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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1998 0-23930
TARGETED GENETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1549568
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1100 OLIVE WAY, SUITE 100
SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 623-7612
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
WARRANTS FOR THE PURCHASE OF SHARES OF COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS, $.01 PAR VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Indicate the aggregate market value of voting stock held by nonaffiliates of
the Registrant as of March 5, 1999: $49,163,309.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 5, 1999:
TITLE OF CLASS NUMBER OF SHARES
-------------- ----------------
Common Stock, $.01 par value 30,664,077
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on May 5, 1999, are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
Forward-Looking Statements
Certain statements contained in the following description of the business of
Targeted Genetics Corporation and elsewhere in this Form 10-K are "forward-
looking statements" as defined by the Private Securities Litigation Reform Act
of 1995. These forward-looking statements could be impacted by known and
unknown risks, uncertainties and other factors. As a result, our company's
actual results, performance or achievements, or industry results, could be
significantly different from those described or implied by these forward-
looking statements. Potential risks for our company include, among other
things: technological uncertainty; unsuccessful clinical trials; inability to
obtain adequate financing in the future; uncertainty regarding patents and
proprietary rights; failure to comply with governmental regulations;
competition; rapid technological change; unavailability of key personnel and
scientific collaborators; inability to manufacture and market products; and
dependence on corporate collaborators. A more detailed description of these
factors can be found in the section entitled "Factors Affecting Operating
Results" contained in Part II, Item 7 of this Form 10-K.
Overview
Targeted Genetics Corporation is focused on the development of gene and cell
therapies for the treatment of acquired and inherited diseases. We have
assembled a broad base of core technologies that we believe will allow us to
address a significant number of these diseases. Our technologies include
proprietary viral and non-viral gene delivery systems and novel techniques for
cytotoxic T lymphocyte (CTL) immunotherapy. We are using this core technology
platform to develop potential products to treat various genetic disorders,
cancers and infectious diseases.
In the area of gene therapy, we believe that different disease targets will
require different methods of gene delivery. The best gene delivery method for
a particular disease will depend on the type of cell to be modified, the
duration of gene expression desired and the need for in vivo (inside the body)
or ex vivo (outside the body) delivery. Accordingly, our strategy has been to
develop multiple gene delivery systems. Our systems are based on three
different vector technologies: adeno-associated viral (AAV), non-viral and
retroviral. We believe these systems may give us the flexibility to develop
gene therapies for a broader range of diseases than we could develop using a
single gene delivery system.
In the area of cell therapy, we have patents and expertise that we believe
give us significant capabilities for using CTLs therapeutically. Our expertise
enables us to isolate potent disease-specific CTLs from small samples of
patient blood and to efficiently multiply them to large numbers for reinfusion
to the patient. We call these manufactured disease-fighting cells Targeted
CTLs. We believe that this technology and expertise could support development
of a series of immunotherapies to treat infectious diseases and cancer.
Targeted CTLs are manufactured with our proprietary Rapid Expansion Method
(REM) technology, for which we received our first patent in 1998. Using REM,
we can grow billions of CTLs from individual cloned cells over several weeks,
while preserving the cells' specific disease-fighting capabilities.
Our company is currently focusing on two particular product development
opportunities in the areas of cystic fibrosis and cancer. We believe that
these opportunities may lead to important therapeutic products to address
unmet medical needs. Additionally, we see these products as important
demonstrations of the potential of our core technologies in the areas of AAV
and non-viral gene delivery vectors. Although we are optimistic about the
long-term prospects for all of our technologies, we have limited our near-term
product development efforts to these two areas in order to conserve our
financial resources.
In our cystic fibrosis program, we have completed a series of Phase I/II
clinical trials in order to assess the safety of our potential product, called
tgAAV-CF, and to observe the effect of the product on certain biological
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measurements. We have now entered Phase I clinical trials in which the product
is being delivered to patients' lungs in an aerosolized form. This is the form
that would ultimately be marketed, assuming our clinical trials prove
successful. In late 1998, we entered into a worldwide collaborative
relationship with Medeva PLC for the development of tgAAV-CF. We believe that
this partnership with Medeva greatly enhances our cystic fibrosis program and
the probability of our ultimate success.
In our cancer program, we have completed Phase I clinical trials with our
product, called tgDCC-E1A, and shown what we believe are promising early
results. These studies tested the product when directly injected into tumors
and when delivered regionally to tumor sites. We have now entered Phase II
clinical trials in which the product is being directly injected into head and
neck tumors. In 1999, we expect to begin tests of tgDCC-E1A in combination
with chemotherapeutic agents, initially delivered to the intraperitoneal
cavity for the treatment of ovarian cancer.
In addition to our cystic fibrosis and cancer programs, we are performing
preclinical research, both internally and through outside collaborators,
oriented toward identifying promising new applications of our technology base.
We hope to use data from these various experiments to generate additional
product development collaborations with pharmaceutical companies or larger
biotechnology companies.
Product Development Programs
tgAAV-CF
Cystic fibrosis is the most common single-gene deficiency affecting the
Caucasian population, afflicting approximately 24,000 people in the United
States and 60,000 people worldwide. The disease is caused by a dysfunctional
cystic fibrosis transmembrane regulator (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.
