
shares of Common Stock issuable upon exercise of such warrants. See
"-- Registration Rights."
1995 Unit Offering
In July 1995, the Company completed a self-managed public offering of
830,598 Units, consisting of four shares of Common Stock and one Warrant. The
Warrants were issued under a Warrant Agreement dated July 7, 1995 between
Targeted Genetics and First Interstate Bank of Washington, N.A., as Warrant
Agent. The Warrants were immediately exercisable upon issuance at an exercise
price of $4.68 per share (the "Exercise Price") and will expire on July 31,
1997. From and after the sale and issuance of the Units, the Warrants and the
shares of Common Stock traded separately. As of June 19, 1996, 769,598 of such
Warrants were outstanding.
60
<PAGE> 62
In case of any reclassification or capital reorganization, or in case of
any consolidation or merger of Targeted Genetics with or into another
corporation or any sale, lease or transfer to another corporation of all or
substantially all the assets of Targeted Genetics, the holder of each
outstanding Warrant will have the right, upon subsequent exercise of a Warrant,
to purchase the kind and amount of shares of stock or other securities and
property receivable upon such reclassification, capital reorganization,
consolidation, merger, sale, lease or transfer by a holder of the number of
shares of Common Stock that would have been received upon the exercise of such
Warrant immediately prior thereto, and the Exercise Price will be appropriately
adjusted. The Warrants do not confer upon the holder any voting or preemptive
rights, or any other rights as a shareholder of Targeted Genetics.
CERTAIN CHARTER PROVISIONS AND WASHINGTON LAW
The Articles of Incorporation and Bylaws of the Company include provisions
that may have the effect of impeding a hostile takeover of the Company. The
Articles of Incorporation and Bylaws provide for a classified Board of Directors
consisting of three classes of directors. The Company's directors may be removed
only for cause by shareholders holding not less than two-thirds of the shares
entitled to elect the director or directors whose removal is sought. The
Articles of Incorporation and Bylaws direct that special meetings of the
Company's shareholders may be called only by the Board of Directors, the
Chairman of the Board or the President of the Company or at the direction of 30%
of the Company's shareholders. The Bylaws require that shareholder nominations
for directors to be elected to the Board of Directors be made pursuant to timely
notice and in proper written form to the Secretary of the Company. To be timely,
the shareholders' notice must be received by the Company not less than 60 or
more than 90 days prior to an annual meeting (or within 10 days of the mailing
by the Company of notice of the date of the annual meeting if such Company
notice is made less than 60 days prior to the date of the annual meeting) and no
more than seven days following the date on which notice is given to shareholders
if the election is to take place at a special meeting. There are also specific
content requirements for such notice. Requests to present matters to the
shareholders at an annual meeting must also be received by the Company not less
than 60 or more than 90 days prior to the meeting, and such requests must meet
specific content requirements.
These provisions, as well as the availability of Preferred Stock for
issuance without shareholder approval, may have the effect of lengthening the
time required for a person to acquire control of the Company through a proxy
contest or the election of a majority of the Board of Directors, and may deter
any potential unfriendly offers or other efforts to obtain control of the
Company, thereby possibly depriving the Company's shareholders of opportunities
to realize a premium for their Common Stock, and could make removal of incumbent
directors more difficult. At the same time, these provisions may have the effect
of inducing any persons seeking control of the Company to negotiate terms
acceptable to the Board of Directors.
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. First, subject to certain
exceptions, including approval of the transaction by a majority of the
corporation's disinterested directors or the satisfaction of a statutory "fair
price" provision, a merger, sale of assets or liquidation of a corporation
involving an "Interested Shareholder" (defined as a person who owns beneficially
20% or more of the corporation's outstanding voting securities) must be approved
by the holders of two-thirds of the corporation's outstanding voting securities,
other than those of the Interested Shareholder. A corporation may, in its
articles of incorporation, exempt itself from coverage of this provision. The
Company has not done so. Washington law also prohibits a corporation, with
certain exceptions, from engaging in certain significant business transactions
with a person or group of persons that holds 10% or more of the Company's
outstanding voting securities for a period of five years after such acquisition.
The prohibited transactions include, among others, a merger with, disposition of
assets to, or issuance or redemption of stock to or from, such person or group
of persons or allowing such person or group of persons to receive any
disproportionate benefit as a shareholder. A corporation may not "opt out" of
this statute. These provisions may have the effect of delaying, deferring or
preventing a change in control of the Company. See "Risk
Factors -- Concentration of Ownership and Antitakeover Considerations."
61
<PAGE> 63
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company's Bylaws contain provisions indemnifying the Company's
directors and officers to the fullest extent permitted by law. The Company has
also entered into indemnity agreements pursuant to which it has agreed, among
other things, to indemnify its directors and executive officers against certain
liabilities. In addition, the Articles of Incorporation contain provisions
limiting the personal liability of directors to the Company or its shareholders
to the fullest extent permitted by law.
REGISTRATION RIGHTS
The holders of an aggregate of 7,505,155 shares of Common Stock are
entitled to certain registration rights as set forth below:
RGene Acquisition
Under the terms of the Merger Agreement, the former RGene stockholders are
entitled to certain registration rights with respect to 3,636,364 shares of
Common Stock issued to such stockholders in connection with the RGene
Acquisition, as well as up to $5 million of Common Stock issuable in connection
with the achievement of certain milestones. Subject to certain limitations, the
Company must register 50% of such shares under the Securities Act prior to the
one-year anniversary of the closing of the RGene Acquisition. The Company has
agreed to cause such registration to remain effective for a period ending 24
months after completion of the RGene Acquisition. See "RGene Acquisition."
Registration Rights Agreement
Pursuant to the terms of a Registration Rights Agreement, dated as of April
27, 1992 (the "Registration Rights Agreement"), between the Company and certain
of the Company's shareholders, including Immunex, such shareholders are entitled
to certain registration rights with respect to 3,806,775 shares of Common Stock
(the "Registrable Securities"). Subject to certain limitations in the
Registration Rights Agreement, the holders of at least 30% of the Registrable
Securities, and their permitted transferees, may require that the Company, on
two occasions, use its best efforts to register such securities for public
resale. In addition, if the Company registers any shares of Common Stock either
for its own account or for the accounts of other holders of Common Stock, the
parties to the Registration Rights Agreement are entitled to include their
Registrable Securities in such registration, subject to the ability of any
underwriters to limit the number of shares included in the offering to no less
than 20% of such offering. The parties to the Registration Rights Agreement also
may require the Company, not more than once in any 12-month period, to register
all or a portion of their Registrable Securities on Form S-3, provided, among
other things, that the proposed aggregate selling price is at least $1 million.
Of the Registrable Securities, 1,193,653 shares are available for immediate
sale in the public market under Rule 144(k). The 2,613,122 shares of Common
Stock held by Immunex will be available for sale in the public market 91 days
after the date of this Prospectus, subject to the limitations provided in Rule
144.
Equipment Financing Warrants
The holders of the Equipment Financing Warrants are entitled to certain
registration rights with respect to 62,016 shares issuable upon exercise of such
warrants. Generally, such registration rights are comparable to the rights
provided to holders of the Registrable Securities under the Registration Rights
Agreement, provided that the holders of the Equipment Financing Warrants have no
demand registration rights and are entitled to include their securities in a
registration statement if and only to the extent that the inclusion of such
securities would not reduce the amount of Registrable Securities included in
such offering.
As of June 19, 1996, Equipment Financing Warrants exercisable for the
purchase of 18,701 shares of Common Stock had an exercise price at or below the
closing sales price for the Common Stock as reported by Nasdaq on such date.
62
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc. ("Vector Securities") and Genesis Merchant Group Securities
are acting as representatives (the "Representatives"), have severally agreed to
purchase, subject to the terms and conditions of the Underwriting Agreement, and
the Company has agreed to sell to the Underwriters, the following respective
number of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
Vector Securities International, Inc...................................... 1,170,000
Genesis Merchant Group Securities......................................... 1,170,000
Alex. Brown & Sons Incorporated........................................... 80,000
CS First Boston Corporation............................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation....................... 80,000
A.G. Edwards & Sons, Inc. ................................................ 80,000
PaineWebber Incorporated.................................................. 80,000
Salomon Brothers Inc ..................................................... 80,000
UBS Securities Inc. ...................................................... 80,000
Brean Murray, Foster Securities Inc. ..................................... 40,000
Cowen & Company........................................................... 40,000
Crowell, Weedon & Co...................................................... 40,000
Cruttenden Roth Incorporated.............................................. 40,000
Howe Barnes Investments, Inc. ............................................ 40,000
Legg Mason Wood Walker, Incorporated...................................... 40,000
McDonald & Company Securities, Inc. ...................................... 40,000
Mesirow Financial, Inc. .................................................. 40,000
Pacific Crest Securities.................................................. 40,000
Punk, Ziegel & Knoell, L.P. .............................................. 40,000
Rauscher Pierce Refsnes, Inc. ............................................ 40,000
Sands Brothers & Co., Ltd. ............................................... 40,000
Starr Securities, Inc. ................................................... 40,000
Sutro & Co. Incorporated.................................................. 40,000
Van Kasper & Company...................................................... 40,000
----------
Total................................................................... 3,500,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $.14 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to certain other dealers. After the
public offering of the shares of Common Stock, the offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 525,000 shares of
63
<PAGE> 65
Common Stock at the public offering price set forth on the cover page of this
Prospectus, less 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. 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 of Common Stock set forth next to such Underwriter's name in the
preceding table bears to the total number of shares listed in the table.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereto.
Vector Securities was retained by the Company to render a fairness opinion
to the Targeted Genetics Board of Directors in connection with the RGene
Acquisition, for which it received customary fees.
The executive officers, directors and certain other shareholders of the
Company have agreed that they will not, without the prior written consent of
Vector Securities International, Inc., offer, sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 90 days after the date of this Prospectus. The Company has
agreed that it will not, without the prior written consent of Vector Securities
International, Inc., offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock for a period of 90
days after the date of this Prospectus, except that the Company may grant
additional options under its stock option plans, or issue shares upon the
exercise of outstanding stock options or warrants.
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualified registered market makers on the Nasdaq
National Market may engage in passive market-making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Exchange Act during the two-business-day period before commencement of sales in
the Offering. The passive market-making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for the security. If all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded. Net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market-making average
daily trading volume in the Common Stock during a price period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail, and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Perkins Coie, Seattle, Washington. Certain legal matters will
be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom,
Chicago, Illinois.
EXPERTS
The financial statements of Targeted Genetics Corporation at December 31,
1993, 1994 and 1995 appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP,
64
<PAGE> 66
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of RGene Therapeutics, Inc. appearing in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy or information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy or information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048; and
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy or information statements and other
information concerning the Company may be inspected at the offices of Nasdaq,
1735 K Street, N.W., Washington, D.C.
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information, reference
is hereby made to the Registration Statement. Statements contained herein
concerning certain provisions of documents are necessarily summaries of such
documents and each such statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission.
65
<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
TARGETED GENETICS CORPORATION
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Shareholders' Equity................................................... F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
RGENE THERAPEUTICS, INC.
Report of Independent Public Accountants............................................. F-13
Balance Sheets....................................................................... F-14
Statements of Operations............................................................. F-15
Statements of Stockholders' Equity................................................... F-16
Statements of Cash Flows............................................................. F-17
Notes to Financial Statements........................................................ F-18
</TABLE>
F-1
<PAGE> 68
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Targeted Genetics Corporation
We have audited the accompanying balance sheets of Targeted Genetics
Corporation (a development stage company) as of December 31, 1994 and 1995, and
the related statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995 and the period
from March 9, 1989 (date of inception) through December 31, 1995. 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 the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Targeted Genetics
Corporation (a development stage company) at December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 and the period from March 9, 1989 (date of
inception) through December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
February 9, 1996, except for Note 9
as to which the date is April 16, 1996
F-2
<PAGE> 69
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 2,306,979 $ 2,154,814 $ 1,526,073
Securities available for sale....................... 9,167,808 12,287,748 10,352,493
Deposits, prepaid expenses and other................ 254,225 196,150 157,800
------------ ------------ ------------
Total current assets............................. 11,729,012 14,638,712 12,036,366
Property, plant and equipment, net.................... 5,038,812 4,959,502 4,990,602
Other assets.......................................... 278,057 362,246 354,176
------------ ------------ ------------
$ 17,045,881 $ 19,960,460 $ 17,381,144
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 704,804 $ 564,403 $ 402,510
Accrued payroll and other liabilities............... 261,562 336,713 229,447
Current portion of long-term obligations............ 584,371 881,210 995,919
------------ ------------ ------------
Total current liabilities........................ 1,550,737 1,782,326 1,627,876
Long-term obligations................................. 2,252,999 2,405,298 2,633,765
Commitments
Shareholders' equity:
Preferred stock, $.01 par value, 6,000,000 shares
authorized, none outstanding..................... -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 8,958,831, 12,317,183 and 12,397,484
outstanding at December 31, 1994 and 1995, and
March 31, 1996, respectively..................... 31,024,884 43,295,436 43,605,225
Unrealized gains (losses) on securities available
for sale......................................... (116,104) 66,319 (5,064)
Deficit accumulated during development stage........ (17,666,635) (27,588,919) (30,480,658)
------------ ------------ ------------
Total shareholders' equity....................... 13,242,145 15,772,836 13,119,503
------------ ------------ ------------
$ 17,045,881 $ 19,960,460 $ 17,381,144
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 70
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 9, MARCH 9,
1989 1989
(DATE OF (DATE OF
INCEPTION) THREE MONTHS ENDED INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
------------------------------------------- DECEMBER 31, --------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
Investment
income........ $ 412,076 $ 448,822 $ 667,835 $ 2,077,282 $ 132,537 $ 183,536 $ 2,260,818
Other........... -- -- 174,625 174,625 -- -- 174,625
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total
revenues.... 412,076 448,822 842,460 2,251,907 132,537 183,536 2,435,443
----------- ----------- ----------- ------------ ----------- ----------- ------------
Expenses:
Research and
development... 4,261,154 6,763,549 8,194,913 22,771,120 1,978,316 2,366,032 25,137,152
General and
administrative... 1,216,434 1,891,947 2,267,516 6,574,720 701,013 616,862 7,191,582
Interest........ -- 192,671 302,315 494,986 74,840 92,381 587,367
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total
expenses.... 5,477,588 8,848,167 10,764,744 29,840,826 2,754,169 3,075,275 32,916,101
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net loss.......... $(5,065,512) $(8,399,345) $(9,922,284) $(27,588,919) $(2,621,632) $(2,891,739) $(30,480,658)
========== ========== ========== =========== ========== ========== ===========
Net loss per
share........... $ (3.73) $ (1.40) $ (0.94) $ (0.29) $ (0.23)
========== ========== ========== ========== ==========
Shares used in
computation of
net loss per
share........... 1,359,840 6,005,141 10,532,950 8,966,194 12,342,748
========== ========== ========== ========== ==========
Pro forma,
assuming
conversion of
preferred stock
to common stock:
Net loss per
share......... $ (0.73) $ (1.03) $ (0.94)
========== ========== ==========
Shares used in
computation of
net loss per
share......... 6,955,826 8,151,547 10,532,950
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 71
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH MARCH 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
GAINS DEFICIT
(LOSSES) ON ACCUMULATED
ADVANCES SECURITIES DURING TOTAL
PREFERRED COMMON FROM AVAILABLE FOR DEVELOPMENT SHAREHOLDERS'
STOCK STOCK IMMUNEX SALE STAGE EQUITY
------------ ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss from March 9, 1989
(date of inception) through
December 31, 1991................. $ -- $ -- $ 2,807,316 $ -- $(2,807,316) $ --
Sale of 1,080,000 shares of common
stock........................... -- 27,600 -- -- -- 27,600
Issuance of 1,920,000 shares of
Series A convertible preferred
stock to Immunex in repayment of
advances........................ 2,807,316 -- (2,807,316) -- -- --
Sale of 3,675,986 shares of Series
B preferred stock, net of
issuance costs of $772,415...... 16,597,399 -- -- -- -- 16,597,399
Issuance of 120,000 shares of
common stock as compensation.... -- 66,000 -- -- -- 66,000
Net loss -- 1992.................. -- -- -- -- (1,394,462) (1,394,462)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1992........ 19,404,715 93,600 -- -- (4,201,778) 15,296,537
Net loss -- 1993.................. -- -- -- -- (5,065,512) (5,065,512)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1993........ 19,404,715 93,600 -- -- (9,267,290) 10,231,025
Sale of 2,154,345 shares of common
stock in initial public
offering, net of issuance costs
of $1,404,056................... -- 11,522,014 -- -- -- 11,522,014
Conversion of Series A and B
preferred stock to 5,595,986
shares of common stock.......... (19,404,715) 19,404,715 -- -- -- --
Exercise of stock options......... -- 4,555 -- -- -- 4,555
Unrealized losses on securities
available for sale.............. -- -- -- (116,104) -- (116,104)
Net loss -- 1994.................. -- -- -- -- (8,399,345) (8,399,345)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1994........ -- 31,024,884 -- (116,104) (17,666,635) 13,242,145
Sale of 3,322,392 shares of common
stock and 830,598 warrants, net
of issuance costs of $214,509... -- 12,244,461 -- -- -- 12,244,461
Exercise of stock options......... -- 26,091 -- -- -- 26,091
Unrealized gains on securities
available for sale.............. -- -- -- 182,423 -- 182,423
Net loss -- 1995.................. -- -- -- -- (9,922,284) (9,922,284)
------------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1995........ -- 43,295,436 -- 66,319 (27,588,919) 15,772,836
Exercise of stock options
(unaudited)..................... -- 11,809 -- -- -- 11,809
Exercise of 61,000 warrants
(unaudited)..................... -- 285,480 -- -- -- 285,480
Expenses paid with 2,461 shares of
common stock (unaudited)........ -- 12,500 -- -- -- 12,500
Unrealized loss on securities
available for sale
(unaudited)..................... -- -- -- (71,383) -- (71,383)
Net loss -- 1996 (unaudited)...... -- -- -- -- (2,891,739) (2,891,739)
------------ ----------- ----------- --------- ------------ -----------
Balance at March 31, 1996
(unaudited)....................... $ -- $43,605,225 $ -- $ (5,064) $(30,480,658) $13,119,503
============ =========== =========== ========= ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 72
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 9, 1989
(DATE OF PERIOD FROM
INCEPTION) MARCH 9, 1989
YEAR ENDED DECEMBER 31, THROUGH THREE MONTHS ENDED (DATE OF
----------------------------------------- DECEMBER 31, MARCH 31, INCEPTION)
1993 1994 1995 1995 ------------------------- THROUGH
----------- ------------ ------------ ------------- 1995 1996 MARCH 31,
----------- ----------- 1996
(UNAUDITED) (UNAUDITED) -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss................ $(5,065,512) $ (8,399,345) $ (9,922,284) $(27,588,919) $(2,621,632) $(2,891,739) $(30,480,658)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Expenses paid with
common stock........ -- -- -- 66,000 -- 12,500 78,500
Depreciation and
amortization........ 411,652 1,264,848 1,484,549 3,162,881 340,023 446,855 3,609,736
(Increase) decrease in
deposits, prepaid
expenses and
other............... (8,610) (161,827) (49,865) (295,290) (26,850) 3,350 (291,940)
(Increase) decrease in
accrued interest on
securities available
for sale............ 124,180 (29,750) (9,287) (82,928) (14,931) 11,038 (71,890)
Increase (decrease) in
current
liabilities......... 133,735 88,493 (17,955) 769,991 (114,941) (184,562) 585,429
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net cash used in
operating
activities...... (4,404,555) (7,237,581) (8,514,842) (23,968,265) (2,438,331) (2,602,558) (26,570,823)
Investing activities:
Purchases of property,
plant and equipment... (4,546,933) (885,604) (1,335,876) (7,170,597) (272,764) (519,482) (7,690,079)
Purchases of securities
available for sale.... (8,770,199) (12,990,428) (13,047,852) (55,090,522) (1,972,886) (1,513,869) (56,604,391)
Sales of securities
available for sale.... 14,049,110 9,369,127 10,119,622 42,952,020 2,838,299 3,366,703 46,318,723
Increase in other
assets................ (199,749) (177,500) (76,500) (574,179) (30,000) -- (574,179)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net cash provided
by (used in)
investing
activities...... 532,229 (4,684,405) (4,340,606) (19,883,278) 562,649 1,333,352 (18,549,926)
Financing activities:
Advances from Immunex... -- -- -- 2,807,316 -- -- 2,807,316
Net proceeds from sale
of capital stock...... -- 11,526,569 12,270,552 40,422,120 8,295 297,289 40,719,409
Proceeds from equipment
financing............. 806,114 1,950,391 1,089,789 3,846,294 237,459 554,063 4,400,357
Payments under capital
leases and installment
loans................. -- (412,315) (657,058) (1,069,373) (140,826) (210,887) (1,280,260)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net cash provided
by financing
activities...... 806,114 13,064,645 12,703,283 46,006,357 104,928 640,465 46,646,822
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in
cash and cash
equivalents............. (3,066,212) 1,142,659 (152,165) 2,154,814 (1,770,754) (628,741) 1,526,073
Cash and cash equivalents,
beginning of period..... 4,230,532 1,164,320 2,306,979 -- 2,306,979 2,154,814 --
----------- ------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents,
end of period........... $ 1,164,320 $ 2,306,979 $ 2,154,814 $ 2,154,814 $ 536,225 $ 1,526,073 $ 1,526,073
=========== ============ ============ ============ ============ ============ ============
Supplemental disclosures
of noncash investing and
financing activities:
Deferred sales tax on
leasehold improvements
and equipment......... $ 363,933 $ 114,589 $ 16,407 $ 509,588 $ 9,256 $ -- $ 509,588
=========== ============ ============ ============ ============ ============ ============
Preferred stock issued
to Immunex in payment
of advances........... $ -- $ -- $ -- $ 2,807,316 $ -- $ -- $ 2,807,316
=========== ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 73
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION
Targeted Genetics Corporation (the "Company") is developing gene therapy
products for the treatment of certain acquired and inherited diseases. As a
development stage company, the Company has devoted substantially all of its
efforts to date to conducting research and development activities, recruiting
personnel and raising capital.
The Company was incorporated in the state of Washington in March 1989 as a
wholly owned subsidiary of Immunex Corporation ("Immunex"). In February 1992,
the Company issued 1,920,000 shares of Series A convertible preferred stock to
Immunex in exchange for the grant of a license to certain technology, settlement
of advances from Immunex and cancellation of 40,000 shares of common stock
issued by the Company to Immunex on March 28, 1989. At December 31, 1995,
Immunex held 21% of the outstanding stock of the Company.
The Company estimates that, at its current rate of expenditures, its
existing cash, cash equivalents and securities available for sale will be
sufficient to meet operating requirements through the end of 1996. Accordingly,
the Company is pursuing one or more collaborative arrangements with corporate
partners, with the intent of generating both research and development funding
and equity capital. The Company may also elect to seek additional equity capital
via the public or private markets, depending on market conditions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The financial information at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Operating results for the March 31,
1996 period are not necessarily indicative of the results that may be expected
for the entire year.
Cash Equivalents
The Company considers all short-term investments with a purchased maturity
of three months or less to be cash equivalents. Cash equivalents, valued at cost
which approximates market, consist principally of money market accounts and
short-term government obligations.
Securities Available for Sale
Securities available for sale consist primarily of corporate debt
securities and U.S. Government notes, all of which mature within two years.
Management currently classifies the Company's entire investment portfolio, other
than cash equivalents, as securities available for sale. Such securities are
stated at market value, with the unrealized gains and losses included in
shareholders' equity. The cost of debt securities in this category is adjusted
for amortization of premiums and accretion of discounts to maturity, which are
included in investment income. Realized gains and losses and declines in value
judged to be other than temporary on securities available for sale are also
included in investment income. The cost of securities sold is calculated using
the specific identification method.
F-7
<PAGE> 74
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of furniture
and equipment is provided using the straight-line method over the assets'
estimated useful lives, ranging from five to seven years. Furniture and
equipment under capitalized leases are amortized over the life of the lease.
Leasehold improvements are amortized over the life of the improvements or the
term of the lease, whichever is shorter.
Net Loss Per Share
Net loss per share is computed based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares are not
included in the computation because the effect of their inclusion would be
antidilutive, except that, in accordance with Securities and Exchange Commission
requirements, common equivalent shares issued during the twelve months prior to
the Company's initial public offering have been included in the calculation as
if they were outstanding for all periods through March 31, 1994.
Upon completion of the Company's initial public offering, all 5,595,986
shares of preferred stock converted to common stock. Unaudited pro forma net
loss per share reflects the assumption that all such shares had converted to
common stock as of the beginning of the periods reported.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic value method, as prescribed by Accounting
Principles Board Opinion No. 25, or the fair value method described in Statement
No. 123. Companies choosing the intrinsic value method will be required to
disclose the pro forma impact of the fair value method on net income and
earnings per share. The Company plans to implement Statement No. 123 in 1996
using the intrinsic value method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
F-8
<PAGE> 75
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. corporate securities............ $ 3,349,999 $ 2,961 $ 34,653 $ 3,318,307
U.S. Government obligations.......... 5,933,913 -- 84,412 5,849,501
---------- ------- -------- -----------
$ 9,283,912 $ 2,961 $119,065 $ 9,167,808
========== ======= ======== ===========
December 31, 1995:
U.S. corporate securities............ $ 2,473,549 $ 8,803 $ -- $ 2,482,352
U.S. Government obligations.......... 9,747,880 57,516 -- 9,805,396
---------- ------- -------- -----------
$12,221,429 $ 66,319 $ -- $12,287,748
========== ======= ======== ===========
March 31, 1996:
U.S. corporate securities............ $ 2,398,777 $ 3,584 $ 191 $ 2,402,170
U.S. Government obligations.......... 7,958,780 7,714 16,171 7,950,323
---------- ------- -------- -----------
$10,357,557 $ 11,298 $ 16,362 $10,352,493
========== ======= ======== ===========
</TABLE>
The gross realized gains on sales of securities available for sale totaled
$15,901 and $25,047, and the gross realized losses totaled $55,576 and $48,013
in 1994 and 1995, respectively. For the three months ended March 31, 1995, the
gross realized gains on sales of securities available for sale totaled $18,158
and there were no gross realized losses.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment............................ $2,835,223 $3,862,632 $4,241,598
Leasehold improvements............................. 3,608,599 3,948,678 4,004,597
---------- ---------- ----------
6,443,822 7,811,310 8,246,195
Less accumulated depreciation and amortization..... 1,405,010 2,851,808 3,255,593
---------- ---------- ----------
$5,038,812 $4,959,502 $4,990,602
========== ========== ==========
</TABLE>
The Company has leased furniture and equipment, primarily laboratory
equipment, under three capital leases. The total cost of furniture and equipment
leased at December 31, 1994 and 1995 was $2,009,604 and $2,655,998,
respectively, with related accumulated depreciation of $489,541 and $1,076,712
at December 31, 1994 and 1995, respectively. At March 31, 1996, the total cost
of furniture and equipment leased was $3,298,545, and the related accumulated
depreciation was $1,238,622.
At December 31, 1994 and 1995, the Company had pledged furniture and
equipment, having a total cost of $616,441 and $853,900, respectively, as
collateral under an installment loan agreement. Accumulated depreciation related
to these assets was $63,911 and $221,410 at December 31, 1994 and 1995,
respectively. At March 31, 1996, the total cost of pledged furniture and
equipment was $853,900, and the related accumulated depreciation was $260,924.
F-9
<PAGE> 76
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred state sales tax.......................... $ 493,181 $ 509,588 $ 509,588
Installment note payable, effective rate of 16.73%
due in monthly installments through 1999........ 741,004 822,214 778,190
Capitalized lease obligations (see note 7)........ 1,603,185 1,954,706 2,341,906
---------- ---------- ----------
2,837,370 3,286,508 3,629,684
Less current portion.............................. 584,371 881,210 995,919
---------- ---------- ----------
$2,252,999 $2,405,298 $ 2,633,765
========== ========== ==========
</TABLE>
The state of Washington granted the Company a deferral of state sales tax
on new construction and equipment used in research and development activities.
The related obligation is payable over six years beginning in 1996.
Principal payments related to long-term obligations for each of the five
years ending December 31, 2000 are $881,210, $1,024,238, $658,800, $430,932 and
$162,539, respectively.
6. SHAREHOLDERS' EQUITY
Common Stock
The Company sold 1,200,000 shares of common stock to its scientific
advisors and founders in February and November 1992. The Company has the right
to repurchase certain of these shares in the event the holder's relationship
with the Company terminates. The repurchase rights expire in annual increments
ending in 1996. The shares were sold at prices ranging from $0.03 to $0.55 per
share. At December 31, 1995, 216,000 shares were subject to repurchase at the
original sales price. At March 31, 1996, 24,000 shares were subject to
repurchase at the original sales price.
Stock Options
The Company has adopted two stock option plans under which 1,520,000 shares
of common stock were reserved for issuance. Generally, options vest in annual
increments over a three- or five-year period. All options expire ten years from
date of grant. Options have been granted at market value or, prior to the
Company's initial public offering, at fair value at the date of grant as
established by the Company's Board of Directors and, accordingly, no
compensation expense has been recorded. As of December 31, 1995, options on
268,620 shares were exercisable and 443,123 shares were available for future
grant. As of March 31, 1996, options on 312,126 shares were exercisable and
281,686 shares were available for future grant.
F-10
<PAGE> 77
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of activity related to the Company's stock option plans follows:
<TABLE>
<CAPTION>
SHARES UNDER
OPTION OPTION PRICE
------------ ------------
<S> <C> <C>
Balance, January 1, 1995.................................. 838,000 $0.50 - 6.25
Cancelled............................................... (22,860) 0.55 - 6.25
Granted................................................. 253,237 4.00 - 5.13
Exercised............................................... (35,960) 0.50 - 5.00
--------- ----------
Balance, December 31, 1995................................ 1,032,417 0.50 - 6.25
</TABLE>
<TABLE>
<S> <C> <C>
Cancelled............................................... (6,920) 0.55 - 5.00
Granted................................................. 168,357 5.00
Exercised............................................... (16,840) 0.50 - 5.00
------------ ------------
Balance, March 31, 1996................................... 1,177,014 $0.50 - 6.25
========== ===========
</TABLE>
Warrants
In July 1995, the Company issued warrants to purchase 830,598 shares of
common stock in conjunction with an offering of its common stock. The warrants
are immediately exercisable at a price of $4.68 per share, expiring July 1997.
The Company has issued a total of 62,016 warrants related to equipment financing
agreements. The warrants have a weighted average exercise price of $6.00 per
share and expire from May 1999 to December 2003. At December 31, 1995 and March
31, 1996, 892,614 shares and 831,614 shares, respectively, of common stock were
reserved for these warrants.
7. LEASE COMMITMENTS
The Company leases its research and office facility under a noncancellable
operating lease that expires April 1, 1999. The lease may be extended under
three five-year renewal options at the then prevailing fair market value rental
rate.
Future minimum rental payments under noncancellable leases at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- ----------
<S> <C> <C>
Year ending December 31:
1996....................................................... $ 433,880 $ 873,814
1997....................................................... 457,446 873,814
1998....................................................... 474,233 303,740
1999....................................................... 119,607 358,866
2000....................................................... -- --
---------- ----------
Total minimum lease payments................................. $1,485,166 2,410,234
==========
Less amount representing interest............................ 455,528
----------
Present value of minimum capitalized lease payments.......... $1,954,706
==========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1996 was $256,354, $321,307,
$396,220 and $101,923, respectively.
F-11
<PAGE> 78
TARGETED GENETICS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $24.2 million and research and experimental credit carryforwards
of approximately $817,000. The carryforwards are available to offset future
federal income taxes and begin to expire in 2007. At December 31, 1994 and 1995,
the Company recognized a valuation allowance to offset deferred tax assets due
to the uncertainty of realizing the related benefits.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $5,162,000 $8,223,000
Research and experimental credit carryforwards............. 654,000 817,000
Depreciation............................................... 29,000 156,000
Other...................................................... 55,000 54,000
---------- ----------
Total deferred tax assets.................................... $5,900,000 $9,250,000
========== ==========
Valuation allowance for deferred tax assets.................. $5,900,000 $9,250,000
========== ==========
</TABLE>
9. SUBSEQUENT EVENTS
On April 16, 1996, the Company entered into a definitive merger agreement
with RGene Therapeutics, Inc. ("RGene") to acquire 100% of the outstanding stock
of RGene. The Company will issue to the RGene stockholders 3,636,364 shares of
its common stock. The RGene stockholders will have the right to receive an
additional $5 million of the Company's common stock if certain milestones
relating to RGene's potential products are achieved prior to December 31, 1998.
Completion of the RGene acquisition is subject to customary conditions,
including the approval of the shareholders of both companies.
On April 16, 1996, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell up to 4,025,000 shares of common stock
in a public offering.
F-12
<PAGE> 79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RGene Therapeutics, Inc.:
We have audited the accompanying balance sheets of RGene Therapeutics, Inc.