Considering our preclinical findings, we believe that tgAAV-CF may be
superior to other gene therapy approaches for the treatment of cystic fibrosis
due to its duration of effect and lack of toxicity. In preclinical studies in
rabbits, we were able to detect expression of the CFTR gene in the lung for
periods of up to six months with no observed side effects. These results were
supported in similar studies in rhesus monkeys, in which gene transfer
occurred in up to 50% of target airway cells and gene expression persisted for
up to six months. Based on these preclinical data, we began two clinical
trials in late 1995 to evaluate the safety and feasibility of using tgAAV-CF
as a treatment for cystic fibrosis lung disease. tgAAV-CF has been granted
orphan drug status by the United States Food and Drug Administration (FDA).
The first clinical trial, which began in November 1995, was a Phase I
clinical trial at Johns Hopkins University and the University of Florida in
which tgAAV-CF was administered to eight cohorts of adult cystic fibrosis
patients at escalating dose levels. A liquid form of tgAAV-CF was administered
in an open-label single dose to the right lower lobe of the lung via
bronchoscopy and to one nostril of each patient. A total of 18 patients were
treated and the product was shown to be safe with no apparent side effects.
A second clinical trial began in December 1995 at Stanford University. This
trial was designed as a Phase I/II trial, in which tgAAV-CF was administered
to the maxillary sinuses of cystic fibrosis patients with chronic sinusitis.
The Phase I part of this trial, designed as a dose escalation study, was
completed in 1996. A total of ten patients were enrolled, and 15 sinuses were
treated, in five cohorts receiving escalating doses. The results of the trial
indicated that tgAAV-CF was safe and well tolerated with no resulting
inflammatory response or other side effects, even after repeat delivery.
Furthermore, administration of tgAAV-CF resulted in consistent gene transfer
and, in the only patient measured at such timepoint, persistence of the gene
for at least 70 days after treatment. Additionally, the dose level was
established for the Phase II part of the trial, in which 23 patients received
tgAAV-CF in one sinus and a placebo in the other. Patients in the Phase II
trial were monitored to assess the ability of tgAAV-CF to prevent the relapse
of chronic sinusitis. The Phase II part of the trial was
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completed in mid-1998. Preliminary results of the trial, presented in October
1998 at the North American Cystic Fibrosis Conference, showed that the drug
was safe. We expect to complete the analysis of all data from the trial in
early 1999.
In December 1998, we began a Phase I clinical trial to test the safety of
aerosol delivery of tgAAV-CF to the whole lungs of CF patients. Current plans
for the study call for nine patients to be treated, three at each of three
escalating dose levels. Additional patients may be added to the study
depending on the results observed in these nine patients. The clinical trial
will be conducted at three sites: Stanford University, the University of
Washington, and Harvard University.
In November 1998, we entered into a license and collaboration agreement with
Medeva Pharmaceuticals, Inc., a subsidiary of Medeva PLC (Medeva), related to
tgAAV-CF, our cystic fibrosis product candidate. Under this agreement, Medeva
received exclusive worldwide rights to develop and commercialize tgAAV-CF. A
detailed description of this relationship can be found in the section of this
Item 1 entitled Research and Development Collaborations.
tgDCC-E1A
Cancer is the second leading cause of death in the United States, with over
one million new cases diagnosed each year. Cancer arises when the genetic
pathways that control normal cell growth and division are disrupted. 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.
Our product candidate for the treatment of cancer uses our proprietary non-
viral delivery system, called DC-Chol, to deliver in vivo the E1A gene to
cancer cells. We call this product tgDCC-E1A. E1A is a gene from the
adenovirus type 5, a common cold virus. Dr. Mien Chie Hung and his colleagues
at University of Texas M.D. Anderson Cancer Center (M.D. Anderson) have shown
that E1A can function as a suppressor of the HER-2/neu oncogene, which is
known to be overexpressed in certain cancers. In preclinical mouse studies,
E1A was shown to inhibit expression of the HER-2/neu oncogene, to inhibit
growth and metastasis of cancer cells, and to increase significantly the long-
term survival of the mice. Our company has worldwide rights to the use of the
E1A gene as a tumor suppressor under patents filed by Dr. Hung.
Other research, conducted by Dr. Steven Frisch and his colleagues at The
Burnham Institute, has suggested that E1A may have other anti-tumor effects
unrelated to the inhibition of HER-2/neu expression. Preclinical in vitro
experiments have shown that E1A, when introduced to a variety of tumor cells,
can alter tumor cells such that they appear to have characteristics of normal
cells. Furthermore, in vivo mouse studies involving tumor cells not
overexpressing HER-2/neu showed reduced tumor growth rates with the
administration of E1A versus the same tumor cells without E1A. E1A was also
shown in preclinical studies to sensitize tumor cells to killing by certain
chemotherapeutic agents. Our company has worldwide rights to patents filed by
Dr. Frisch that are complementary to those filed by Dr. Hung.
The first Phase I clinical trial of tgDCC-E1A began in 1996 at M.D.
Anderson, Rush Presbyterian Medical Center in Chicago (Rush) and Virginia
Mason Medical Center in Seattle. In this clinical trial, patients with ovarian
or breast cancer received weekly doses of tgDCC-E1A for up to six months. The
trial was conducted as an interpatient escalating dose study with doses of
tgDCC-E1A delivered into the peritoneal cavity of the ovarian cancer patients
and into the pleural cavity of the breast cancer patients. The objectives of
the trial were to assess safety, levels of gene transfer and expression and
tumor response. A total of 18 patients were treated through the trial's
completion in early 1998. The results showed that the drug was safe, and that
the E1A gene was present and active in tumor cells. Additionally, in certain
patients, decreased levels of HER-2/neu expression and decreased numbers of
tumor cells were observed.