(a Delaware corporation in the development stage), as of December 31, 1994 and
1995, and the related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1994 and 1995, and the period from
inception (August 27, 1993) through December 31, 1995. 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 financial position of RGene Therapeutics, Inc., as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1995, and the period from
inception (August 27, 1993) through December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has operated as a development stage enterprise
since its inception, devoting substantially all of its efforts to financial
planning, raising capital and performing research and development. Consequently,
as shown in the accompanying financial statements, the Company has not realized
any revenues from product sales and has a cumulative loss of $5,075,183 since
its inception, all of which raises substantial doubt about its ability to
continue as a going concern. Accordingly, the Company's continued existence is
dependent upon its ability to obtain additional financing to develop,
manufacture and market its products and to attain successful future operations.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts of other current
assets and property and equipment or the amount of liabilities that might result
should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
April 10, 1996
F-13
<PAGE> 80
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- ----------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 2,300,235 $ 239,361 $ 1,677,083
Other current assets............................... 83,473 84,700 146,235
----------- ----------- -----------
Total current assets............................ 2,383,708 324,061 1,823,318
Furniture, equipment and leasehold improvements, net
of accumulated depreciation of $10,839, $56,828 and
$70,263, respectively.............................. 174,332 176,370 176,179
----------- ----------- -----------
Total assets.................................... $ 2,558,040 $ 500,431 $ 1,999,497
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 36,458 $ 152,138 $ 149,028
Payable to contract manufacturer................... 74,057 154,997 115,131
Payable to related parties......................... -- 65,000 1,500,000
Notes payable to related parties................... -- 1,000,000 1,000,000
----------- ----------- -----------
Total current liabilities....................... 110,515 1,372,135 2,764,159
Commitments and contingencies (Note 9)
Stockholders' equity:
Undesignated serial preferred stock, $.001 par
value; 4,196,428 shares authorized; none issued
and outstanding at December 31, 1994 and 1995
and March 31, 1996.............................. -- -- --
Series A convertible preferred stock, $.001 par
value; 5,803,572 shares authorized; 3,571,430
issued and outstanding at December 31, 1994 and
1995 and March 31, 1996......................... 3,571 3,571 3,571
Common stock, $.001 par value; 15,000,000 shares
authorized; 3,264,176, 3,394,176 and 3,394,176
issued and outstanding at December 31, 1994 and
1995 and March 31, 1996, respectively........... 3,264 3,394 3,394
Additional paid-in capital......................... 4,020,884 4,196,514 4,353,314
Deficit accumulated during the development stage... (1,580,194) (5,075,183) (5,124,941)
----------- ----------- -----------
Total stockholders' equity (deficit)............ 2,447,525 (871,704) (764,662)
----------- ----------- -----------
Total liabilities and stockholders'
equity................................... $ 2,558,040 $ 500,431 $ 1,999,497
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 81
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(AUGUST 27, 1993) FOR THE PERIOD
YEAR ENDED DECEMBER 31, THROUGH THREE MONTHS FROM INCEPTION
------------------------- DECEMBER 31, ENDED MARCH 31, (AUGUST 27, 1993)
1994 1995 1995 ------------------------- THROUGH
----------- ----------- ----------------- 1995 1996 MARCH 31,
----------- ----------- 1996
(UNAUDITED) (UNAUDITED) -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License and other
fees................ $ -- $ 300,000 $ 300,000 $ -- $ 2,500,000 $ 2,800,000
Interest income........ 56,266 53,277 109,543 26,092 23,048 132,591
----------- ----------- ----------- ----------- ----------- -----------
Total
revenues..... 56,266 353,277 409,543 26,092 2,523,048 2,932,591
Expenses:
Research and
development......... 976,786 3,073,268 4,050,054 447,902 2,269,934 6,319,988
General and
administrative...... 659,674 752,943 1,412,617 194,708 270,772 1,683,389
Interest expense....... -- 22,055 22,055 -- 32,100 54,155
----------- ----------- ----------- ----------- ----------- -----------
Total
expenses..... 1,636,460 3,848,266 5,484,726 642,610 2,572,806 8,057,532
----------- ----------- ----------- ----------- ----------- -----------
Net loss................. $(1,580,194) $(3,494,989) $(5,075,183) $ (616,518) $ (49,758) $(5,124,941)
=========== =========== =========== =========== =========== ===========
Loss per share........... $ (0.61) $ (1.06) $ (0.19) $ (0.01)
=========== =========== =========== ===========
Weighted average shares
used in computing loss
per share.............. 2,598,449 3,289,820 3,264,176 3,394,176
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 82
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1993) THROUGH MARCH 31, 1996
<TABLE>
<CAPTION>
DEFICIT
SERIES A ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING TOTAL
------------------ ------------------ PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL STAGE EQUITY
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception, August 27, 1993..... -- $ -- -- $ -- $ -- $ -- $ --
Warrants issued to purchase shares of
common stock in conjunction with bridge
loan on September 27, 1993.............. -- -- -- -- -- -- --
Issuance of common stock for cash,
February 14, 1994, through April 4, 1994
($.001 per share)....................... -- -- 1,763,462 1,763 -- -- 1,763
Issuance of common stock for cash,
February 24, 1994 ($.01 per share)...... -- -- 215,000 215 1,935 -- 2,150
Issuance of common stock for license
agreement rights, April 6, 1994, through
April 8, 1994 ($.001 per share)......... -- -- 1,284,614 1,285 -- -- 1,285
Issuance of Series A preferred stock for
cash, April 8, 1994, through September
22, 1994 ($1.12 per share).............. 3,571,430 3,571 -- -- 3,996,429 -- 4,000,000
Issuance of common stock for services,
August 17, 1994 ($.11 per share)........ -- -- 1,100 1 120 -- 121
Compensation expense related to stock
purchase agreements..................... -- -- -- -- 22,400 -- 22,400
Net loss.................................. -- -- -- -- -- (1,580,194 ) (1,580,194)
--------- ------- --------- ------- --------- ----------- ----------
Balance, December 31, 1994................ 3,571,430 3,571 3,264,176 3,264 4,020,884 (1,580,194 ) 2,447,525
Warrants issued to purchase shares of
common stock in conjunction with bridge
loan on September 29, 1995.............. -- -- -- -- -- -- --
Issuance of common stock for license
agreement rights, October 20, 1995 ($.11
per share).............................. -- -- 130,000 130 14,170 -- 14,300
Compensation expense related to stock
purchase agreements and stock options... -- -- -- -- 161,460 -- 161,460
Net loss.................................. -- -- -- -- -- (3,494,989 ) (3,494,989)
--------- ------- --------- ------- --------- ----------- ----------
Balance, December 31, 1995................ 3,571,430 3,571 3,394,176 3,394 4,196,514 (5,075,183 ) (871,704)
Compensation expense related to stock
purchase agreements and stock options
(unaudited)............................. -- -- -- -- 156,800 -- 156,800
Net loss (unaudited)...................... -- -- -- -- -- (49,758 ) (49,758)
--------- ------- --------- ------- --------- ----------- ----------
Balance, March 31, 1996................... 3,571,430 $3,571 3,394,176 $3,394 $4,353,314 $(5,124,941) $ (764,662)
========= ======= ========= ======= ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 83
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(AUGUST 27, 1993) FOR THE PERIOD
DECEMBER 31, THROUGH THREE MONTHS FROM INCEPTION
------------------------- DECEMBER 31, ENDED MARCH 31, (AUGUST 27, 1993)
1994 1995 1995 ------------------------ THROUGH
----------- ----------- ----------------- 1995 1996 MARCH 31,
---------- ----------- 1996
(UNAUDITED) (UNAUDITED) -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(1,580,194) $(3,494,989) $(5,075,183) $ (616,518) $ (49,758) $(5,124,941)
Adjustments to reconcile net
loss to net cash used in
operating activities --
Depreciation.............. 10,839 45,989 56,828 10,063 13,435 70,263
Issuance of common stock
for license agreement
rights.................. 1,285 14,300 15,585 -- -- 15,585
Compensation expense
related to stock
purchase agreements and
stock options........... 22,400 161,460 183,860 -- 156,800 340,660
Changes in assets and
liabilities --
(Increase) decrease in
other current
assets............... (83,473) (1,227) (84,700) 54,983 (61,536) (146,236)
Increase (decrease) in
accounts payable,
accrued liabilities
and payable to
contract
manufacturer......... 110,515 196,620 307,135 (776) (42,975) 264,161
Increase in payable to
related parties...... -- 65,000 65,000 -- 1,435,000 1,500,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (1,518,628) (3,012,847) (4,531,475) (552,248) 1,450,966 (3,080,508)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchase of fixed assets..... (185,171) (48,027) (233,198) (18,347) (13,244) (246,443)
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (185,171) (48,027) (233,198) (18,347) (13,244) (246,443)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Issuance of common stock..... 4,034 -- 4,034 -- -- 4,034
Issuance of Series A
preferred stock........... 4,000,000 -- 4,000,000 -- -- 4,000,000
Proceeds from notes
payable................... -- 1,000,000 1,000,000 -- -- 1,000,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 4,004,034 1,000,000 5,004,034 -- -- 5,004,034
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in
cash......................... 2,300,235 (2,060,874) 239,361 (570,595) 1,437,722 1,677,083
Cash and cash equivalents,
beginning of period.......... -- 2,300,235 -- 2,300,235 239,361 --
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end
of period.................... $ 2,300,235 $ 239,361 $ 239,361 $1,729,640 $ 1,677,083 $ 1,677,083
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 84
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
1. ORGANIZATION AND BUSINESS
RGene Therapeutics, Inc. (the Company), a Delaware corporation in the
development stage, was incorporated on August 27, 1993, and effectively
commenced operations in 1994. The Company is developing gene therapy products to
deliver genes that may provide unique clinical benefits in the treatment of a
number of human diseases. The Company's initial research and drug discovery
programs are based on inventions by leading scientists at The University of
Texas M. D. Anderson Cancer Center (MDACC) and the University of Pittsburgh
(UP).
The Company is a development stage company and has not yet generated
revenue from product sales or other sources, nor is there any assurance that the
Company will generate significant revenue in the future. The research and
development activities engaged in by the Company involve a high degree of risk
and uncertainty. The ability of the Company to successfully develop, manufacture
and market its proprietary products is dependent upon many factors. These
factors include, but are not limited to, the need for additional financing,
attracting and retaining key personnel and consultants, dependence on licenses,
patents and know-how, and successfully developing manufacturing, sales and
marketing operations. The Company's ability to develop these operations may be
immensely impacted by uncertainties related to patents and proprietary
technologies, technological change and obsolescence, product development,
competition, government regulations and approvals, healthcare reform and product
liability exposure. As a result of the aforementioned factors and the related
uncertainties, there can be no assurance of the Company's future success.
The Company believes that its current cash balance will be sufficient to
satisfy its funding needs through mid-1996. The Company must raise additional
funds during the next 12 months to maintain its research and development
activities. The Company's future funding requirements will depend on many
factors, including the progress of the Company's research and development and
the establishment of other collaborative relationships. Accordingly, the Company
is considering all of its financing alternatives, including corporate partnering
relationships with pharmaceutical companies to license some of its technology
and/or jointly develop products or the combination of the Company with another
entity (see Note 10). As a result of the aforementioned factors and the related
uncertainties, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts of other current assets and furniture, equipment and leasehold
improvements or the amount and classification of liabilities that might result
from the outcome of this uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
Interim financial statements
The interim financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited, and certain information and
footnote disclosures, normally included in
F-18
<PAGE> 85
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows for
the interim periods then ended, have been included. The results of operations
for the interim periods are not necessarily indicative of the results that may
be expected for the entire year.
Cash and cash equivalents
All highly liquid investments purchased with a remaining maturity of three
months or less are considered to be cash equivalents.
Furniture, equipment and leasehold improvements
Furniture, equipment and leasehold improvements are carried at cost and
depreciated on a straight-line basis over the estimated useful economic lives of
the assets involved. The estimated useful lives employed in computing
depreciation are three to seven years. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in income. Maintenance and repairs
that do not extend the life of assets are charged to expense when incurred.
Revenue recognition
Option, license and milestone payments under collaborative agreements are
recorded as earned based on the provisions of each agreement.
Research and development costs
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company. Payments related to the
acquisition and patenting of technology rights, for which development work is in
process, are expensed and considered a component of research and development
costs.
Loss per share
Loss per share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the periods. During
the noted periods, all common stock equivalents were antidilutive.
F-19
<PAGE> 86
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- -------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment........................... $ 31,094 $ 72,087 $ 85,331
Lab equipment..................................... 146,985 146,706 146,706
Leasehold improvements............................ 7,092 14,405 14,405
-------- -------- --------
185,171 233,198 246,442
Less -- Accumulated depreciation and
amortization.................................... 10,839 56,828 70,263
-------- -------- --------
$174,332 $176,370 $ 176,179
======== ======== ========
</TABLE>
4. NOTES PAYABLE
On September 29, 1995, the Company executed $1,000,000 in promissory notes
from certain stockholders of the Company. The promissory notes bear interest at
prime (8.5 percent at December 31, 1995) and are secured by the Company's
patents. The notes matured on December 31, 1995; the principal amount of
$1,000,000 and accrued interest of $22,055 and $54,155 are included in current
liabilities in the accompanying financial statements as of December 31, 1995 and
March 31, 1996, respectively. Management believes that the principal and accrued
interest on the notes will be converted into the Company's common stock in
conjunction with the contemplated merger (see Note 10).
5. STOCKHOLDERS' EQUITY
Series A convertible preferred stock
For the period from April 1994 through September 1994, the Company issued
3,571,430 shares of Series A convertible preferred stock, at a price of $1.12
per share, for cash proceeds of $4,000,000.
Series A convertible preferred shares are convertible at the option of the
holder into common stock as determined by dividing $1.12 by the conversion price
($1.12 at December 31, 1995) in effect at the time of conversion. At December
31, 1995, the Company reserved 3,571,430 shares of common stock for the
conversion of Series A convertible preferred stock. Series A convertible
preferred stock shall automatically be converted into common stock upon the
closing of a public offering with total proceeds of at least $7,500,000. The
holders of Series A convertible preferred stock have the right to vote on all
stockholder matters on an as-if-converted basis.
Series A convertible preferred stockholders may receive dividends at the
discretion of the Company's board of directors. To date, no dividends have been
declared.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A convertible preferred stock are entitled to receive
preference over any distribution to the holders of common stock in the amount of
$1.12 per share. The holders of Series A convertible preferred stock have
registration rights as defined in the stock purchase agreement.
F-20
<PAGE> 87
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Warrants
In connection with the bridge loans provided by two stockholders of the
Company, the Company issued each of the two stockholders warrants to purchase
50,000 shares of common stock at a price of $.10 per share. In April 1994, the
bridge loans were converted to Series A preferred stock. At the date of
issuance, the warrants were estimated to have a de minimis value and,
accordingly, the warrants were recorded at zero in the financial statements. The
warrants expire if not exercised before September 27, 1998.
During 1995, the Company issued warrants to purchase $250,000 of common
stock in conjunction with the $1,000,000 bridge loans provided by certain
stockholders of the Company. The number of shares of common stock to be issued
upon exercise of the warrants is to be determined by dividing $250,000 by the
price of the next equity financing. According to their original terms, the
warrants are exercisable at a price per share equal to the price of the next
equity financing and expire on September 28, 2000. In connection with the
contemplated merger (see Note 10), the Company and the warrant holders have
agreed that the warrants to purchase $250,000 of common stock shall be exercised
prior to completion of the merger at a price of $1.40 per share (unaudited) in
exchange for 178,571 shares of the Company's common stock. At the date of
issuance, the warrants were estimated to have a de minimis value and,
accordingly, the warrants have been recorded at zero in the financial
statements.
Options
During 1995, the board of directors approved the expansion of the incentive
stock option pool to a total of the greater of (a) 750,000 shares of common
stock or (b) 10 percent of the total common stock issued of the Company. The
options under the 1994 Stock Option Plan (the Plan) have a term of 10 years.
Options to purchase 388,000 shares of common stock vest upon the achievement of
specific milestones. Options to purchase 168,000 shares of common stock vest
over a period of five years for each year of employment with the Company. At
December 31, 1995 and March 31, 1996, 144,216 and 152,566 options, respectively
were exercisable. The Company has recorded $74,100 and $156,800 of compensation
expense for the difference between the grant price and the deemed fair value, as
of December 31, 1995 and March 31, 1996, respectively, for financial statement
presentation purposes related to options which vest based upon the successful
completion of milestones.
F-21
<PAGE> 88
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
5. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity for the Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
<S> <C> <C>
Balance at inception (August 27, 1993)..................... -- $ --
Granted.................................................. 52,000 $ .10
-------
Balance at December 31, 1994............................... 52,000 $ .10
Granted.................................................. 505,000 $.10 to .11
Forfeited................................................ (1,000) $ .11
-------
Balance at December 31, 1995............................... 556,000 $.10 to .11
Granted (unaudited)...................................... -- $ --
Forfeited (unaudited).................................... -- $ --
-------
Balance at March 31, 1996 (unaudited)...................... 556,000 $.10 to .11
=======
</TABLE>
Prior to completion of the contemplated merger (see Note 10), in accordance
with the Plan, all outstanding stock options shall become immediately
exercisable, and will be exercised prior to the merger.
6. FEDERAL INCOME TAXES
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1995, the Company has
generated net operating loss (NOL) carryforwards of approximately $3.2 million
and approximately $70,000 of research and development credits available to
reduce future income taxes. These carryforwards begin to expire in 2008.
The Tax Reform Act of 1986 provides for an annual limitation following
certain ownership changes on the use of NOL and credit carryforwards that could
significantly limit the Company's ability to utilize its carryforwards. The
Company's ability to utilize its current and future NOLs to reduce future
taxable income and tax liabilities may be limited. Additionally, because United
States tax laws limit the time during which these carryforwards may be applied
against future taxes, the Company may not be able to take full advantage of
these attributes for federal income tax purposes.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109), requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, an NOL requires the
recognition of a deferred tax asset. As the Company has had cumulative losses
and there is no assurance of future taxable income, a valuation allowance has
been
F-22
<PAGE> 89
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
6. FEDERAL INCOME TAXES (CONTINUED)
established to fully offset the deferred tax assets at December 31, 1994 and
1995. The components of the Company's deferred tax assets are as follows at
December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 306,000 $ 1,088,000
Research and development tax credits........................ 27,000 70,000
--------- ----------
Total deferred tax assets......................... 333,000 1,158,000
Less -- Valuation allowance................................. (333,000) (1,158,000)
--------- ----------
Net deferred tax assets........................... $ -- $ --
========= ==========
</TABLE>
7. LICENSE AND RESEARCH AGREEMENTS
In March 1994, the Company entered into a license agreement with the Board
of Regents of The University of Texas System (the System) and MDACC, a component
institution of the System, whereby the Company has an exclusive noncancelable
worldwide license to certain technology rights. In exchange for the grant of
this exclusive license, the Company issued 642,307 shares of its common stock
pursuant to the stockholder agreement entered into in April 1994. The Company
will pay MDACC for 15 years, beginning with the first commercial sale of a
product incorporating the licensed technologies, a royalty based on net sales by
the Company or its affiliates or by sublicense agreement of products
incorporating any of such technologies. The Company is obligated by the
agreement to reimburse any of MDACC's costs that may be incurred in connection
with obtaining necessary patents. Failure by the Company to make all
commercially reasonable efforts to commercialize a licensed product could result
in termination of the license agreement rights.
In April 1994, the Company entered into an assignment agreement and
development agreement with Aronex Pharmaceuticals, Inc. (Aronex), formerly Argus
Pharmaceuticals, Inc. The assignment agreement transfers to the Company all
rights and obligations with respect to certain technology rights and related
patent applications invented by a research scientist licensed under an exclusive
license agreement between Aronex and the System. The development agreement
provides that the Company bear all costs in funding the research and development
of the technology and patent rights assigned above that is performed by Aronex.
The development agreement has an initial term of three years. In connection with
the above agreements and the sublicense agreement mentioned below, the Company
issued 321,154 shares of its common stock at a price of $.001 per share to the
research scientist referred to above. In addition, in exchange for the
sublicense agreement and assignment agreement described below, the Company
issued to Aronex 642,307 shares of its common stock pursuant to a stock purchase
agreement.
In April 1994, the Company entered into a sublicense agreement with Aronex,
whereby the Company has an exclusive worldwide sublicense to the technology
licensed under Aronex's license agreement with the University of Tennessee
Research Corporation (UTRC) dated May 25, 1992. Under the original license
agreement between Aronex and UTRC, any sales of licensed products by a
sublicensee are subject to royalties based on net sales.
F-23
<PAGE> 90
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
7. LICENSE AND RESEARCH AGREEMENTS (CONTINUED)
In October 1995, the Company entered into a license agreement with UTRC. In
consideration for the license granted, the Company paid a license fee of
$250,000 to UTRC. As additional consideration, the Company issued 130,000 shares
of its common stock at a price of $.11 per share to UTRC, three research
scientists and McMaster University. The Company has committed to pay royalties
to UTRC in an amount based on net sales of the licensed technology and on any
sublicense of the licensed technology. As of December 31, 1995, royalties of
$65,000 are payable to UTRC. In addition, pursuant to the agreement, the Company
has commitments to UTRC for annual license maintenance fees as follows: $30,000
per year for 1996 through 1999; $40,000 per year for 2000 through 2004; and
$50,000 per year for 2005 and each year thereafter during the term of the
agreement. As of March 31, 1996, the Company paid $30,000 pertaining to this
annual license maintenance fee.
In October 1994, the Company entered into a license agreement with UP
whereby the Company has an exclusive worldwide license to certain technology
rights. Upon execution of the agreement, the Company paid UP an initial license
fee of $15,000. The Company has committed to pay an additional $35,000
immediately upon the filing of the first patent application with respect to the
licensed technology. The Company has committed to pay royalties to UP in an
amount based on net sales of the licensed technology.
In August 1995, the Company entered into a nonexclusive license agreement
with QIAGEN GmbH (Qiagen). Under the license agreement, the Company has the
right to produce or sell a product made with Qiagen technology. As consideration
for the license agreement, the Company is committed to pay a royalty on net
sales.
In December 1995, the Company entered into a license agreement with Pasteur
Merieux Serums & Vaccins S.A. (PMSV). Under the terms of the agreement, the
Company is to receive license and milestone fees upon the completion of certain
performance milestones. In 1995, the Company received $300,000 in license and
other fees in accordance with the agreement. In addition, as consideration of
the license granted, the Company will receive royalties on net sales from PMSV.
The Company has sponsored research agreements with MDACC and UP to fund
research and clinical studies. During fiscal 1994 and 1995 and the three months
ended March 31, 1996, the Company paid $375,741, $771,214 and $193,164,
respectively, pursuant to those agreements and has committed to pay a minimum of
approximately $900,000 through 1998 to continue funding research and clinical
activities. The payments are recorded as research and development expense.
8. CONSULTING AND RELATED AGREEMENTS
The Company has consulting agreements with research scientists associated
with the System and UP, to provide technical know-how, expertise and other
assistance. Pursuant to these agreements, the Company has commitments through
1998 with remaining payments through that date totaling $153,000. In connection
with these two consulting agreements, the Company issued 1,121,154 shares of
common stock for a purchase price of $.001 per share. Pursuant to these
stockholder agreements, the Company has certain repurchase rights.
The Company has stock purchase agreements with an officer of the Company.
Under the stock purchase agreements, the Company issued 321,154 shares of common
stock at a price of $.001 per
F-24
<PAGE> 91
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
8. CONSULTING AND RELATED AGREEMENTS (CONTINUED)
share. In the event the officer is terminated, the Company can elect to
repurchase a specified number of shares at a price of $.001 per share, based on
the length of employment prior to termination. The Company also issued 215,000
shares of common stock at a price of $.01 per share, of which, 200,000 shares
are subject to repurchase by the Company if certain performance milestones are
not met by the officer. The Company recorded compensation expense of $20,000,
$78,000, and $80,000 for fiscal 1994 and 1995 and for the three months ended
March 31, 1996, respectively, in connection with these agreements. In addition,
if the Company terminates the officer before the term of the employment
agreement has expired, the officer shall have the option to require the Company
to repurchase 24,000 shares at a price per share based on the fair value at the
date of termination. The Company recorded compensation expense of $2,400,
$9,360, and $9,600 in 1994, 1995 and the three months ended March 31, 1996,
respectively, in connection with this aspect of the officer's employment
agreement.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its principal office under a lease which expires on
December 31, 1996. Monthly rental under the lease is $2,331. Lease expense
totaled $4,662, $27,972 and $5,439 for 1994 and 1995 and the three months ended
March 31, 1996, respectively.
10. SUBSEQUENT EVENTS
License, research and marketing agreement
On December 28, 1995, the Company granted a pharmaceutical company an
exclusive option to enter into a license agreement. In connection with the
execution of the option agreement, in January 1996 the pharmaceutical company
paid the Company a nonrefundable fee of $2,000,000 to maintain the option until
February 16, 1996. On February 22, 1996, the Company agreed to an outline of
principal terms in contemplation of a license agreement with the pharmaceutical
company. In consideration for the outline of principal terms and the extension
of the option period to April 30, 1996, the pharmaceutical company paid an
additional nonrefundable fee of $500,000 to the Company in March 1996. The $2.5
million received from the pharmaceutical company has been recorded as revenue as
of March 31, 1996 and, as a result, $1.5 million has been recorded as a payable
to related parties (see Note 7). Such amounts received are nonrefundable and are
creditable toward the license fee due upon execution of the license agreement.
On April 30, 1996, the option was extended to May 17, 1996. Effective May 1996,
the Company and the pharmaceutical company entered into a license, research and
marketing agreement under which the pharmaceutical company received exclusive
rights to develop and commercialize in Europe the Company's E1A tumor suppressor
product candidate and other product candidates based on the E1A tumor suppressor
gene and developed pursuant to the agreement. An additional $2.5 million
(unaudited) has been received in June 1996 as an upfront license fee. The
Company may receive additional payments if the parties achieve certain
development milestones and royalties on sales of resulting products, if any. An
additional $1.5 million may be payable to related parties (see Note 7). In
addition, if the parties are able to negotiate a mutually acceptable supply
agreement, the Company will be entitled to manufacture products for the
pharmaceutical company in return for manufacturing fees. As a result of an
amendment to an existing license agreement completed in the second quarter of
1996, each of the $1.5 million payables to related parties will be reduced to
$500,000 (unaudited).
F-25
<PAGE> 92
RGENE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.)
10. SUBSEQUENT EVENTS (CONTINUED)
Merger (unaudited)
On April 16, 1996, the Company entered into a definitive merger agreement
(the Merger Agreement) with Targeted Genetics Corporation (Targeted). Pursuant
to the Merger Agreement, Targeted will acquire the Company by merging the
Company with and into TGC Acquisition Corporation (TGC), a wholly owned
subsidiary of Targeted. Under the Merger Agreement, Targeted will issue
3,636,364 shares of common stock in exchange for 100 percent of the outstanding
stock of the Company. Prior to completion of the merger, in accordance with the
Plan, all outstanding stock options will become immediately exercisable. All of
the Company's outstanding stock options and warrants are expected to be
exercised. Pursuant to the Merger Agreement and prior to the merger, an
additional $550,000 shall be advanced under the promissory notes from certain
stockholders of the Company (see Note 4). Such advances, together with the
$1,000,000 in promissory notes from certain stockholders of the Company, shall
be converted at or prior to the merger into common stock of the Company at a
conversion price of $1.40 per share. The Company stockholders will have the
right to receive up to an additional $5 million of Targeted's common stock if
certain milestones are achieved.
F-26
<PAGE> 93
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, sales representative or any other person is authorized in
connection with any offering made hereby to give any information or to make any
representation not contained herein and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Underwriters. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any security other than the securities offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer to
buy any such securities to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
date subsequent to the date hereof.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
RGene Acquisition........................... 6
Risk Factors................................ 8
Use of Proceeds............................. 18
Price Range of Common Stock................. 19
Dividend Policy............................. 19
Dilution.................................... 20
Capitalization.............................. 21
Selected Financial Data..................... 22
Unaudited Pro Forma Consolidated Financial
Statements................................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 26
Business.................................... 30
Management.................................. 49
Certain Transactions........................ 57
Principal Shareholders...................... 58
Description of Capital Stock................ 60
Underwriting................................ 63
Legal Matters............................... 64
Experts..................................... 64
Additional Information...................... 65
Index to Financial Statements............... F-1
</TABLE>
------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
3,500,000 SHARES
TARGETED GENETICS CORPORATION
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
Vector Securities International, Inc.
Genesis Merchant Group Securities
June 20, 1996
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
2.1+ -- Form of Agreement and Plan of Merger dated as of April 16, 1996, by and among
Targeted Genetics Corporation, TGC Acquisition Corporation and RGene Therapeutics,
Inc.
3.1 -- Restated Articles of Incorporation (Exhibit 3.1)(B)
3.2 -- Amended and Restated Bylaws (Exhibit 3.2)(C)
4.1 -- Warrant to Purchase 11,000 shares of Series B Preferred Stock of Targeted Genetics
Corporation issued to MMC/GATX Partnership No. 1 on December 27, 1993 (Exhibit
4.2)(A)
4.2 -- Warrant to Purchase 11,000 shares of Series B Preferred Stock of Targeted Genetics
Corporation issued to LINC Capital Management Services, Ltd. on December 27, 1993
(Exhibit 4.3)(A)
4.3 -- Warrant to Purchase 18,701 shares of Common Stock of Targeted Genetics Corporation
issued to MMC/GATX Partnership No. 1 on November 30, 1994 (Exhibit 4.3)(B)
4.4 -- Warrant Agreement between Targeted Genetics Corporation and First Interstate Bank
of Washington, N.A., as Warrant Agent (Exhibit 4.4)(D)
4.5 -- Specimen Warrant Certificate (Exhibit 4.5)(C)
4.6 -- Warrant to Purchase 21,315 shares of Common Stock of Targeted Genetics Corporation
issued to Financing for Science International, Inc. on November 30, 1995(D)
5.1+ -- Opinion of Perkins Coie regarding legality of shares
10.1* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted
Genetics Corporation and Philip D. Greenberg (Exhibit 10.1)(A)
10.2* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted
Genetics Corporation and A. Dusty Miller (Exhibit 10.2)(A)
10.3* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted
Genetics Corporation and Richard D. Palmiter (Exhibit 10.3)(A)
10.4* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted
Genetics Corporation and George Stamatoyannopoulos (Exhibit 10.4)(A)
10.5 -- Form of Indemnification Agreement between the registrant and its officers and
directors (Exhibit 10.6)(A)
10.6* -- Non-exclusive License Agreement, dated as of November 19, 1991, between Fred
Hutchinson Cancer Research Center and Immunex Corporation (Exhibit 10.7)(A)
10.7* -- Gene Transfer Technology License Agreement, dated as of February 18, 1992, between
Immunex Corporation and Targeted Genetics Corporation (Exhibit 10.8)(A)
10.8* -- License Agreement, dated as of June 1, 1992, between Wisconsin Alumni Research
Foundation and Targeted Genetics Corporation (Exhibit 10.9)(A)
10.9* -- License Agreement, dated as of August 14, 1992, between Leland Stanford Junior
University and Targeted Genetics Corporation (Exhibit 10.10)(A)
</TABLE>
II-1
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.10* -- PHS Patent License Agreement -- Non-exclusive, dated as of July 13, 1993, between
National Institutes of Health Centers for Disease Control and Targeted Genetics
Corporation (Exhibit 10.13)(A)
10.11* -- Non-exclusive Patent License Agreement, dated as of December 25, 1993, between The
University of Florida Research Foundation, Inc. and Targeted Genetics Corporation
(Exhibit 10.14)(A)
10.12* -- Research and Exclusive License Agreement, dated as of January 1, 1994, between
Targeted Genetics Corporation and Fred Hutchinson Cancer Research Center (Exhibit
10.19)(A)
10.13* -- PHS Patent License Agreement -- Exclusive, dated as of March 10, 1994, between
National Institutes of Health Centers for Disease Control and Targeted Genetics
Corporation (Exhibit 10.15)(A)
10.14* -- Exclusive License Agreement, dated as of March 14, 1994, between Medical College
of Ohio and Targeted Genetics Corporation (Exhibit 10.16)(A)
10.15* -- License Agreement, dated as of March 16, 1994, between The Johns Hopkins
University and Targeted Genetics Corporation (Exhibit 10.17)(A)
10.16* -- License Agreement, dated as of March 28, 1994, between Targeted Genetics
Corporation and the University of Michigan (Exhibit 10.18)(A)
10.17* -- Exclusive License Agreement, dated as of March 28, 1994, between Fred Hutchinson
Cancer Research Center and Targeted Genetics Corporation (Exhibit 10.20)(A)
10.18* -- Exclusive License Agreement, dated as of August 25, 1994, between Targeted
Genetics Corporation and Fred Hutchinson Cancer Research Center (Exhibit 10.20)(B)
10.19 -- Olive Way Building Lease, dated as of November 20, 1993, between Metropolitan
Federal Savings and Loan Association and Targeted Genetics Corporation (Exhibit
10.21)(A)
10.20 -- First Amendment to Olive Way Building Lease, dated as of December 10, 1994,
between Targeted Genetics Corporation and Metropolitan Federal Savings and Loan
Association (Exhibit 10.22)(B)
10.21 -- MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of December 27,
1993 (Exhibit 10.22)(A)
10.22 -- LINC Capital Management, Ltd. Equipment Lease Agreement, dated as of December 27,
1993 (Exhibit 10.23)(A)
10.23 -- Loan and Security Agreement, dated as of November 30, 1994, between MMC/GATX
Partnership No. 1 and Targeted Genetics Corporation (Exhibit 10.25)(B)
10.24 -- Master Equipment Lease Agreement, dated as of October 17, 1995, between Financing
for Science International, Inc. and Targeted Genetics Corporation (Exhibit
10.28)(D)
10.25 -- Registration Rights Agreement, dated as of April 27, 1992, among Targeted Genetics
Corporation and the holders of the Series A and Series B Convertible Preferred
Stock (Exhibit 10.26)(A)
10.26 -- 1992 Restated Stock Option Plan (Exhibit 10.26)(B)
10.27 -- Stock Option Plan for Nonemployee Directors (Exhibit 10.31)(D)
10.28*+ -- Development Agreement dated April 6, 1994, by and between Argus Pharmaceuticals,
Inc. and RGene Therapeutics, Inc.
10.29*+ -- Patent and Technology License Agreement effective as of March 1, 1994, by and
among the Board of Regents of the University of Texas M.D. Anderson Cancer Center
and RGene Therapeutics, Inc.
</TABLE>
II-2
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.30*+ -- First Amended and Restated License Agreement effective October 12, 1995, by and
between The University of Tennessee Research Corporation and RGene Therapeutics,
Inc.
10.31*+ -- License Agreement dated October 12, 1994, by and between The University of
Pittsburgh of the Commonwealth System of Higher Education and RGene Therapeutics,
Inc.
10.32*+ -- Agreement dated as of May 28, 1996 by and between RGene Therapeutics, Inc. and
Laboratoires Fournier S.C.A.
11.1 -- Computation of net loss per share (D)
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Ernst & Young LLP (contained on page II-5)
23.2 -- Consent of Arthur Andersen LLP (contained on page II-6)
23.3+ -- Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1 hereto)
24.1+ -- Power of Attorney
99.1+ -- Consent of Martin P. Sutter as Director Nominee
99.2+ -- Consent of Austin M. Long, III as Director Nominee
</TABLE>
- ------------------
+ Previously filed.
* Confidential treatment has been requested from the Securities and Exchange
Commission for portions of these agreements.
(A) Incorporated by reference to the designated exhibit included with the
registrant's Form S-1 Registration Statement (Registration No. 33-77054)
filed March 30, 1994, as amended.
(B) Incorporated by reference to the designated exhibit included with the
registrant's Form 10-K for the year ended December 31, 1994.
(C) Incorporated by reference to the designated exhibit included with the
registrant's Form S-1 Registration Statement (No. 33-91500) filed April 24,
1995, as amended.
(D) Incorporated by reference to the designated exhibit included with the
registrant's Form 10-K for the year ended December 31, 1995.
(b) Financial Statement Schedules
All financial statement schedules have been omitted because the required
information is either included in the financial statements or the notes thereto
or is not applicable.
II-3
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 19th day of June, 1996.
TARGETED GENETICS CORPORATION
By: /s/ James A. Johnson
----------------------------------------
James A. Johnson, Vice President,
Finance,
Chief Financial Officer, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 19th day of June, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
*H. Stewart Parker President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
H. Stewart Parker
/s/ James A. Johnson Vice President, Finance, Chief Financial
- --------------------------------------------- Officer, Treasurer and Secretary
James A. Johnson (Principal Financial Officer)
*Stephen A. Duzan Director
- ---------------------------------------------
Stephen A. Duzan
*James D. Grant Director
- ---------------------------------------------
James D. Grant
*Donald E. O'Neill Director
- ---------------------------------------------
Donald E. O'Neill
*Jeremy Curnock Cook Director
- ---------------------------------------------
Jeremy Curnock Cook
*By: /s/ James A. Johnson
- ---------------------------------------------
James A. Johnson
As Attorney-in-Fact
</TABLE>
II-4
<PAGE> 98
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 9,
1996, except for Note 9 as to which the date is April 16, 1996 in the
Registration Statement (Form S-1) and related Prospectus of Targeted Genetics
Corporation for the registration of its common stock.
ERNST & YOUNG LLP
Seattle, Washington
June 19, 1996
II-5
<PAGE> 99
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
June 19, 1996
II-6
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
2.1+ Form of Agreement and Plan of Merger dated as of April 16, 1996, by and
among Targeted Genetics Corporation, TGC Acquisition Corporation and
RGene Therapeutics Inc.