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A second Phase I clinical trial began in early 1997 at M.D. Anderson, Rush,
and Wayne State University in Detroit. In this clinical trial, patients with
inoperable primary head or neck tumors or metastatic breast or lung tumors
were administered up to ten weekly doses of tgDCC-E1A, injected directly into
the tumor. The trial was conducted as an interpatient escalating dose study
with four dose levels. The objectives of the trial were to assess safety,
levels of gene transfer and expression and tumor response. A total of 18
patients were treated through the trial's completion in early 1998. The
results showed that the drug was safe, and that the E1A gene was present and
active in tumor cells. Additionally, in a majority of the patients, tumor
growth was inhibited.
Based on the data obtained from the two Phase I clinical trials described
above, we began a Phase II clinical trial of tgDCC-E1A in head and neck cancer
in October 1998. The trial is being conducted at six cancer centers and a
total of 20 patients will be treated. The trial is designed to provide further
evaluation of product safety and tumor response.
In 1996, we entered into a license, research and marketing agreement with
Laboratoires Fournier S.C.A. (Fournier) under which Fournier received
exclusive rights to develop and commercialize tgDCC-E1A in Europe. Currently,
Fournier is conducting a Phase I clinical trial in ovarian cancer patients at
five hospitals in the United Kingdom. A detailed description of this
relationship can be found in the section of this Item 1 entitled "Research and
Development Collaborations."
Core Technologies
Our company has assembled a broad range of core technologies that we believe
will allow us to address a number of different diseases. In the area of gene
therapy, we believe that different disease targets will require different
methods of gene delivery. The best gene delivery method for a particular
disease will depend on the type of cell to be modified, the duration of gene
expression desired and the need for in vivo (inside the body) or ex vivo
(outside the body) delivery. Accordingly, our strategy has been to develop
multiple gene delivery systems. Our systems are based on three different
vector technologies: adeno-associated viral (AAV), non-viral and retroviral.
We believe these systems may give us the flexibility to develop gene therapies
for a broader range of diseases than we could develop using a single gene
delivery system.
In the area of cell therapy, we believe that our technology and expertise in
isolating and multiplying CTLs could support development of a series of
immunotherapies to treat infectious diseases and cancer.
Gene Therapy
Overview. Gene therapy is an approach to the treatment and prevention of
genetic and acquired diseases that involves inserting 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 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 has been 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
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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 cells 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
involves 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. Together with our scientific collaborators, we have developed
significant expertise in the design and use of AAV vectors in gene therapy. We
believe that AAV vectors are particularly well suited for the treatment of a
number of diseases because:
. AAV has never been associated with causing any human disease;
. AAV vectors contain no viral genes that, if present, might produce
unwanted immune responses leading to side effects or reduced efficacy;
. AAV vectors can introduce genes into nondividing or slowly dividing
cells, such as cells lining the airway of the lung;
. AAV vectors may persist in the host cell to provide relatively long-term
expression; and
. AAV vectors can be purified and concentrated, allowing for more
efficient manufacturing.
We are building a proprietary position in AAV through the development of or
acquisition of exclusive rights to inventions that:
. provide important enhancements to AAV vectors;
. demonstrate novel approaches to the use of AAV vectors for gene therapy;
and
. establish new and improved methods for large-scale production of AAV
vectors.
In addition to our tgAAV-CF development program, which is focused on
delivery to lung cells, we are conducting research to assess the potential for
delivery of genes to other target cells using AAV vectors. Currently, we have
ongoing efforts to evaluate the use of AAV vectors in cells of the
cardiovascular system, joints and the liver. As resources are available to do
so, we intend to examine, both internally and through academic collaborators,
the use of AAV vectors in additional cell types.
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Non-Viral Vectors. Our company has exclusive rights to a significant body of
non-viral gene delivery technology based on cationic lipids. These non-viral
vectors are formulated by mixing negatively charged DNA with positively
charged cationic lipids, which promote uptake by cells. These vectors appear
to be safe and they can be used in vivo as well as ex vivo. We believe that
non-viral vectors have several characteristics that make them particularly
well suited for the treatment of certain diseases, including:
. the ability to target a specific cell type;
. relative ease of manufacture; and
. the ability to transfer relatively large segments of DNA.
We are working in collaboration with Dr. Leaf Huang of the University of
Pittsburgh to develop a series of non-viral delivery systems based on his
discoveries. Dr. Huang's original DC-Chol system, is used in our tgDCC-E1A
cancer product. We have an exclusive license to an issued U.S. patent on DC-
Chol for the treatment of cancer and certain other diseases. Also, we have
obtained broad licenses to a series of Dr. Huang's more recent discoveries in
this area from the University of Pittsburgh. In one of these discoveries, DNA
is condensed into particles of defined size that have significantly enhanced
gene transfer efficiency. Another includes specific ligands to enhance
delivery to specific target cells and to increase stability when delivered
intravenously. We believe that these improved non-viral vector systems may
have significant long-term value.
Retroviral Vectors. We believe that retroviral vectors are well suited for
ex vivo genetic modification of rapidly dividing cells, such as T cells and
stem cells. Our company 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 inventions in this area is an improved retroviral
vector packaging cell line called PG13, which the Company has licensed
exclusively from the Fred Hutchinson Center Research Center (Hutchinson
Center). Vectors produced in this cell line have been shown to have improved
efficiency for ex vivo transfer of genes to human T cells and stem cells.