3.1 Restated Articles of Incorporation (Exhibit 3.1) (B)
3.2 Amended and Restated Bylaws (Exhibit 3.2) (C)
4.1 Warrant to Purchase 11,000 shares of Series B Preferred Stock of (A)
Targeted Genetics Corporation issued to MMC/GATX Partnership No. 1 on
December 27, 1993 (Exhibit 4.2)
4.2 Warrant to Purchase 11,000 shares of Series B Preferred Stock of (A)
Targeted Genetics Corporation issued to LINC Capital Management
Services, Ltd. on December 27, 1993 (Exhibit 4.3)
4.3 Warrant to Purchase 18,701 shares of Common Stock of Targeted Genetics (B)
Corporation issued to MMC/GATX Partnership No. 1 on November 30, 1994
(Exhibit 4.3)
4.4 Warrant Agreement between Targeted Genetics Corporation and First (D)
Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 4.4)
4.5 Specimen Warrant Certificate (Exhibit 4.5) (C)
4.6 Warrant to Purchase 21,315 shares of Common Stock of Targeted Genetics (D)
Corporation issued to Financing for Science International, Inc. on
November 30, 1995
5.1+ Opinion of Perkins Coie regarding legality of shares
10.1 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A)
Targeted Genetics Corporation and Philip D. Greenberg (Exhibit 10.1)
</TABLE>
<TABLE>
<C> <S> <C>
10.2 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A)
Targeted Genetics Corporation and A. Dusty Miller (Exhibit 10.2)
10.3 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A)
Targeted Genetics Corporation and Richard D. Palmiter (Exhibit 10.3)
10.4 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A)
Targeted Genetics Corporation and George Samatoyannopoulos (Exhibit
10.4)
10.5 Form of Indemnification Agreement between the registrant and its (A)
officers and directors (Exhibit 10.6)
10.6 * Non-exclusive License Agreement, dated as of November 19, 1991, between (A)
Fred Hutchinson Cancer Research Center and Immunex Corporation (Exhibit
10.7)
10.7 * Gene Transfer Technology License Agreement, dated as of February 18, (A)
1992, between Immunex Corporation and Targeted Genetics Corporation
(Exhibit 10.8)
10.8 * License Agreement, dated as of June 1, 1992, between Wisconsin Alumni (A)
Research Foundation and Targeted Genetics Corporation (Exhibit 10.9)
10.9 * License Agreement, dated as of August 14, 1992, between Leland Stanford (A)
Junior University and Targeted Genetics Corporation (Exhibit 10.10)
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.10* PHS Patent License Agreement -- Non-exclusive, dated as of July 13, (A)
1993, between National Institutes of Health Centers for Disease Control
and Targeted Genetics Corporation (Exhibit 10.13)
10.11* Non-exclusive Patent License Agreement, dated as of December 25, 1993, (A)
between The University of Florida Research Foundation, Inc. and Targeted
Genetics Corporation (Exhibit 10.14)
10.12* Research and Exclusive License Agreement, dated as of January 1, 1994, (A)
between Targeted Genetics Corporation and Fred Hutchinson Cancer
Research Center (Exhibit 10.19)
10.13* PHS Patent License Agreement -- Exclusive, dated as of March 10, 1994, (A)
between National Institutes of Health Centers for Disease Control and
Targeted Genetics Corporation (Exhibit 10.15)
10.14* Exclusive License Agreement, dated as of March 14, 1994, between Medical (A)
College of Ohio and Targeted Genetics Corporation (Exhibit 10.16)
10.15* License Agreement, dated as of March 16, 1994, between The Johns Hopkins (A)
University and Targeted Genetics Corporation (Exhibit 10.17)
10.16* License Agreement, dated as of March 28, 1994, between Targeted Genetics (A)
Corporation and the University of Michigan (Exhibit 10.18)
10.17* Exclusive License Agreement, dated as of March 28, 1994, between Fred (A)
Hutchinson Cancer Research Center and Targeted Genetics Corporation
(Exhibit 10.20)
10.18* Exclusive License Agreement, dated as of August 25, 1994, between (B)
Targeted Genetics Corporation and Fred Hutchinson Cancer Research Center
(Exhibit 10.20)
10.19 Olive Way Building Lease, dated as of November 20, 1993, between (A)
Metropolitan Federal Savings and Loan Association and Targeted Genetics
Corporation (Exhibit 10.21)
10.20 First Amendment to Olive Way Building Lease, dated as of December 10, (B)
1994, between Targeted Genetics Corporation and Metropolitan Federal
Savings and Loan Association (Exhibit 10.22)
10.21 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A)
December 27, 1993 (Exhibit 10.22)
10.22 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as of (A)
December 27, 1993 (Exhibit 10.23)
10.23 Loan and Security Agreement, dated as of November 30, 1994, between (B)
MMC/GATX Partnership No. 1 and Targeted Genetics Corporation (Exhibit
10.25)
10.24 Master Equipment Lease Agreement, dated as of October 17, 1995, between (D)
Financing for Science International, Inc. and Targeted Genetics
Corporation (Exhibit 10.28)
10.25 Registration Rights Agreement, dated as of April 27, 1992, among (A)
Targeted Genetics Corporation and the holders of the Series A and Series
B Convertible Preferred Stock (Exhibit 10.26)
10.26 1992 Restated Stock Option Plan (Exhibit 10.26) (B)
10.27 Stock Option Plan for Nonemployee Directors (Exhibit 10.31) (D)
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.28*+ Development Agreement dated April 6, 1994, by and between Argus
Pharmaceuticals, Inc. and RGene Therapeutics, Inc.
10.29*+ Patent and Technology License Agreement effective as of March 1, 1994,
by and among the Board of Regents of the University of Texas M.D.
Anderson Cancer Center and RGene Therapeutics, Inc.
10.30*+ First Amended and Restated License Agreement effective October 12, 1995,
by and between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc.
10.31*+ License Agreement dated October 12, 1994, by and between The University
of Pittsburgh of the Commonwealth System of Higher Education and RGene
Therapeutics, Inc.
10.32*+ Agreement dated as of May 28, 1996 by and between RGene Therapeutics,
Inc. and Laboratoires Fournier S.C.A.
11.1 Computation of net loss per share(D)
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP (contained on page II-5)
23.2 Consent of Arthur Andersen LLP (contained on page II-6)
23.3+ Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto)
24.1+ Power of Attorney
99.1+ Consent of Martin P. Sutter as Director Nominee
99.2+ Consent of Austin M. Long, III as Director Nominee
</TABLE>
- ------------------
+ Previously filed.
* Confidential treatment has been requested from the Securities and Exchange
Commission for portions of these agreements.
(A) Incorporated by reference to the designated exhibits included with the
registrant's Form S-1 Registration Statement (Registration No. 33-77054)
filed March 30, 1994, as amended.
(B) Incorporated by reference to the designated exhibit included with the
registrant's Form 10-K for the year ended December 31, 1994.
(C) Incorporated by reference to the designated exhibit included with the
registrant's Form S-1 Registration Statement (No. 33-91500) filed April 24,
1995, as amended.
(D) Incorporated by reference to the designated exhibit included with the
registrant's Form 10-K for the year ended December 31, 1995.
<PAGE> 1
3,500,000 Shares
TARGETED GENETICS CORPORATION
Common Stock
UNDERWRITING AGREEMENT
June 19, 1996
VECTOR SECURITIES INTERNATIONAL, INC.
GENESIS MERCHANT GROUP SECURITIES
As Representatives of the Several Underwriters
c/o VECTOR SECURITIES INTERNATIONAL, INC.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Ladies and Gentlemen:
Targeted Genetics Corporation, a Washington corporation (the
"Company"), proposes to issue and sell an aggregate of 3,500,000 shares of its
common stock, par value $0.01 per share, (the "Initial Securities") to the
several Underwriters named in Schedule I hereto (the "Underwriters") for whom
Vector Securities International, Inc. ("Vector") and Genesis Merchant Group
Securities are acting as representatives (collectively, the "Representatives").
In addition, solely for the purpose of covering over-allotments, the Company
proposes to grant to the several Underwriters, upon the terms and conditions set
forth in Section 2 hereof, an option to purchase up to an additional 525,000
shares of Common Stock of the Company (the "Option Securities"). The Initial
Securities and the Option Securities are hereinafter collectively referred to as
the "Securities." The Company's common stock, par value $0.01 per share,
including the Securities, is hereinafter referred to as the "Common Stock." The
Company wishes to confirm as follows its agreements with you and the other
Underwriters on
<PAGE> 2
whose behalf you are acting in connection with the several purchases by the
Underwriters of the Securities:
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 (No. 333-3592) covering the registration of
the Securities under the Securities Act of 1933, as amended (the "1933 Act"),
including the related preliminary prospectus, or prospectuses, and either (A)
has prepared and filed, prior to the effective date of such registration
statement, an amendment to such registration statement, including a final
prospectus or (B) if the Company has elected to rely upon Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations"), will prepare and file a prospectus, in accordance with
the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act
Regulations, promptly after execution and delivery of this Agreement.
Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of
the 1933 Act Regulations, the Company will prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b),
promptly after execution and delivery of this Agreement. The information, if
any, included in such prospectus or in such Term Sheet, that was omitted from
such registration statement at the time it became effective but that is deemed
to be part of such registration statement at the time it becomes effective (a)
pursuant to paragraph (b) of Rule 430A, is referred to herein as the "Rule 430A
Information," or (b) pursuant to paragraph (d) of Rule 434, is referred to
herein as the "Rule 434 Information." Each prospectus used before the time such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information that was used
after effectiveness and prior to the execution and delivery of this Agreement is
herein called a "preliminary prospectus." Such registration statement, including
the exhibits thereto, at the time it became effective and including, if
applicable, the Rule 430A Information or the Rule 434 Information, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term Registration
Statement shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriters for use in connection
with the offering of the Securities
2
<PAGE> 3
is herein referred to as the "Prospectus." If Rule 434 is relied upon, the term
"Prospectus" shall refer to the preliminary prospectus last furnished to the
Underwriters in connection with the offering of the Securities, together with
the Term Sheet, and all references to the date of the Prospectus shall mean the
date of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy, if any, filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, the Company hereby agrees to issue
and sell to each Underwriter and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $ per share
(the "Purchase Price Per Share"), the number of Initial Securities set forth in
Schedule I opposite the name of such Underwriter under the column "Number of
Initial Securities to be Purchased from the Company" (or such number of Initial
Securities increased as set forth in Section 10 hereof).
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein,
the Company hereby grants an option (the "Over-Allotment Option") to the
Underwriters to purchase from the Company, at the Purchase Price Per Share, up
to an aggregate of 525,000 Option Securities. Option Securities may be purchased
solely for the purpose of covering over-allotments made in connection with the
offering of the Securities. Such option shall expire at 5:00 P.M., Chicago time,
on the 30th day after the date of this Agreement (or, if such 30th day shall be
a Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading). Such over-allotment option may be
exercised at any time or from time to time until its expiration. Upon any
exercise of the Over-Allotment Option, each Underwriter, severally and not
jointly, agrees to purchase from the Company that proportion of the total number
of Option Securities as is equal to the percentage of Initial Securities that
such Underwriter is purchasing from the Company (or such number of Initial
Securities increased as set forth in Section 10 hereof),
3
<PAGE> 4
subject to such adjustments as you may determine to avoid fractional shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Underwriters propose to make a public offering of the Securities as soon
after the Registration Statement and this Agreement have become effective as in
your judgment is advisable and initially to offer the Securities upon the terms
set forth in the Prospectus.
4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Initial Securities shall be made at the
office of Perkins Coie, 1201 Third Avenue, 40th Floor, Seattle, Washington
98101, at 7:00 A.M., Seattle time, on the third (fourth, if the pricing occurs
after 4:30 p.m. (Eastern Time) on any given day) business day after the date
hereof (unless postponed in accordance with the provisions of Section 10 hereof)
(the "Closing Date"). The place of closing for the Initial Securities and the
Closing Date may be varied by agreement among you and the Company.
Delivery to the Underwriters of and payment for any Option Securities
to be purchased by the Underwriters shall be made at the aforementioned office
of Perkins Coie at such time on such date (an "Option Closing Date"), which may
be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Option Securities. The place of closing for any Option Securities and the Option
Closing Date for such Option Securities may be varied by agreement between you
and the Company.
Certificates for the Initial Securities and for any Option Securities
to be purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice (it being understood that a
facsimile transmission shall be deemed written notice) prior to 9:30 A.M.,
Chicago time, on the second business day preceding the Closing Date or any
Option Closing Date, as the case may be. Such certificates shall be made
available to you in Chicago, Illinois or New York, New York, as
4
<PAGE> 5
requested by you in the aforesaid notice, for inspection and packaging not later
than 9:30 A.M., Chicago time, on the business day next preceding the Closing
Date or any Option Closing Date, as the case may be. The certificates evidencing
the Initial Securities and any Option Securities to be purchased hereunder shall
be delivered to you on the Closing Date or the Option Closing Date, as the case
may be, against payment of the purchase price therefor by certified or official
bank check or checks payable in New York Clearing House (next day) funds to the
order of the Company. It is understood that each Underwriter has authorized you,
for its account, to accept delivery of, acknowledge receipt of, and make payment
of the purchase price for, the Initial Securities and the Option Securities, if
any, which it has agreed to purchase. Vector, individually and not as
representative of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose check has not been
received by the Closing Date or the Option Closing Date, as the case may be, but
such payment shall not relieve such Underwriter from its obligations hereunder.
5. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with the
several Underwriters as follows:
a. The Company will notify the Representatives immediately,
and confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendment thereto, (ii) of the receipt of any comments from
the Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the suspension of
qualification of the Securities for offering or sale in any jurisdiction or the
initiation of any proceedings for such purpose and (v) during the period when
the Prospectus is required to be delivered under the 1933 Act or Securities
Exchange Act of 1934, as amended (the "1934 Act"), of any change, or any event
or occurrence which could result in such a change, in the Company's condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company or the happening of any event, including the filing of any
information, documents or reports pursuant to the 1934 Act, that makes any
statement of a material fact made in the Registra-
5
<PAGE> 6
tion Statement or the Prospectus (as then amended or supplemented) untrue or
which requires the making of any additions to or changes in the Registration
Statement or the Prospectus in order to state a material fact required by the
1933 Act or the 1933 Act Regulations to be stated therein or necessary in order
to make the statements therein not misleading, or of the necessity to amend or
supplement the Prospectus to comply with the 1933 Act, the 1933 Act Regulations
or any other law. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, and, if at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities commission or other regulatory
authority shall issue an order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, the Company shall use
every reasonable effort to obtain the withdrawal or lifting of such order at the
earliest possible time.
b. The Company will give the Underwriters notice of its
intention to prepare or file any amendment to the Registration Statement
(including any post-effective amendment), any Rule 462(b) Registration
Statement, any Term Sheet or any amendment or supplement to the Prospectus
(including any revised prospectus or Term Sheet and preliminary prospectus which
the Company proposes for use by the Underwriters in connection with the offering
of the Securities which differs from the prospectus on file at the Commission at
the time the Registration Statement becomes effective, whether or not such
revised prospectus or Term Sheet and preliminary prospectus is required to be
filed pursuant to Rule 424(b)), whether pursuant to the 1933 Act, the 1934 Act
or otherwise, will furnish the Underwriters with copies of any Rule 462(b)
Registration Statement, Term Sheet, amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such Rule 462(b) Registration Statement, Term Sheet, amendment or
supplement or use any such prospectus to which the Underwriters or counsel for
the Underwriters shall object.
c. The Company has furnished or will deliver to the
Underwriters and their counsel, without charge, as many signed and conformed
copies of the Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith
6
<PAGE> 7
or incorporated by reference therein) as the Underwriters may reasonably
request. If applicable, the copies of the Registration Statement and each
amendment thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
d. The Company will furnish to each Underwriter, without
charge, from time to time during the period when the Prospectus is required to
be delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as such Underwriter may reasonably
request for the purposes contemplated by the 1933 Act, the 1934 Act, the 1933
Act Regulations or the rules and regulations of the Commission under the 1934
Act (the "1934 Act Regulations"). If applicable, the Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
e. The Company will comply with the 1933 Act and the 1933 Act
Regulations so as to permit the completion of the distribution of the Securities
as contemplated in this Agreement and in the Prospectus. If at any time when a
prospectus is required by the 1933 Act, the 1934 Act, the 1933 Act Regulations
or the 1934 Act Regulations to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 5(b) of the 1933 Act, such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectus comply with
such requirements and the Company will
7
<PAGE> 8
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
f. During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to shareholders or filed with the Commission or the Nasdaq National
Market ("NASDAQ"), and (ii) from time to time such other information concerning
the Company as you may request, subject to appropriate confidentiality
provisions with respect to any material nonpublic information so furnished.
g. The Company will use its best efforts, in cooperation with
counsel to the Underwriters, to qualify the Securities for offering and sale
under the applicable securities or Blue Sky laws of such states and other
jurisdictions of the United States as the Representatives may designate and to
maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to qualify as a foreign corporation in any jurisdiction in which it is
not so qualified. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
h. The Company will make generally available to its security
holders as soon as practicable, but not later than 45 days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next following the "effective date" (as defined in said Rule 158) of the
Registration Statement.
i. The Company will use the net proceeds received by it from
the sale of the Securities in the manner specified in the Prospectus under "Use
of Proceeds."
j. If, at the time that the Registration Statement becomes
effective, any Rule 430A Information or Rule 434 Informa-
8
<PAGE> 9
tion shall have been omitted therefrom, then immediately following the execution
of this Agreement, the Company will prepare, and file or transmit for filing
with the Commission in accordance with Rule 430A or Rule 434 and Rule 424(b),
copies of a Prospectus or Term Sheet containing such Rule 430A Information and
Rule 434 Information, respectively, or, if required by Rule 430A, a
post-effective amendment to the Registration Statement (including an amended
Prospectus), containing such Rule 430A Information.
k. If the Company elects to rely upon Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern Time on
the date hereof and (ii) the time confirmations are sent or given, as specified
by Rule 462(b)(2).
l. The Company, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, will file all
documents required to be filed with the Commission pursuant to Section 13, 14 or
15 of the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.
m. During a period of 90 days from the date of the Prospectus,
the Company will not, without the prior written consent of Vector, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any share
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be
sold hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of any security outstanding
on the date hereof and referred to in the Prospectus, (C) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant
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<PAGE> 10
to existing employee benefit plans of the Company referred to in the Prospectus
or (D) any shares of Common Stock issued pursuant to any non-employee director
stock plan.
n. The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers, directors, Immunex Corporation and International Biotechnology
Trust plc.
o. The Company will supply the Underwriters with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Securities under the 1933 Act.
p. Prior to the Closing Date, the Company shall furnish to the
Underwriters, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company and its sole subsidiary
set forth on Exhibit 21 to Item 16(a) of the Registration Statement (the
"Subsidiary"), for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the Prospectus.
q. Prior to the Closing Date, the Company will issue no press
release or other communications directly or indirectly and hold no press
conference with respect to the Company or its Subsidiary, the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of any of them, or the offering of the Securities, without the prior written
consent of the Representatives unless in the judgment of the Company and its
counsel, and after notification to the Representatives, such press release or
communication is required by law.
r. The Company will comply with all provisions of Florida H.B.
1771, codified as Section 517.075 of the Florida statutes, and all regulations
promulgated thereunder relating to issuers doing business with Cuba.
s. The Company has not taken, nor will it take, directly or
indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities.
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<PAGE> 11
t. The Company will use its best efforts to maintain the
quotation of the Common Stock (including the Securities) on NASDAQ and will file
with NASDAQ all documents and notices required by NASDAQ of companies that have
securities that are traded in the over-the-counter market and quotations for
which are reported by NASDAQ.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
a. When the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto becomes
effective, at the date of the Prospectus, if different, and at the Closing Date
and the Option Closing Date, as the case may be, (i) the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and supplements
thereto complied or will comply in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations and did not and will not contain
any 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. The Prospectus and any supplements or amendments thereto will not at
the date of the Prospectus, at the date of any such supplements or amendments,
or at the Closing Date or the Option Closing Date, if any, include an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. If Rule 434 is used, the Company will comply
with the requirements of Rule 434 and the Prospectus shall not be "materially
different," as such term is used in Rule 434, from the Prospectus included in
the Registration Statement at the time it became effective. The representations
and warranties in this subsection shall not apply to statements in or omissions
from the Registration Statement or Prospectus relating to any Underwriter made
in reliance upon and in conformity with information furnished to the Company in
writing by any Underwriter, through Vector expressly for use in the Registration
Statement or Prospectus. The Company has not distributed any offering materials
in connection with the offering or sale of the Securities other than the
Registration Statement, the preliminary prospectus, the Prospectus, the Term
Sheet, if applicable, or any other materials, if any, permitted by the 1933 Act
or the 1933 Act Regulations.