Cell Therapy
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 infectious diseases 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.
Targeted CTLs. 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
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antigen-specific CTLs. In our Targeted CTL program, antigen-specific CTLs are
isolated from a small sample of the patient's blood, multiplied to large
numbers ex vivo and then reinfused into the patient. In essence, these
Targeted CTLs are intended to amplify the natural disease-fighting function of
the immune system relating to specific infected or cancerous cells.
We believe that our Targeted CTL program represents an improvement over
other approaches to immunotherapy because:
. it is based on highly potent, cloned, antigen-specific CTLs;
. virtually all of the reinfused CTLs target the specific diseased cells;
and
. side effects may be reduced due to the uniformity and consistency of the
reinfused cells.
Our focus on Targeted CTLs originated from research conducted by
collaborators at the Hutchinson Center, Drs. Philip Greenberg and Stanley
Riddell. These researchers conducted a Phase I clinical trial to evaluate the
use of cytomegalovirus (CMV) -specific CTLs to provide an immune response
against CMV in bone marrow transplant patients. This trial represented the
first time that cloned, antigen-specific CTLs had been used. None of the 14
patients receiving the CTLs developed CMV viremia or disease. Dr. Riddell is
now conducting a Phase II clinical trial following up on the promising results
observed in Phase I. Other work by Drs. Greenberg and Riddell has shown that
Targeted CTLs may be useful in treating HIV infection.
During 1998, we completed a preclinical study in which chimpanzees
chronically infected with hepatitis B virus (HBV) were administered Targeted
CTLs. The objective of the study was to establish safety of the therapy and,
potentially, obtain proof of concept that HBV-specific Targeted CTLs may be
promising as a treatment for humans infected with HBV. The preliminary results
of the study, presented in August 1998, showed that the therapy was safe and
that there were trends toward efficacy, evidenced by a temporary drop in viral
burden, increased levels of liver enzymes, and improvement in liver condition.
This study has given us additional reasons to believe that Targeted CTLs have
potential to treat viral diseases.
Rapid Expansion Method. The Targeted CTL program is made possible by our
proprietary rapid expansion method, or REM, which is used to rapidly grow CTLs
prior to infusion into the patient. REM represents a significant improvement
over other methods of growing T cell clones. Using REM, CTL clones can be
multiplied over a thousandfold in less than two weeks. We can grow billions of
CTLs from individual cloned cells over several weeks, while preserving the
cells' disease-fighting capabilities in vitro. We have seen consistent results
from REM both with CD8 and CD4 T cells. Furthermore, we have shown that REM is
effective for growing Targeted CTLs for a number of viral diseases and
cancers, such as HIV, CMV, HBV, malignant melanoma and prostate tumor
peptides. We have filed patent applications, on a worldwide basis, relating to
the original REM process and to subsequent process improvements. The first of
these patents issued in 1998.
RESEARCH AND DEVELOPMENT COLLABORATIONS
Medeva PLC
In November 1998, we entered into agreements with Medeva to develop and
commercialize tgAAV-CF, our potential gene therapy product for the treatment
of cystic fibrosis. tgAAV-CF uses our proprietary AAV technology to deliver a
normal copy of the CFTR gene to patients with cystic fibrosis. Medeva
committed to provide up to three years of funding (up to $5 million per year)
to support tgAAV-CF development and commercialization activities including:
scale up and validation of manufacturing processes; development and validation
of analytical methods; conduct of certain Phase I clinical trials including
trials of our aerosolized version of our tgAAV-CF product; and other
activities in support of product testing and commercialization. In addition to
development and clinical support, Medeva has agreed to pay the costs of Phase
II and subsequent clinical trials of the potential product. While we may
manage Phase II clinical trials in the United States, Medeva will be
responsible for all other trials and worldwide registration of tgAAV-CF.
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Under the terms of the tgAAV-CF agreement, we granted Medeva an exclusive
worldwide license to sell tgAAV-CF products developed in this collaboration
and we assumed responsibility for manufacturing and supplying bulk tgAAV-CF
product to support clinical trials and product commercialization. Medeva
agreed to loan us $2 million in 1999 to partially fund the construction of a
pilot scale tgAAV-CF manufacturing facility. Under certain conditions Medeva
will loan us up to an additional $10 million toward building a GMP
manufacturing facility for higher volume production of tgAAV-CF.
Assuming successful commercialization of the tgAAV-CF product, we could
receive a total of up to $54 million in license fees, development funding,
milestone payments, loans and equity investments connected to the Medeva
tgAAV-CF agreements. We will also receive proceeds from sales of our tgAAV-CF
product (if any) under a pricing formula intended to provide us with a fixed
percentage of Medeva's net product sales. The research and development funding
agreement is effective to October 1, 2001 with options to extend the term if
both parties agree. The long-term supply agreement is effective for the term
of the patents covering the Company's tgAAV-CF technology. After November 23,
1999, Medeva may terminate our tgAAV-CF agreements at will with 180 days
advance notice. Should Medeva exercise this right to terminate any of the
tgAAV-CF agreements all rights related to tgAAV-CF technology would return to
us.
Laboratoires Fournier S.C.A.
In May 1996, we entered into a license, research and marketing agreement
under which Fournier received exclusive European rights to develop and
commercialize tgDCC-E1A and any other product candidates based on the E1A
tumor suppressor gene developed under the agreement. Fournier agreed to pursue
development of tgDCC-E1A in Europe, including conducting all clinical trials,
preparing and filing submissions for regulatory approval, and paying all
associated costs. We maintained responsibilities for development and
commercialization of tgDCC-E1A in the United States and elsewhere.
Fournier has paid us a $5 million upfront license fee and $2.5 million of
milestone payments through the end of 1998. Our agreement provides that
Fournier will make additional milestone payments upon the achievement of
specified goals by Fournier or Targeted Genetics and royalties on sales of
resulting products, if any. In addition, if we are able to negotiate a
mutually acceptable supply agreement, we will be entitled to manufacture
products for Fournier in return for manufacturing fees. Under the agreement,
we will indemnify Fournier with respect to any claims incurred as a result of
the manufacture, supply or sale of tgDCC-E1A. The agreement may be terminated
if the parties mutually agree that the results of the collaboration are
unsatisfactory.
Relationship With Immunex Corporation
Targeted Genetics was formed in 1989 as a subsidiary of Immunex Corporation
(Immunex), a biopharmaceutical company developing immunoregulatory proteins as
therapeutics. In February 1992, Targeted Genetics and Immunex entered into a
technology license agreement. In exchange for shares of preferred stock, which
were converted into 1,920,000 shares of common stock at the time of our
initial public offering, Immunex granted a worldwide, exclusive field of use
license to Targeted Genetics for certain Immunex proprietary technology
specifically applicable to our gene therapy business. The technology
transferred to Targeted Genetics relates to gene identification and cloning,
panels of retroviral vectors, packaging cell technology, recombinant
cytokines, DNA constructs, cell lines, promoter/enhancer elements and
immunological assays. In addition, until February 1999, the agreement required
Immunex to disclose information concerning improvements, such as new
techniques, biological materials, inventions, or developments, discovered or
developed by Immunex relating to the transferred technology. We have the
option to acquire a nonexclusive, worldwide, fully paid royalty-free license
(and in certain cases an opportunity to negotiate the conversion of a
nonexclusive license into an exclusive license) for the transferred technology
and related improvements. As part of this agreement, we granted to Immunex a
right of first offer and a 30-day right of first refusal on technology that we
intend to out-license that is based on Immunex technology. We may accept or
reject any offers made by Immunex under such rights. Immunex currently owns
approximately 9% of our company's outstanding common stock.
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<PAGE>
Patents and Proprietary Rights
Patents and licenses are important to our business. Our policy is to file
patent applications to protect technology, inventions and improvements to
inventions that are considered important to the development of its business.
We also rely on trade secrets, knowhow, continuing technological innovations
and licensing opportunities to develop and maintain our competitive position.
To date, we have filed or exclusively licensed 56 patent applications relating
to our product and technology development programs with the United States
Patent and Trademark Office (USPTO), as well as foreign counterparts of
certain of these applications in Europe, Japan and certain other countries. Of
these patent applications, 21 patents have been issued or allowed by the
USPTO.
In addition to the intellectual property that we own or have exclusively
licensed, we have licensed several issued and pending patents that relate to
our 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, we
have acquired nonexclusive rights to the cystic fibrosis gene being delivered
in an AAV vector.
The patent positions of pharmaceutical and biotechnology firms, including
our patent positions, 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, we do 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, we cannot be certain that we 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, we are currently indirectly
involved in a patent interference proceeding declared by the USPTO to
determine priority of invention relating to the non-exclusively licensed CFTR
gene delivered in our potential tgAAV-CF gene therapy product. As a non-
exclusive licensee of the CFTR gene technology we do not expect to directly
participate in the CFTR gene interference proceedings. If the eventual outcome
of the CFTR interference proceeding is unfavorable to our licensor, we may
have to secure a technology licensing arrangement from the prevailing party in
order to proceed with commercializing our potential product. Costs associated
with securing a licensing arrangement may be substantial and could include
ongoing royalties in excess of those currently payable pursuant to our
existing CFTR gene license. There can be no assurance that any license
required in such a circumstance would be made available to us on acceptable
terms, if at all. Although we do not anticipate that material expenditures
will be made in connection with these proceedings, participation could result
in substantial cost to us, even if the eventual outcome were favorable to us.
There can be no assurance that our 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 us, may be necessary to enforce our patents or to determine the scope
and validity of other parties' proprietary rights. If the outcome of any such
litigation were adverse, our business could be adversely affected. We are
unable to predict how courts will resolve any future issues relating to the
validity and scope of our 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 our
business. Some of these technologies, applications or patents may conflict
with our technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that we may be able to obtain or result in
denial of our patent applications. In addition, if patents that cover our
activities are issued to other companies, there can be no assurance that we
would be able to develop or obtain alternative technology.
Furthermore, as the biotechnology industry expands and more patents are
issued, the risk increases that our processes and potential products may give
rise to claims that they infringe the patents of others. Such other
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<PAGE>
persons could bring legal actions against us 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 us, to protect trade secrets or know how owned by us or to determine
the enforceability, scope and validity of proprietary rights of others. If we
become involved in such litigation, it could result in substantial expense to
us and significant diversion of effort by our technical and management
personnel. If there were an adverse outcome of any such litigation, our
business could be adversely affected. In addition to any potential liability
for significant damages, we 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 us on acceptable terms, if at
all.