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<PAGE> 12
b. Each preliminary prospectus and the prospectus filed as
part of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied
when so filed in all material respects with the 1933 Act Regulations and, if
applicable, each preliminary prospectus and the Prospectus delivered to the
Underwriters for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
c. The accountants who certified the financial statements
included in the Registration Statement are independent public accountants as
required by the 1933 Act and the 1933 Act Regulations.
d. The financial statements included in the Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates indicated and the
results of their operations for the periods specified; except as otherwise
stated in the Registration Statement, said financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis; and no supporting schedules are required to be included in
the Registration Statement. The summary financial and statistical data set forth
in the Prospectus are prepared on an accounting basis consistent with such
financial statements.
e. Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (i) there has been no material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiary considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) except with
respect to the Merger (as defined below), there have been no transactions
entered into by the Company or its Subsidiary, other than those in the ordinary
course of business, which are material with respect to the Company, and (iii)
there has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock. The Company has no material
contingent obligations which are not specifically
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<PAGE> 13
disclosed in the Company's financial statements that are included in the
Registration Statement.
f. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Washington with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not, singly or in the aggregate,
have a material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
Subsidiary considered as one enterprise.
g. The Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not have a material adverse effect
on the condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its Subsidiary considered as one
enterprise; all of the issued and outstanding capital stock of the Subsidiary
has been duly authorized and validly issued, is fully paid and nonassessable and
is owned by the Company free and clear of any security interest, mortgage,
pledge, lien, charge, encumbrance, claim or equity. There are no outstanding
subscriptions, options, warrants, commitments, convertible or exchangeable
securities or other rights granted by the Company or its Subsidiary to acquire
any shares of capital stock of or ownership interests in any subsidiary of the
Company and there are no commitments, plans or arrangements to do so. Except as
described in the Prospectus, the Company does not own, directly or indirectly,
any shares of stock or any other equity or long-term debt securities of any
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<PAGE> 14
corporation or have any equity interest in any firm, partnership, joint venture,
association or other entity.
h. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee or director benefit plans or the exercise of
convertible securities referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable and have not been issued in
violation of or are not otherwise subject to any preemptive or other rights to
subscribe for or purchase securities; the Securities have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement against payment
of the consideration set forth herein, will be validly issued and fully paid and
nonassessable; the certificates evidencing the Securities are in due and proper
form under Washington law; the authorized capital stock of the Company,
including the Securities, conforms to all statements relating thereto contained
in the Prospectus; and the issuance of the Securities is not subject to
preemptive or other rights to subscribe for or purchase securities. There are no
outstanding subscriptions, options, warrants, convertible or exchangeable
securities or other rights granted to or by the Company to purchase shares of
Common Stock or other securities of the Company and there are no commitments,
plans or arrangements to issue any shares of Common Stock or any security
convertible into or exchangeable for Common Stock, in each case other than as
described in the Prospectus.
i. Except as disclosed in the Registration Statement and
except as would not, singly or in the aggregate, reasonably be expected to have
a material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
Subsidiary considered as one enterprise, (A) the Company and its Subsidiary are
each in compliance with all applicable Environmental Laws (as defined below),
(B) the Company and its Subsidiary have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each in
compliance with the requirements of such permits authorizations and approvals,
(C) there are no pending or, to the best knowledge of the Company, threatened
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<PAGE> 15
Environmental Claims against the Company or its Subsidiary and (D) under
applicable law, there are no circumstances with respect to any property or
operations of the Company or its Subsidiary that are reasonably likely to form
the basis of an Environmental Claim against the Company or its Subsidiary.
For purposes of this Agreement, the following terms shall have
the following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgement, relating to the environment,
health, safety or any chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority. "Environmental
Claims" means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.
j. Neither the Company nor its Subsidiary is in violation of
its charter or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any material contract, indenture,
mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement,
voting trust, or other instrument or agreement to which the Company or its
Subsidiary is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or its Subsidiary is subject; and
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein and the fulfillment of the terms hereof
have been duly authorized by all necessary corporate action and will not
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or its Subsidiary pursuant to, any contract, indenture,
mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement,
voting trust or other instrument or agreement to which the Company or its
Subsidiary is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or its Subsidiary is subject, nor
will such action result in any violation of the provisions of the charter or
bylaws of the Company or its
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<PAGE> 16
Subsidiary or any applicable statute, law, rule, regulation, ordinance,
decision, directive or order.
k. No labor dispute with the employees of the Company or its
Subsidiary exists or, to the best knowledge of the Company, is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors which
might, singly or in the aggregate, be expected to result in any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its Subsidiary considered as
one enterprise.
l. There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the Company or
its Subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which, singly or in the aggregate, might
result in any material adverse change in the condition, financial or otherwise,
or in the earnings, business affairs or business prospects of the Company and
its Subsidiary considered as one enterprise, or which, singly or in the
aggregate, might materially and adversely affect the properties or assets
thereof or which might materially and adversely affect the consummation of this
Agreement; all pending legal or governmental proceedings to which the Company or
its Subsidiary is a party or of which any of their respective property or assets
is the subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, are, considered in the
aggregate, not material; and there are no contracts or documents of the Company
or its Subsidiary which are required to be filed as exhibits to the Registration
Statement by the 1933 Act or by the 1933 Act Regulations which have not been so
filed.
m. Except as otherwise specifically disclosed in the
Prospectus, the Company and its Subsidiary own or are licensed to use all
patents, patent applications, inventions, trademarks, trade names, applications
for registration of trademarks, service marks, service mark applications,
copyrights, know-how, manufacturing processes, formulae, trade secrets, licenses
and rights in any thereof and any other intangible property and assets (herein
called the "Proprietary Rights") which are material to the business of the
16
<PAGE> 17
Company and its Subsidiary considered as one enterprise as now conducted and as
proposed to be conducted, in each case as described in the Prospectus. The
description of the Proprietary Rights in the Prospectus is correct in all
material respects and fairly and correctly describes the Company's and its
Subsidiary's rights with respect thereto. The Company does not have any
knowledge of, and the Company has not given or received any notice of, any
pending conflicts with or infringement of the rights of others with respect to
any Proprietary Rights or with respect to any license of Proprietary Rights
which are material to the business of the Company and its Subsidiary considered
as one enterprise. No action, suit, arbitration, or legal, administrative or
other proceeding, or investigation is pending, or, to the best knowledge of the
Company, threatened, which involves any Proprietary Rights. Neither the Company
nor its Subsidiary is subject to any judgment, order, writ, injunction or decree
of any court or any Federal, state, local, foreign or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any arbitrator, or has entered into or is a party to any contract
which restricts or impairs the use of any such Proprietary Rights in a manner
which would have a material adverse effect on the use of any of the Proprietary
Rights. Except as otherwise specifically disclosed in the Prospectus, to the
best knowledge of the Company, no Proprietary Rights used by the Company or its
Subsidiary, and no services or products sold by the Company or its Subsidiary,
conflict with or infringe upon any proprietary rights of any third party.
Neither the Company nor its Subsidiary has received written notice of any
pending conflict with or infringement upon such third-party proprietary rights.
Neither the Company nor its Subsidiary has entered into any consent,
indemnification, forbearance to sue or settlement agreement with respect to
Proprietary Rights other than in the ordinary course of business. No claims have
been asserted by any person with respect to the validity of the Company's or its
Subsidiary's ownership or right to use the Proprietary Rights and, to the best
knowledge of the Company, there is no reasonable basis for any such claim to be
successful. The Proprietary Rights which are material to the business of the
Company and its Subsidiary considered as one enterprise are valid and
enforceable and no registration relating thereto has lapsed, expired or been
abandoned or cancelled or is the subject of cancellation or other adversarial
proceedings, and all applications therefore are pending and are in good
standing. The Company and its Subsidiary have complied, in all material
respects, with their
17
<PAGE> 18
respective contractual obligations relating to the protection of the Proprietary
Rights which are material to the business of the Company and its Subsidiary
considered as one enterprise used pursuant to licenses. To the best knowledge of
the Company, no person is infringing on or violating the Proprietary Rights
which are material to the business of the Company and its Subsidiary considered
as one enterprise owned or used by the Company or its Subsidiary.
n. No registration, authorization, approval, qualification or
consent of any court or governmental authority or agency is necessary in
connection with the offering, issuance or sale of the Securities hereunder,
except such as may be required under the 1933 Act or the 1933 Act Regulations or
state securities or Blue Sky laws (or such as may be required by the National
Association of Securities Dealers, Inc. ("NASD")).
o. The Company and its Subsidiary possess and are operating in
compliance with all material licenses, certificates, consents, authorities,
approvals and permits (collectively, "permits") from all state, Federal, foreign
and other regulatory agencies or bodies necessary to conduct the businesses now
operated by them, and neither the Company nor its Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
permit or any circumstance which would lead it to believe that such proceedings
are reasonably likely which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and adversely affect
the condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its Subsidiary considered as one
enterprise.
p. This Agreement has been duly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
principles of equity and except as rights to indemnity and contribution
hereunder may be limited by Federal or state securities laws or the public
policy underlying such laws.
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<PAGE> 19
q. Except as described in the Prospectus, there are no persons
with registration or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the Company
under the 1933 Act.
r. No order preventing or suspending the use of any
preliminary prospectus has been issued and no proceedings for that purpose are
pending or, to the knowledge of the Company, threatened by the Commission; and
to the best knowledge of the Company, no order suspending the offering of the
Securities in any jurisdiction designated by the Underwriters pursuant to
Section 5(g) of this Agreement has been issued and, to the best knowledge of the
Company, no proceedings for that purpose have been instituted or threatened or
are contemplated.
s. The Company and its Subsidiary have good and marketable
title to their respective properties, free and clear of all material security
interests, mortgages, pledges, liens, charges, encumbrances and claims of
record. The properties of the Company and its Subsidiary are, in the aggregate,
in good repair (reasonable wear and tear excepted), and suitable for their
respective uses. Any real properties held under lease by the Company and its
Subsidiary are held by them under valid, subsisting and enforceable leases with
such exceptions as are not material and do not interfere with the conduct of the
business of the Company and its Subsidiary considered as one enterprise.
t. The Company and its Subsidiary maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
u. The Company and its Subsidiary have conducted and are
conducting their respective businesses in compliance with all applicable
Federal, state, local and foreign statutes, laws, rules, regulations,
ordinances, codes, decisions, decrees, direc-
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<PAGE> 20
tives and orders, except where the failure to do so would not, singly or in the
aggregate, have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business affairs or business prospects of the
Company and its Subsidiary considered as one enterprise.
v. To the best of the Company's knowledge, the Company and its
Subsidiary take security measures adequate to assert trade secret protection in
their non-patented technology.
w. To the best of the Company's knowledge, neither the Company
nor its Subsidiary nor any employee or agent of the Company or its Subsidiary
has made any payment of funds of the Company or its Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
x. The Company is not now, and after sale of the Securities 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.
y. All offers and sales of capital stock of the Company prior
to the date hereof were at all relevant times duly registered or exempt from the
registration requirements of the 1933 Act and were duly registered or subject to
an available exemption from the registration requirements of the applicable
state securities or Blue Sky laws.
z. The Company has complied with all provisions of Florida
H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with Cuba.
aa. The Common Stock is registered pursuant to Section 12(g)
of the 1934 Act. The Securities have been duly authorized for quotation on
NASDAQ. The Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the 1934 Act
or delisting the Common Stock from NASDAQ, nor has the Company
20
<PAGE> 21
received any notification that the Commission or NASDAQ is contemplating
terminating such registration or listing.
bb. Neither the Company nor, to its knowledge, any of its
officers, directors or affiliates has taken, and at the Closing Date and at any
later Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Securities.
cc. The Company and its Subsidiary maintain insurance of the
types and in amounts adequate for its and its Subsidiary's business and
consistent with insurance coverage maintained by similar companies in similar
business, including but not limited to, insurance covering clinical trial
liability, product liability and real and personal property owned or leased
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
dd. The Company and its Subsidiary have filed all material tax
returns required to be filed, which returns are true and correct in all material
respects, and neither the Company nor its Subsidiary is in default in the
payment of any taxes, including penalties and interest, assessments, fees and
other charges, shown thereon due or otherwise assessed, other than those being
contested in good faith and for which adequate reserves have been provided or
those currently payable without interest which were payable pursuant to said
returns or any assessments with respect thereto.
ee. Except as described in the Prospectus, to the best of the
Company's knowledge, there are no rulemaking or similar proceedings before The
United States Food and Drug Administration or comparable Federal, state, local
or foreign government bodies which involve or affect the Company or its
Subsidiary, which, if the subject of an action unfavorable to the Company or its
Subsidiary, could involve a prospective material adverse change in or effect on
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiary considered as one
enterprise.
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<PAGE> 22
ff. The Company has not received any communication (whether
written or oral) relating to the termination or threatened termination or
modification or threatened modification of any material, consulting, licensing,
marketing, research and development, cooperative or any similar agreement,
including, without limitation, the collaborative research and license agreements
listed under the section of the Prospectus entitled, "Collaborative and
Licensing Agreements." Each such collaborative and licensing agreement is in
effect substantially as described in such section of the Prospectus.
gg. To the knowledge of the Company, if any full-time
employee identified in the Prospectus has entered into any non-competition,
non-disclosure, confidentiality or other similar agreement with any party other
than the Company or its Subsidiary, such employee is neither in violation
thereof nor is expected to be in violation thereof as a result of the business
conducted or expected to be conducted by the Company or its Subsidiary as
described in the Prospectus or such person's performance of his obligations to
the Company or its Subsidiary; and neither the Company nor its Subsidiary has
received written notice that any consultant or scientific advisor of the Company
or its Subsidiary is in violation of any non-competition, non-disclosure,
confidentiality or similar agreement.
hh. On or prior to the date hereof, the Company and RGene
Therapeutics, Inc. ("RGene") have received the requisite approval or approvals
of that certain Agreement and Plan of Merger, dated as of April 16, 1996 (the
"Merger Agreement"), by and among the Company, TGC Acquisition Corporation and
RGene, pursuant to which TGC Acquisition Corporation will be merged with and
into RGene (the "Merger"). Except as set forth in the Prospectus, no such
approval or approvals imposes on the Company or any affiliate thereof any
condition that adversely affects the ability of the Company and its affiliates
to conduct their business as the same is described in the Prospectus or
adversely affects the ability of the Underwriters to market the Securities on
the terms and in the manner contemplated by the Prospectus.
ii. The Certificate of Merger with respect to the Merger has
been filed with the Secretary of State of the State of Delaware and has become
effective, the Merger has occurred and all other transactions contemplated by
the Merger Agreement to be
22
<PAGE> 23
consummated on or prior to the Closing Date have been consummated without waiver
or modification thereto.
7. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless (i) each
Underwriter and (ii) each person, if any, who controls any Underwriter within
the meaning of Section 15 of the 1933 Act (any of the persons referred to in
this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) the respective directors, officers, partners and employees of any of the
Underwriters or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities and expenses whatsoever (including, without limitation, all
reasonable costs of pursuing, investigating and defending any claim, suit or
action or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to any Indemnified Person), directly or indirectly, caused by, related to, based
upon or arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any amendment thereto, including the Rule 430A Information and Rule 434
Information, if applicable, or any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading or caused by, related to, based upon, arising
out of or in connection with any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith;
provided, however, that the indemnification contained in this paragraph a. with
respect to any preliminary
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<PAGE> 24
prospectus shall not inure to the benefit of any Underwriter (or related
Indemnified Person) on account of any such loss, claim, damage, liability or
expense arising from the sale of the Securities by such Underwriter to any
person if a copy of the Prospectus shall not have been delivered or sent to such
person within the time required by the 1933 Act or the 1933 Act Regulations, and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such preliminary prospectus was corrected in the
Prospectus (or any amendment or supplement thereto), provided that the Company
has delivered the Prospectus to the several Underwriters in requisite quantity
on a timely basis to permit such delivery or sending.
b. If any action, suit or proceeding shall be brought against
any Indemnified Person in respect of which indemnity may be sought against the
Company, such Indemnified Person shall promptly notify in writing the parties
against whom indemnification is being sought (the "indemnifying parties"), and
such indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Indemnified
Person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the indemnifying parties have agreed in writing to pay such fees and
expenses, (ii) the indemnifying parties have failed to assume the defense and
employ counsel or (iii) the named parties to any such action, suit,
investigation or proceeding (including any impleaded parties) include both such
Indemnified Person and the indemnifying parties and representation of such
Indemnified Person and any indemnifying party by the same counsel would, in the
reasonable judgment of the Indemnified Person, be inappropriate due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Indemnified Person). It is understood, however,
that the indemnifying parties shall, in connection with any one such action,
suit or proceeding or separate but substantially similar or related actions,
suits or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys (in addition to any local counsel) at any
time for all such Indemnified Persons not having actual or potential differing
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<PAGE> 25
interests with you or among themselves, which firm shall be designated in
writing by Vector, and that all such fees and expenses shall be reimbursed as
they are incurred. The indemnifying parties shall not be liable for any
settlement of any such action, suit or proceeding effected without their written
consent, which consent shall not be unreasonably withheld, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Indemnified Person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
c. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person who controls the Company within the
meaning of Section 15 of the 1933 Act, to the same extent as the foregoing
indemnity from the Company to each Indemnified Person, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter through Vector expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus, or any amendment or supplement
thereto. If any action, suit, investigation or proceeding shall be brought
against the Company, any of its directors, any such officer or any such
controlling person based on the Registration Statement, the Prospectus or any
preliminary prospectus, or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Underwriter pursuant to this
paragraph (c), such Underwriter shall have the rights and duties given to the
Company by paragraph (b) above, and the Company, its directors, any such officer
and any such controlling person shall have the rights and duties given to the
Indemnified Persons by paragraph (a) above.
d. If the indemnification provided for in this Section 7 is
unavailable to, or insufficient to hold harmless, an indemnified party under
paragraphs (a) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each 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, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the
25
<PAGE> 26
Company on the one hand and the Underwriters on the other hand from the offering
of the Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law or judicial determination, 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 the
Underwriters on the other hand, 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 hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus or, if Rule 434 is used, the corresponding
location on the Term Sheet. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or by the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The indemnity and contribution obligations of the Company set forth herein shall
be in addition to any liability or obligation the Company may otherwise have to
any Indemnified Person.
e. The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
a 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 the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 7, no
Underwriter (or any of its related Indemnified Persons) shall be required to
contribute (whether pursuant to subsection (a) or (c) or otherwise) any amount
in excess of the
26
<PAGE> 27
underwriting discount applicable to the Securities underwritten by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 7 are several
in proportion to the respective numbers of Securities set forth opposite their
names in Schedule I hereto (or such numbers of Securities increased as set forth
in Section 10 hereof) and not joint.
f. No indemnifying party shall, without the prior written
consent of the Indemnified Person, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any Indemnified Person
is or could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement includes an unconditional
release of such Indemnified Person from all liability on claims that are the
subject matter of such action, suit or proceeding.
g. Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Indemnified Person, the Company, its
directors or officers or any person controlling the Company, (ii) acceptance of
any Securities and payment therefor hereunder and (iii) any termination of this
Agreement.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase the Initial Securities hereunder are subject to the
following conditions:
a. The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective on the date hereof, or with
the consent of the Representatives, at a later date and time; no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission. If
27
<PAGE> 28
the Company has elected to rely upon Rule 430A, Rule 430A Information previously
omitted from the effective Registration Statement pursuant to Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule 424(b)
within the prescribed time period and the Company shall have provided evidence
satisfactory to the Underwriters of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A. If the Company has
elected to rely upon Rule 434, a Term Sheet shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed time period.
b. The Underwriters shall have received:
(i) The favorable opinion, dated as of the
Closing Date, of Perkins Coie, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect
that:
A. The Company has been duly incorporated and is
validly existing as a corporation under the laws of the State
of Washington.
B. The Company has corporate power and authority to
own or lease its properties and to conduct its business as
described in the Registration Statement and the Prospectus and
to enter into and perform its obligations under this
Agreement.
C. To their knowledge, the Company is duly qualified
as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is
required, except where the failure to qualify would not have a
material adverse effect on the Company.
D. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
"Capitalization" (except for subsequent
28
<PAGE> 29
issuances, if any, pursuant to reservations, agreements,
employee or director benefit plans or the exercise of
convertible securities referred to in the Prospectus), and the
shares of issued and outstanding capital stock of the Company,
including the Securities, have been duly authorized and
validly issued and are fully paid and nonassessable and, to
their knowledge, have not been issued in violation of or are
not otherwise subject to any preemptive rights or, to such
counsel's knowledge, other rights to subscribe for or purchase
securities.
E. The Securities have been duly authorized for
issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and
fully paid and nonassessable; and the issuance of the
Securities is not subject to preemptive or, to such counsel's
knowledge, other rights to subscribe for or purchase
securities.
F. The Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has corporate
power and authority to own and lease its properties and to
conduct its business as described in the Registration
Statement and, to their knowledge, is duly qualified as a
foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is
required, except where the failure to qualify would not have a
material adverse effect on the Company; all of the issued and
outstanding capital stock of the Subsidiary has been duly
authorized and
29
<PAGE> 30
validly issued, is fully paid and nonassessable and, to their
knowledge, is owned by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
G. To their knowledge, except as described in the
Prospectus, there are no outstanding options, warrants or
other rights granted to or by the Company to purchase shares
of Common Stock or other securities of the Company and there
are no commitments, plans or arrangements to issue any shares
of Common Stock or other securities.
H. This Agreement has been duly authorized,
executed and delivered by the Company.
I. At the time the Registration Statement became
effective and at the Closing Date, the Registration Statement
(other than the financial statements, as to which no opinion
need be rendered) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act
Regulations.
J. The form of certificate used to evidence each of
the Securities is in due and proper form.
K. To their knowledge, there are no legal or
governmental proceedings pending or threatened to which the
Company or its Subsidiary is a party or to which any property
of the Company or its Subsidiary is subject which are required
to be disclosed in the Registration Statement other than those
disclosed therein, and all pending legal or governmental
proceedings to which the Company or its Subsidiary is a party
or to which any of their property is subject
30
<PAGE> 31
which are not described in the Registration Statement,
including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material.
L. The information in the Prospectus under "Risk
Factors--Shares Eligible for Future Sale; Registration
Rights," "Business--Research Collaborations and Licensing
Agreements," "--Benefit Plans," "Limitation of Liability and
Indemnification Matters" and "Description of Capital Stock,"
to the extent that it constitutes matters of law, summaries of
legal matters, documents or proceedings, or legal conclusions,
has been reviewed by them and fairly summarizes in all
material respects the information called for with respect
thereto.
M. The Merger Agreement conforms in all material
respects to the description thereof con- tained in the
Prospectus.
N. The Merger has been duly authorized by all
requisite corporate action on the part of the Company and
RGene. On June 19, 1996, a duly authorized and executed
Certificate of Merger with respect to the Merger was filed
with the Secretary of State of the State of Delaware and on
such date the Merger became effective pursuant to the Delaware
General Corporation Law with the effect set forth in Section
259(a) thereof.
O. Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or the
Prospectus which are not so filed or described as required and
such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized
in all material respects.
31
<PAGE> 32
To their knowledge, neither the Company nor its Subsidiary is
in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, loan agreement, deed,
trust, note, lease, sublease, voting trust, voting agreement
or other instrument or agreement to which it is a party or by
which it or any of its properties may be bound, except for
defaults which neither individually nor in the aggregate are
material to the condition, financial or otherwise, of the
Company and its Subsidiary, taken as one enterprise.
P. The form of the agreements executed by the
Company's employees, consultants and other advisors respecting
trade secrets, confidentiality or intellectual property rights
is valid, binding and enforceable in accordance with its
express terms (it being understood that such counsel will
attach to such opinion a certificate executed by an
appropriate officer of the Company to the effect that the
Company uses all reasonable efforts to cause its employees,
consultants and other advisors to execute such agreements).
Q. The Company is the non-exclusive licensee of the
United States and foreign patents and patent applications
listed on Schedule I hereto and is the exclusive licensee of
the United States and foreign patents and patent applications
listed on Schedule II hereto. All such licenses are duly
executed, validly binding and enforceable in accordance with
their terms and, to the best of their knowledge, the Company
is not in default (declared or undeclared) of any material
provision of any such license.
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<PAGE> 33
R. No authorization, approval, consent or order of
any court or governmental authority or agency is required in
connection with the offering, issuance or sale of the
Securities to the Underwriters, except such as may be required
under the 1933 Act or the 1933 Act Regulations or state
securities or Blue Sky laws or such as may be required by the
NASD; and, to such counsel's knowledge, the execution,
delivery and performance of this Agreement and the
consummation of the transactions contemplated herein and the
compliance by the Company with its obligations hereunder will
not conflict with or constitute a breach of, or default under,
or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or its
Subsidiary pursuant to, any material contract, indenture,
mortgage, loan agreement, note, deed, trust, lease, sublease,
voting trust, voting agreement or other instrument or
agreement to which the Company or its Subsidiary is a party or
by which it or any of them may be bound, or to which any of
the property or assets of the Company or its Subsidiary is
subject, nor will such action result in any violation of the
provisions of the charter or bylaws of the Company or its
Subsidiary, or any applicable statute, law, rule, regulation,
ordinance, code, decision, directive or order.
S. To their knowledge, except as set forth in the
Prospectus, there are no legal or governmental proceedings,
pending or threatened, to which the Company or its Subsidiary
is a party or by which any property of the Company or its
Subsidiary is subject which are required to be disclosed in
the Registration Statement which could reasonably be expected
to have a material adverse effect on the business or
condition,
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<PAGE> 34
financial or otherwise, of the Company and its Subsidiary
considered as one enterprise.
T. Except as described in the Prospectus, to their
knowledge, there are no persons with registration or other
similar rights to have any securities registered pursuant to
the Registration Statement or otherwise registered by the
Company under the 1933 Act.
U. The Company is not an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
V. Based on the representations and warranties made
by the respective investors contained in each respective
purchase agreement and the responses (if any) of such
investors to the Company's inquiries and the facts and
circumstances contemplated by each respective purchase
agreement, and except that such counsel expresses no opinion
as to whether information provided to the investors was
sufficient and assuming that each offer and sale was a
discrete transaction and not integrated with any offer or sale
of securities by the Company, the sales of the Company's
Common Stock during the three years immediately before the
date hereof were at all relevant times duly registered or
exempt from registration under Section 5 of the 1933 Act.
W. Although they have made no independent
investigation, in the course of their representation of the
Company in connection with the offering of the Securities,
nothing has come to their attention that leads them to believe
that either the Company or its Subsidiary is not in
34
<PAGE> 35
compliance with, or is not conducting its business in
conformity with, all applicable laws and regulations relating
to the operation of its business as described in the
Registration Statement, except to the extent that any failure
so to comply or conform would not have a material adverse
effect upon the business or condition, financial or otherwise,
of the Company and its Subsidiary considered as one
enterprise.
X. The Registration Statement has become effective
under the 1933 Act; any required filing of the Prospectus, and
any supplements thereto or the Term Sheet, pursuant to Rule
424(b) and if applicable, Rule 434, has been made in the
manner and within the time period required; and to their
knowledge, no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and
no proceedings therefor have been instituted or are pending or
contemplated under the 1933 Act.
In giving their opinions with respect to matters involving the
Merger required by subsection b(i) of this Section 8, Perkins Coie shall be
entitled to rely upon opinions of local counsel and certificates of officers of
the Company or its Subsidiary as to matters of fact.
(ii) The favorable opinion, dated as of the Closing
Date, of Morrison & Foerster LLP, patent counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, to the
effect that:
A. To the best of their knowledge, the statements set
forth on Schedule I to this opinion, which are contained in
the Prospectus under the captions "Risk Factors--Uncertainty
of Patent Position and Proprietary Rights; Access to
Proprietary Genes" and "--
35
<PAGE> 36
Patents and Proprietary Rights" (the "Patent Paragraphs"), are
accurate and complete statements or summaries of the matters
set forth therein.
B. To the best of their knowledge, there are no
pending or threatened legal or governmental proceedings (other
than patent applications and the patent interference
proceeding described in the Prospectus) relating to patent
rights of the Company to which the Company is a party and, to
the best of their knowledge, no such proceedings are
threatened or contemplated.
C. Based solely upon the Officer's Certificate
attached as Exhibit A to this opinion (the "Officer's
Certificate"), to the best of their knowledge, the Company is
not infringing or otherwise violating any patents of any
persons that the Company believes would be held valid and, to
the best of their knowledge, no person is infringing or
otherwise violating any of the Company's patents.
D. Based solely upon the Officer's Certificate, to
the best of their knowledge, the Company owns or possesses
sufficient licenses or other rights to use all patents
necessary to conduct the business now being conducted by the
Company as described in the Prospectus.
E. Assignment documents listing the Company as the
sole assignee of each of the patent applications listed on
Schedule II to this opinion (the "Solely Assigned
Applications") have been filed with the United States Patent
and Trademark Office (the "PTO"), and corresponding Notices of
Recordation of Assignment Documents have been received from
the PTO. Such counsel is
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<PAGE> 37
not aware of any communications to the Company in which it is
alleged that the Company is not the sole assignee of the
Solely Assigned Applications. Assignment documents listing the
Company as an assignee of each of the patent applications
listed on Schedule III to this opinion (the "Jointly Assigned
Applications") have been filed with the PTO, and corresponding
Notices of Recordation of Assignment Documents have been
received from the PTO. Such counsel is not aware of any
communications to the Company in which it is alleged that the
Company is not an assignee of the Jointly Assigned
Applications.
F. Each of the United States patent applications
listed in Schedule IV to this opinion was prepared and filed
in a form sufficient to obtain a filing date and serial number
from the PTO.
G. To the best of their knowledge, each of the
foreign patent applications listed on Schedule IV hereto was
prepared and filed in a form sufficient to obtain a serial
number and filing date from the applicable foreign patent
office.
H. Each of the United States patent applications
listed as "Pending" in Schedule IV to this opinion is being
prosecuted in a manner sufficient to avoid abandonment of the
applications (other than an abandonment in favor of a
continuing application). To the best of their knowledge, each
of the foreign patent applications listed as "Pending" in
Schedule IV to this opinion is being prosecuted in a manner
sufficient to avoid abandonment.
I. Such counsel believes that it has complied with
its obligations to disclose
37
<PAGE> 38
information material to patentability pursuant to 37 C.F.R.
1.56 in connection with the filing of the United States patent
applications listed on Schedule IV to this opinion.
In giving their opinions required by subsections (b)(ii) of
this Section 8, Morrison & Foerster LLP shall additionally state that nothing
has come to their attention that leads them to believe that the Patent
Paragraphs at the time the Registration Statement became effective contained an
untrue statement of a material fact with respect to patent rights of the Company
or omitted to state a material fact with respect to patent rights of the Company
required to be stated therein or necessary to make the statements therein not
misleading or that the Patent Paragraphs as of the date of the Prospectus or at
the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact with respect to patent rights of the Company
or omitted to state a material fact with respect to patent rights of the Company
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(iii) The favorable opinion, dated as of the Closing
Date, of Morgan & Finnegan, L.L.P., patent counsel for RGene, in form
and substance satisfactory to counsel for the Underwriters, to the
effect that:
A. To their knowledge, the information in the
Prospectus under "Risk Factors--Uncertainty of Patent Position
and Proprietary Rights; Access to Proprietary Genes" and
"--Patents and Proprietary Rights," as it relates solely to
matters for which Morgan & Finnegan, L.L.P. is identified
under the column "LAW FIRM CONTACT DOCKET NO." as being
responsible in Schedule 2.11 and Schedule 2.14 (collectively,
the "Schedules") attached to that certain Merger Agreement,
dated as of April 16, 1996 (the "Merger Agreement"), by and
between Targeted Genetics Corporation, TGC Acquisition
Corporation and RGene Therapeutics, Inc., to the extent that
it constitutes matters of
38
<PAGE> 39
law, summaries of legal matters, documents or proceedings, or
legal conclusions, has been reviewed by them and is correct in
all material respects and fairly and correctly presents the
information called for with respect thereto.
B. To their knowledge, other than as set forth in the
Schedules, there are no pending or threatened legal or
governmental proceedings, nor allegations on the part of any
person of infringement, relating to patent rights of RGene
and, to their knowledge, no such proceedings are threatened or
contemplated.
C. To their knowledge, RGene is not infringing or
otherwise violating any patents, trade secrets, trademarks,
service marks, copyrights or other proprietary information or
know-how of any persons and, to their knowledge, no person is
infringing or otherwise violating any of RGene's patents,
trade secrets, trademarks, service marks, copyrights or other
proprietary information or know-how of RGene in a way in which
could materially affect the use thereof by RGene.
D. To their knowledge, there are no asserted or
unasserted claims of any persons relating to the scope or
ownership of any of the patent applications listed on Schedule
I to this opinion (herein called the "Applications") (which
include and are limited to all United States patent
applications for which Morgan & Finnegan, L.L.P. is identified
under the column "LAW FIRM CONTACT DOCKET NO." as being
responsible on the Schedules), there are no liens which have
been filed against any of the Applications, there are no
material defects of form in the preparation or filing of such
Applications,
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<PAGE> 40
the Applications are being diligently prosecuted, and none of
the Applications has been finally rejected or abandoned.
E. To their knowledge, there are no asserted or
unasserted claims of any persons relating to the scope or
ownership of any of the foreign patent applications listed on
Schedule II to this opinion (herein called the "Foreign
Applications") (which include and are limited to all foreign
patent applications for which Morgan & Finnegan, L.L.P. is
identified under the column "LAW FIRM CONTACT DOCKET NO." as
being responsible on the Schedules), there are no liens which
have been filed against any of the Foreign Applications, there
are no material defects of form in the preparation or filing
of such Foreign Applications, the Foreign Applications are
being diligently prosecuted, and none of the Foreign
Applications has been finally rejected or abandoned.
F. Nothing has come to their attention that leads
them to believe that the Applications and the corresponding
Foreign Applications will not eventuate in issued patents, or
that any patents issued in respect of any such Applications or
Foreign Applications will not be valid or will not afford
RGene reasonable patent protection relative to the subject
matter thereof.
G. With respect to each of the licenses listed on
Schedule III to this opinion (which include and are limited to
all agreements pursuant to which RGene licenses the patents
and patent applications set forth on the Schedules), such
counsel has no knowledge of any default (declared or
undeclared) by RGene of any material provision of any such
license.
40
<PAGE> 41
H. To their knowledge, all material prior art
references known to RGene or its counsel during the
prosecution of the Applications were disclosed to the United
States Patent and Trademark Office (the "PTO") and, to their
knowledge, neither such counsel nor RGene made any
misrepresentation to, or concealed any material fact from, the
PTO during such prosecution.
In giving their opinions required by subsections (b)(iii) of
this Section 8, Morgan & Finnegan, L.L.P. shall additionally state that nothing
has come to their attention that leads them to believe that, with respect to
licenses, patents or other proprietary information or know-how owned or used by
RGene which are the subject of the foregoing opinions, 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 therein not misleading or that the
Prospectus, as of its date (unless the term "Prospectus" refers to a prospectus
which has been provided to the Underwriters by RGene for use in connection with
the offering of the Securities which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective, in which
case at the time it is first provided to the Underwriters for such use) or at
the Closing Date or the Option Closing Date, as the case may be, included or
includes an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
For purposes of the opinion, "RGene" shall mean RGene
Therapeutics, Inc. and its successors and assigns, including through the Merger
of a wholly-owned subsidiary of the Company with and into RGene.