In addition to patent protection, we rely upon trade secret protection for
our 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 our trade secrets or
disclose such technology. To protect its trade secrets, we require our
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 our company.
In the case of employees, the agreements also provide that all inventions
resulting from work performed by them while in the employ of Targeted Genetics
will be our exclusive property. There can be no assurance, however, that these
agreements will provide meaningful protection of our trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such information.
Competition
We are 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, our 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
our 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 our resources and experiences in these areas. 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. Our competitors may succeed
in developing, obtaining patent protection for, receiving FDA and other
regulatory approvals for, or commercializing products more rapidly than our
efforts in these areas. If we are successful in commercializing our products,
we will be required to compete with respect to manufacturing efficiency and
marketing capabilities, areas in which we have no experience. We also compete
with others in acquiring products or technology from research institutions or
universities. Our competitors may develop new technologies and products that
are available for sale prior to our potential products or that are more
effective than our potential products. In addition, competitive products may
be manufactured and marketed more successfully than our potential products.
Such developments could render our potential products less competitive or
obsolete, and could have a material adverse effect on our business.
Governmental Regulation
All of our 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 our potential products. Similar requirements are imposed by
foreign regulators. In some cases, state requirements also apply.
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<PAGE>
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.
We may encounter difficulties or unanticipated costs in our efforts to secure
necessary governmental approvals, which could delay or preclude our efforts to
market our 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 Investigational New
Drug application (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.
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.
After completion of clinical trials of a product candidate, we are required
to obtain FDA approval to market the product in the United States. The FDA's
legal authority is defined in the Federal Food, Drug and Cosmetics Act. Our
products are regulated by the Center for Biologics Evaluation and Research.
While we expect this regulatory structure to continue through licensure and
commercialization of our current potential cystic fibrosis product candidate,
we also expect the FDA's regulatory approach to evolve with increased
scientific knowledge in the area of somatic and gene therapy. Current FDA
regulations relating to biologic therapeutics require us to submit a Biologics
License Application (BLA) to the FDA before commercial marketing is permitted.
A BLA includes product development activities, results of preclinical studies
and clinical trials, and detailed manufacturing information. Unless expedited
review status is given, the BLA review process generally takes at least one
year. The FDA may refuse to accept a BLA if it fails to meet predetermined
requirements.
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The FDA is an agency focused on public health; it reviews all products for
safety and efficacy. Both standards must be met before the FDA grants product
approval. Should the FDA have any concerns with respect to product safety and
efficacy, the FDA may delay product review or request additional data.
Notwithstanding the submission of relevant data, the FDA may ultimately decide
that a license application does not satisfy its criteria for approval and
might require us to do any or all of the following:
. modify the scope of the desired claims
. add warnings or other safety-related information
. perform additional testing
Once approved by the FDA, marketed products are 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 in its withdrawal from the market, as well as possible
criminal penalties or sanctions.
The FDA requires that manufacturers of a product comply with current Good
Manufacturing Practices (cGMP) requirements, both as a condition of product
approval and on a continuing basis. In complying with cGMP requirements, we
must expend time, money and effort on a continuing basis in production, record
keeping and quality control. Our manufacturing facilities are subject to
periodic inspections by the FDA to ensure compliance. Failure to pass such
inspections may subject us 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 us to recall a product.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other federal, state and local regulations. Our research
and development activities involve the controlled use of hazardous materials,
chemicals, biological materials and radioactive compounds. Although we believe
that our 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, we could be held
liable for any resulting damages, and any such liability could exceed our
resources.
Human Resources
At December 31, 1998, we had 64 full time equivalent employees. Of these
employees, 49 are directly involved in research and development, and 11 have
Ph.D. or M.D. degrees. A significant number of our management and professional
employees have prior experience with other biotechnology or pharmaceutical
companies.
Our success will depend in large part on our 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. We believe that we have compensation and benefit
programs in place that will allow us to be competitive in this environment.
However, we cannot be certain that we will be successful in retaining our
existing workforce or scientific advisors, or in attracting additional
qualified employees.
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Executive Officers
The following are the executive officers of Targeted Genetics who will serve
in the capacities noted until their successors are duly appointed and
qualified.
<TABLE>
<CAPTION>
Name Age Position
------------------- --- -------------------------------------------------
<C> <C> <S>
H. Stewart Parker.. 43 President, Chief Executive Officer and Director
Barrie J. Carter, 54 Executive Vice President and Director of Research
Ph.D.............. and Development
James A. Johnson... 42 Senior Vice President, Finance and
Administration, Chief Financial Officer,
Treasurer and Secretary
</TABLE>
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 (Receptech),
from February 1991 to January 1993. Currently, Ms. Parker is a member of the
Executive Committee and the Board of Directors of BIO, the primary trade
organization for the biotechnology industry. She received her B.A. and M.B.A.
from the University of Washington.
Barrie J. Carter 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 and Digestive and Kidney Diseases from 1982 to
1992. 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. He then 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 Human Gene Therapy, as a Section Editor of
Current Opinion in Molecular Therapeutics and as an Associate Editor of
Virology. Since 1995, he has been an Affiliate Professor of Medicine at the
University of Washington Medical School.
James A. Johnson joined the Company in March 1994 as Vice President,
Finance, Chief Financial Officer, Treasurer and Secretary. In January 1999, he
was promoted to Senior Vice President, Finance and Administration. He was
employed by Immunex from January 1988 to February 1994, initially as Director
of Finance and as Vice President, Finance beginning February 1990. While at
Immunex, Mr. Johnson served as Treasurer of Targeted Genetics from its
inception in 1989. From November 1989 to January 1993, he also served as
Treasurer and Assistant Secretary of Receptech. He received his B.A. from the
University of Washington.