(iv) The favorable opinion, dated as of the Closing
Date, of the firm of Weiser & Associates, patent counsel for the
University of Tennessee Research Corporation ("UTRC") and McMaster
University, Ontario, Canada ("McMaster"), with respect to patent rights
in certain novel cholesterol
41
<PAGE> 42
derivatives (the "DC cholesterol technology"), in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. To the best of its knowledge, the information in
the Prospectus under "Risk Factors--Uncertainty of Patent
Position and Proprietary Rights; Access to Proprietary Genes,"
"Business--Research Collaborations and Licensing Agreements"
and "--Patents and Proprietary Rights," as it relates solely
to UTRC's patent rights (as defined below) in the DC
cholesterol technology, to the extent that it constitutes
matters of law, summaries of legal matters, documents or
proceedings, or legal conclusions, has been reviewed by it and
is correct in all material respects and does not include any
untrue statement of a material fact or omit to state a
material fact with respect thereto or necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading.
With respect to the DC cholesterol technology, the United
States of America has certain rights under the provisions of 35 U.S.C. 200 et
seq., Chapter 18, applicable to patent rights and inventions made with federal
assistance, and with respect to said technology, UTRC owns an undivided one-half
interest (the other undivided one-half interest being owned by McMaster, for
which McMaster, by virtue of an agreement, dated as of May 25, 1992, by and
between UTRC and McMaster, has granted to UTRC a worldwide exclusive right and
license to commercialize the DC cholesterol technology, including the right to
grant exclusive and nonexclusive licenses therefor). The patent rights described
in this paragraph are hereinafter referred to as "UTRC's patent rights."
B. To the best of its knowledge, there are no pending
or threatened legal or governmental proceedings, nor
allegations on the part of any person of infringement,
relating to UTRC's patent rights, and, to
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<PAGE> 43
the best of its knowledge, no such proceedings are threatened
or contemplated.
C. To the best of its knowledge, neither UTRC nor
McMaster is infringing or otherwise violating any patents of
any persons and no such proceedings are threatened by others,
and no person is infringing or otherwise violating any of
UTRC's patent rights in a way which could materially affect
the use thereof by UTRC or McMaster.
D. UTRC (together with McMaster) is listed in the
records of the United States Patent and Trademark Office (the
"PTO") as the assignee of record of the patent related to the
DC cholesterol technology listed on Schedule I to this opinion
(herein called the "UTRC Patent") and each of the applications
related to the DC cholesterol technology listed on Schedule II
to this opinion (herein called the "UTRC Applications"). To
the best of its knowledge, there are no asserted claims of any
persons relating to the scope, except with respect to
assertions thereto submitted by one or more parties with
respect to the European, the Japanese and the Australian
patent applications which circumstances are described in the
Prospectus, or ownership of the UTRC Patent or the UTRC
Applications; there are no liens which have been filed against
the UTRC Patent or the UTRC Applications; there are no
material defects of form in the preparation or filing of the
UTRC Applications; the UTRC Applications are being diligently
prosecuted; and none of the UTRC Applications has been finally
rejected with no right to further prosecute or has been
abandoned. To the best of its knowledge, the UTRC Patent is
entitled to a statutory presumption of validity under 35
U.S.C. 282 or the analogous foreign law and,
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<PAGE> 44
to the best of its knowledge, there is no legal basis to rebut
the statutory presumption of validity of the UTRC Patent.
E. UTRC (together with McMaster) is listed in the
records of the appropriate foreign patent offices as the
assignee of record of each of the foreign applications related
to the DC cholesterol technology listed on Schedule III to
this opinion (herein called the "UTRC Foreign Applications").
To the best of its knowledge, there are no asserted or
unasserted claims of any persons relating to the scope, other
than as described in paragraph D hereinabove, or ownership of
the UTRC Foreign Applications; there are no liens which have
been filed against any of the UTRC Foreign Applications; there
are no material defects of form in the preparation or filing
of the UTRC Foreign Applications; the UTRC Foreign
Applications are being diligently prosecuted; and none of the
UTRC Foreign Applications has been finally rejected without
right to further prosecute or abandoned.
F. Nothing has come to its attention, other than as
described in paragraph D hereinabove, that leads it to believe
that the UTRC Applications and the UTRC Foreign Applications
will not eventuate in issued patents, or that any patents
issued in respect of any such UTRC Applications or UTRC
Foreign Applications will not be valid or will not afford UTRC
and McMaster reasonable patent protection relative to the
subject matter thereof.
G. To the best of its knowledge, all pertinent prior
art references known to UTRC, McMaster or its counsel during
the prosecution of the UTRC Patents and the UTRC Applications
were disclosed to the PTO and
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<PAGE> 45
other relevant patent offices and, to the best of its
knowledge, neither such counsel, UTRC nor McMaster made any
misrepresentation to, or concealed any material fact from, the
PTO during such prosecution and, to the best of its knowledge,
all information submitted to the PTO and such other relevant
patent offices was accurate.
In giving its opinions required by subsections (b)(iv) of this
Section 8, Weiser & Associates shall additionally state that nothing has come to
its attention that leads it to believe that, with respect to UTRC's patent
rights, the UTRC Patents, the UTRC Applications or the UTRC Foreign Applications
owned or used by UTRC and McMaster which are the subject of the foregoing
opinions, 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 therein not
misleading or that the Prospectus, as of its date (unless the term "Prospectus"
refers to a prospectus which has been provided to the Underwriters for use in
connection with the offering of the Securities which differs from the Prospectus
on file at the Commission at the time the Registration Statement becomes
effective, in which case at the time it is first provided to the Underwriters
for such use) or at the Closing Date or the Option Closing Date, as the case may
be, included or includes an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
For purposes of the opinion, "UTRC" shall mean the University
of Tennessee Research Corporation and its successors and assigns and "McMaster"
shall mean McMaster University, Ontario, Canada and its successors and assigns.
(v) The favorable opinion, dated as of the Closing
Date, of the firm of Covington & Burling, regulatory counsel for the
Company, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
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<PAGE> 46
A. The statements in the Registration Statement under
the captions "Risk Factors--Uncertainty of Governmental
Regulatory Requirements; Lengthy Approval Process" and
"Business--Governmental Regulation," to the best of such
counsel's knowledge and belief, are accurate and complete
statements or summaries of the United States Food and Drug
Administration matters therein set forth and nothing has come
to such counsel's attention that causes them to believe that
the above-referenced portions of the Registration Statement
and the Prospectus contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made,
not misleading.
B. Such counsel is not aware of any adverse legal or
governmental proceedings pending relating to products or
potential products of the Company, or any such proceedings
threatened or contemplated by governmental authorities or
others.
(vi) The favorable opinion, dated as of the Closing
Date, of Skadden, Arps, Slate, Meagher & Flom, counsel for the
Underwriters with respect to the issuance and sale of the Securities,
the Registration Statement and the Prospectus and such other related
matters as the Underwriters shall reasonably request.
(vii) In giving their opinions required by
subsections (b)(i) and (b)(vi), respectively, of this Section 8,
Perkins Coie and Skadden, Arps, Slate, Meagher & Flom shall each
additionally state that nothing has come to their attention that leads
them to believe that the Registration Statement (except for financial
statements and other financial information included therein, as to
which counsel
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<PAGE> 47
need make no 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
therein not misleading or that the Prospectus (except for financial
statements and other financial information included therein, as to
which counsel need make no statement), as of its date (unless the term
"Prospectus" refers to a prospectus which has been provided to the
Underwriters by the Company for use in connection with the offering of
the Securities which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective, in
which case at the time it is first provided to the Underwriters for
such use) or at the Closing Date or the Option Closing Date, as the
case may be, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
c. (i) There shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiary considered as one
enterprise, whether or not arising in the ordinary course of business, (ii) the
representations and warranties of the Company in Section 6 hereof shall be true
and correct with the same force and effect as though expressly made at and as of
the Closing Date, except to the extent that any such representation or warranty
relates to a specific date, (iii) the Company shall have complied in all
material respects with all agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Closing Date, (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been initiated or threatened by the
Commission and (v)
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<PAGE> 48
the Representatives shall have received a certificate, dated the Closing Date
and signed by the President or any Vice President and the chief financial or
accounting officer of the Company to the effect set forth in clauses (i), (ii),
(iii) and (iv) above.
d. At the time of the execution of this Agreement,
the Underwriters shall have received from Ernst & Young LLP a letter dated such
date, in form and substance satisfactory to the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
e. At the time of the execution of this Agreement,
the Underwriters shall have received from Arthur Andersen LLP a letter dated
such date, in form and substance satisfactory to the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
f. The Underwriters shall have received from Ernst
& Young LLP a letter, dated as of the Closing Date, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection (d)
of this Section, except that the specified date referred to shall be a date not
more than three business days prior to the Closing Date.
g. The Underwriters shall have received from Arthur
Andersen LLP a letter, dated as of the Closing Date, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection (e)
of this Section, except that the specified date referred to shall be a date not
more than three business days prior to the Closing Date.
h. The Securities shall have been approved for
quotation on NASDAQ.
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<PAGE> 49
i. In the event that the Underwriters exercise
their option provided in Section 2 hereof to purchase all or any portion of the
Option Securities, the representations and warranties of the Company contained
herein and the statements in any certificates furnished by the Company hereunder
shall be true and correct as of the Option Closing Date and, at the relevant
Option Closing Date, the Underwriters shall have received:
(1) A certificate, dated such Option
Closing Date, of the President or any Vice President of the Company and
of the chief financial or accounting officer of the Company confirming
that the certificate delivered at the Closing Date pursuant to Section
8 (c) hereof remains true and correct as of such Option Closing Date.
(2) The favorable opinion of
Perkins Coie, in form and substance satisfactory to counsel for the
Underwriters, dated such Option Closing Date, relating to the Option
Securities to be purchased on such Option Closing Date and otherwise to
the same effect as the opinion required by Sections 8 (b)(i) and 8
(b)(vii) hereof.
(3) The favorable opinion of
Morrison & Foerster, LLP, in form and substance satisfactory to counsel
for the Underwriters, dated such Option Closing Date to the same effect
as the opinion required by Section 8(b)(ii) hereof.
(4) The favorable opinion of Morgan
& Finnegan, L.L.P., in form and substance satisfactory to counsel for
the Underwriters, dated such Option Closing Date, to the same effect as
the opinion required by Section (b)(iii) hereof.
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<PAGE> 50
(5) The favorable opinion of Weiser
& Associates, in form and substance satisfactory to counsel for the
Underwriters, dated such Option Closing Date, to the same effect as the
opinion required by Section (b)(iv) hereof.
(6) The favorable opinion of
Covington & Burling, in form and substance satisfactory to counsel for
the Underwriters, dated such Option Closing Date, to the same effect as
the opinion required by Section (b)(v) hereof.
(7) The favorable opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters,
dated such Option Closing Date, relating to the Option Securities to be
purchased on such Option Closing Date and otherwise to the same effect
as the opinion required by Sections 8 (b)(vi) and 8 (b)(vii) hereof.
(8) A letter from Ernst & Young LLP
in form and substance satisfactory to the Underwriters and dated such
Option Closing Date, substantially the same in form and substance as
the letter furnished to the Underwriters pursuant to Section 8(f)
hereof, except that the "specified date" in the letter furnished
pursuant to this Section 8(i)(8) shall be a date not more than three
business days prior to such Option Closing Date.
(9) A letter from Arthur Andersen
LLP in form and substance satisfactory to the Underwriters and dated
such Option Closing Date, substantially the same in form and substance
as the letter furnished to the Underwriters pursuant to Section 8(g)
hereof, except that the "specified date" in the letter furnished
pursuant to this Section 8(i)(9) shall be a date not more than three
business days prior to such Option Closing Date.
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<PAGE> 51
j. At the date of this Agreement, the Underwriters
shall have received lock-up agreements in form and substance satisfactory to the
Underwriters by the persons listed on Schedule B hereto.
k. Counsel for the Underwriters shall have been
furnished with such documents and opinions as they may require for the purpose
of enabling them to pass upon the issuance and sale of the Securities as herein
contemplated and related proceedings, or in order to evidence the accuracy of
any of the representations or warranties or the fulfillment of any of the
conditions herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein contemplated
shall be satisfactory in form and substance to the Underwriters and counsel for
the Underwriters.
l. The NASD shall not have raised any objection
with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
m. Any certificate or document signed by any
officer of the Company and delivered to you, as Representatives of the
Underwriters, or to counsel for the Underwriters, shall be deemed a
representation and warranty by the Company to each Underwriter as to the
statements made therein.
n. If any condition specified in this Section 8
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on an Option Closing Date which is after the Closing Date, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Date or such an Option Closing Date as the case
may be, and such termination shall be without liability of any party to any
other party except as provided in Section 9 and except that Sections 6 and 7
shall survive any such termination and remain in full force and effect.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the prepara-
51
<PAGE> 52
tion, printing or reproduction, and filing with the Commission of the
Registration Statement (including financial statements and exhibits thereto),
each preliminary prospectus, the Prospectus, and each amendment or supplement to
any of them; (ii) the printing (or reproduction) and delivery (including
postage, air freight and charges for counting and packaging) of such copies of
the Registration Statement, each preliminary prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Securities; (iii) the
preparation, printing, authentication, issuance and delivery of certificates for
the Securities, including any stamp taxes in connection with the original
issuance and sale of the Securities; (iv) the printing (or reproduction) and
delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda
and all other agreements or documents printed (or reproduced) and delivered in
connection with the original issuance and sale of the Securities; (v) the
quotation of the Securities on NASDAQ; (vi) the registration or qualification of
the Securities for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the reasonable fees and expenses of counsel for the
Underwriters incident to securing any required review by the NASD; and (viii)
the fees and expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company.
If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or pursuant to clauses (ii), (iii), (iv) and (v)
of Section 11 hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company to
comply, in any material respect, with the terms or fulfill, in any material
respect, any of the conditions of this Agreement, the Company agrees to
reimburse the Representatives for all reasonable out-of-pocket expenses
(including reasonable fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
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<PAGE> 53
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by or on behalf of the
parties hereto; or (ii) if, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Securities
may commence, when notification of the effectiveness of the Registration
Statement or such post-effective amendment has been released by the Commission.
Until such time as this Agreement shall have become effective, it may be
terminated by the Company, by notifying you, or by you, as Representatives of
the several Underwriters, by notifying the Company.
If one or more of the Underwriters shall fail on the Closing
Date to purchase the Initial Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
a. if the number of Defaulted Securities does not
exceed 10% of the number of Initial Securities, the non-defaulting Underwriters
shall be obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
b. if the number of Defaulted Securities exceeds
10% of the number of Initial Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
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<PAGE> 54
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Company shall
have the right to postpone the Closing Date for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
Any notice under this Section 10 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. a. The Underwriters may
terminate this Agreement, by notice to the Company, at any time at or prior to
the Closing Date or Option Closing Date, as the case may be, (i) if there has
been, since the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any material adverse change
or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its Subsidiary considered as
one enterprise, whether or not arising in the ordinary course of business, (ii)
if there has occurred any change in the financial markets in the United States
or elsewhere or any outbreak of hostilities or escalation thereof or other
calamity or crisis the effect of which is such as to make it, in your judgement,
impracticable or inadvisable to market the Securities or to enforce contracts
for the sale of the Securities, (iii) if trading in the Common Stock has been
suspended by the Commission, or if trading generally on the American Stock
Exchange, the New York Stock Exchange or in the over-the-counter markets has
been suspended, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices for securities have been required, by such exchange or
markets or by order of the Commission or any other governmental authority, or if
a banking moratorium has been declared by either Federal, New York or Illinois
authorities, (iv) the enactment, publication, decree or other promulgation of
any Federal or state statute, regulation, rule or order of any court or other
governmental authority which in your judgement materially and adversely affects
or may materially or adversely affect the business or operations of the Company
and its Subsidiary or (v) the taking of any action by any Federal, state or
local
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<PAGE> 55
government or agency in respect of its monetary or fiscal affairs which in your
judgement has a material adverse effect on the securities markets in the United
States, and would in your judgement make it impracticable or inadvisable to
market the Securities or to enforce any contract for the sale thereof. Notice of
such termination may be given by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
b. If this Agreement is terminated pursuant to this
Section 11, such termination shall be without liability of any party to any
other party except as provided in Section 9 and provided further that Sections 6
and 7 shall survive such termination and remain in full force and effect.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements
set forth in the last paragraph on the cover page, the stabilization legend on
the inside front cover page, and the statements under the caption "Underwriting"
in any preliminary prospectus and in the Prospectus constitute the only
information furnished by or on behalf of the Underwriters through you as such
information is referred to in Sections 5(a) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5,
10 and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company at the office of the
Company, at 1100 Olive Way, Suite 100, Seattle, Washington 98101, Attention: H.
Stewart Parker, President and Chief Executive Officer; or (ii) if to you, as
Representatives of the several Underwriters, care of Vector Securities
International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield, Illinois 60015,
Attention: Syndicate Department.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
applicable to contracts made and to be performed within the State of Illinois.
This Agreement may be signed in various counterparts which together constitute
one and the same instrument. If signed in counterparts, this Agreement shall not
become effective unless at least one counterpart hereof shall have been executed
and delivered on behalf of each party hereto.
15. SUCCESSORS. This Agreement has been and is made solely for
the benefit of the several Underwriters, the Company,
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<PAGE> 56
its directors and officers, the other persons referred to in Section 7 hereof
and their respective successors and assigns, to the extent provided herein, and
no other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns" as
used in this Agreement shall include a purchaser from any Underwriter of any of
the Securities in his status as such purchaser.
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<PAGE> 57
Please confirm that the foregoing correctly sets forth the
agreement among the Company and the several Underwriters.
Very truly yours,
TARGETED GENETICS CORPORATION
By:_____________________________
President and Chief
Executive Officer
Confirmed as of the date first above mentioned on behalf of themselves and the
other several Underwriters named in Schedule I hereto.
VECTOR SECURITIES INTERNATIONAL, INC.
GENESIS MERCHANT GROUP SECURITIES
As Representatives of the Several Underwriters
By VECTOR SECURITIES INTERNATIONAL, INC.
By:________________________________
Vice President
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SCHEDULE I
TARGETED GENETICS CORPORATION
Number of Initial
Securities Purchased
Underwriter from the Company
- ----------- ----------------
Vector Securities
International, Inc................................
Genesis Merchant
Group Securities..................................
Total
----------------
58
<PAGE> 1
Exhibit 21.1
Subsidiaries
RGene Therapeutics, Inc., a Delaware Corporation