ITEM 2. PROPERTIES
Targeted Genetics currently occupies approximately 33,000 square feet of
laboratory and office space in a single facility in Seattle, Washington. Our
original lease term expires on April 1, 1999, but we have already extended it
through April 1, 2004 under the first of three five-year extensions. The
average annual rent payment was $408,000 during the initial term of the lease
and approximately $550,000 during the first five-year renewal term. In 1996,
we entered into a lease for approximately 4,700 square feet of office space in
an office complex adjoining our primary facility. This lease expires on March
31, 2004 and includes options to extend the lease term for two additional
five-year periods. The average annual rent payment during the initial term of
the lease is approximately $95,000. In order to continue to grow our AAV
vector manufacturing capability, we expect that we will need to expand our
manufacturing operations to a separate facility. We have recently begun the
process of identifying alternatives for this expansion. Otherwise, we believe
that our current facilities, together with
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approximately 2,000 square feet of expansion space remaining in our primary
facility and additional expansion space available in the adjoining office
complex, will be adequate to meet our projected needs for the next several
years. Within that time frame, we could be required to locate alternative
facilities, depending on the extent of our company's growth and development.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of its fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the
symbol TGEN. At March 5, 1999, there were approximately 175 shareholders of
record and approximately 7,000 total beneficial holders of the Company's
common stock. The Company has never paid cash dividends and does not
anticipate paying them in the foreseeable future. The following table sets
forth for each calendar quarter indicated, the high and low bid quotations for
the Company's common stock as quoted on The Nasdaq Stock Market. These quotes
reflect inter-dealer prices, without retail mark-up or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------- --------
<S> <C> <C>
1st Quarter........................ $3 1/8 $ 31/32
2nd Quarter........................ 4 1/4 1 5/16
3rd Quarter........................ 1 3/4 7/8
4th Quarter........................ 2 5/16 1 5/16
<CAPTION>
1997
----
<S> <C> <C>
1st Quarter........................ $5 3/4 $3 3/8
2nd Quarter........................ 3 5/8 2 1/2
3rd Quarter........................ 6 7/16 2 7/8
4th Quarter........................ 5 1/2 2 1/4
</TABLE>
On November 23, 1998, the Company sold to Medeva 750,000 shares of its
common stock at an aggregate offering price of $1.5 million in a transaction
not involving a public offering and therefore exempt pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues................ $ 7,950,730 $ 1,978,477 $ 2,254,178 $ 842,460 $ 448,822
Expenses................ 16,637,779 16,166,251 28,292,220 10,764,744 8,848,167
Net loss................ (8,687,049) (14,187,774) (26,038,042) (9,922,284) (8,399,345)
Basic and diluted net
loss per share......... (.33) (.70) (1.59) (.94) (1.40)
Shares used in computing
basic and diluted net
loss per share......... 26,637,823 20,196,325 16,407,928 10,532,950 6,005,141
FINANCIAL CONDITION
Cash, cash equivalents
and securities
available for sale..... $11,956,796 $ 5,037,821 $ 19,051,070 $14,442,562 $11,474,787
Total assets............ 16,204,083 9,767,084 25,139,052 19,960,460 17,045,881
Long-term obligations,
including current
portion................ 2,072,044 2,547,324 3,378,420 3,286,508 2,837,370
Shareholders' equity.... 11,981,759 5,591,587 19,507,788 15,772,836 13,242,145
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Risks and Uncertainties
This discussion contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated. Factors which could cause actual results to
be different include technological uncertainty; unsuccessful clinical trials;
inability to obtain adequate financing in the future; uncertainty regarding
patents and proprietary rights; failure to comply with governmental
regulations; competition; rapid technological change; unavailability of key
personnel and scientific collaborators; inability to manufacture and market
products; and dependence on corporate collaborators. A more detailed
description of these factors can be found in the section entitled "Factors
Affecting Operating Results" included in this item. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date of this report. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.
Overview
Targeted Genetics Corporation was incorporated in March 1989 to research and
develop gene and cell therapy products for the treatment of acquired and
inherited diseases. In June 1996, the Company acquired RGene Therapeutics,
Inc. (RGene), a privately-held biotechnology company. In November 1998, the
Company entered into its first major product development collaboration, an
agreement with Medeva PLC (Medeva) focused on the Company's tgAAV-CF cystic
fibrosis product candidate. Currently, the Company's only significant revenue
sources are the Medeva collaboration, another smaller collaborative agreement
related to the European development of the Company's tgDCC-E1A cancer product
candidate, and income earned on investments. The Company has generated an
accumulated deficit of $76.5 million through December 31, 1998.
Although the Company's technology appears promising, it is unknown whether
any commercially viable products will result from the Company's research and
development. It is not anticipated that the Company will have any product-
related revenue for at least the next several 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 future revenue and expense levels
and cash requirements will depend on many factors, including 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 filing, prosecuting and enforcing patent claims; the time and costs of
manufacturing scale-up and commercialization activities; and other factors.
The Company's ability to achieve profitability depends in part on its ability,
together with its collaborative partners, 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.
Results of Operations
Revenue under collaborative agreements increased to $7.2 million for the
year ended December 31, 1998, from $888,000 for the year ended December 31,
1997. The increase resulted from license fees and milestone revenues earned
from the collaborative agreement with Medeva for the worldwide development and
commercialization of the Company's cystic fibrosis product candidate, tgAAV-
CF. In 1999 and future years, the Company expects to realize significant
ongoing revenue from this collaboration, including up to $5 million per year
of research and development funding, manufacturing revenue based on the
Company's cost of producing bulk clinical trial materials, and funding of
Phase II clinical trial costs incurred by the Company. The decrease in
collaborative agreement revenue to $888,000 in 1997 from $1.2 million in 1996
primarily resulted from a reduction in tgDCC-E1A cancer product candidate
milestone payments received under the Company's collaborative agreement with
Laboratoires Fournier S.C.A.
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<PAGE>
Investment income decreased to $440,000 for the year ended December 31,
1998, from $651,000 and $924,000 for the years ended December 31, 1997 and
1996, respectively. The decreases, both in 1998 and 1997, resulted from lower
average balances of cash available for investment in the respective periods.
Other revenue primarily consisted of grant funding earned from research
grants awarded by the National Institutes of Health. After increasing from
$127,000 to $439,000 for the years ended December 31, 1996 and 1997,
respectively, as a result of new grants received, this revenue item declined
to $318,000 for 1998 due to expiration of and completion of work under the
grants. The Company does not currently expect to earn any grant revenue in
1999.
Research and development expenses increased by $0.3 million to $13.3 million
for the year ended December 31, 1998, from $13.0 million for the year ended
December 31, 1997. The increase in 1998 compared to 1997 reflects increased
expenses related to the development of manufacturing methods for the Company's
tgDCC-E1A cancer product candidate and a $1 million tgDCC-E1A clinical trial
milestone payment. The increase in tgDCC-E1A manufacturing development costs
are primarily due to a 1998 project to develop a FDA compliant, scaleable
manufacturing process for tgDCC-E1A. The $1 million tgDCC-E1A milestone
payment was made as a result of the start of Phase II clinical trials for the
tgDCC-E1A cancer product candidate. The Company made this milestone payment by
issuing 875,134 shares of common stock to RGene's former stockholders. These
increases in research and development costs were largely offset by the effect
of a restructuring plan that was implemented by the Company in February 1998.
The restructuring plan focused the Company's resources on the advancement of
its two lead product candidates: tgAAV-CF in cystic fibrosis and tgDCC-E1A in
cancer. Although the plan called for reductions in operating costs throughout
the organization, a significant portion of the reductions were to relatively
early-stage research and development programs. The increases in research and
development expense were also offset by decreases in 1998 patent costs
compared to patent costs incurred in the year ending December 31, 1997.
Research and development expense for 1997 increased approximately $1.5 million
versus the year ended December 31, 1996. Although internal expenses for
research and development leveled off in 1997, the Company experienced an
increase in external expenses related to intellectual property and to the
continued progression of the Company's clinical trial programs. Research and
development expenses are expected to increase in 1999 due to increased
staffing and increases in external expenses necessary to support the Medeva
collaboration.
In-process research and development expense resulted from the acquisition of
RGene in 1996. Of the total RGene purchase price, paid in shares of the
Company's common stock at closing, $13.5 million was allocated to RGene's
existing technology and was written off to in-process research and development
expense.
General and administrative expenses increased slightly to $3.0 million for
the year ended December 31, 1998, from $2.8 million for the year ended
December 31, 1997. The increase resulted from legal fees incurred related to
the Medeva transaction and increased investor and public relations costs.
These increases were partially offset by decreases in operating expenses
achieved through the February 1998 reduction in force. The decrease in 1997
expenses versus the year ended December 31, 1996 reflected a leveling off of
internal management costs consistent with the trends in internal research and
development expenses.
Interest expense showed a decreasing trend over the three years ended
December 31, 1998, from $397,000 for 1996, to $338,000 and $265,000 for 1997
and 1998, respectively. This expense related to obligations under capital
leases and installment loans used to finance purchases of laboratory and
computer equipment, furniture and leasehold improvements. The decreasing trend
resulted from a declining principal balance under the related obligations. The
Company expects that it will continue to finance asset purchases under leases
or loans and, thus, expects the decreasing trend in interest expense to
reverse in the future.
Liquidity and Capital Resources
The Company's capital requirements have been financed with sales of equity,
proceeds from leases and revenue from collaborations and grants. At December
31, 1998, the Company had cash, cash equivalents and
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<PAGE>
securities available for sale totaling $12.0 million, compared to $5.0 million
at December 31, 1997. The increase was attributable to the completion of a
private placement of common stock and warrants in April 1998, which resulted
in net proceeds to the Company of approximately $12.8 million. A sale of
common stock to Medeva in November 1998, which provided $1.3 million of net
proceeds, also contributed to the increase. These cash inflows were offset
partially by the Company's use of $5.8 million to fund its operations for the
year, payments of $1.3 million under equipment leases and loans, and purchases
of property, plant and equipment totaling $238,000.
Although the Company's expenses are expected to increase substantially in
response to the demands of the Medeva collaboration, revenues from Medeva are
expected to more than offset these increases. The Company has committed to
expend approximately $900,000 in 1999 to complete the construction of a new
100-liter scale AAV vector manufacturing facility within its corporate
headquarters building. Most of the cost of this project, however, will be
funded through an existing lease financing commitment. The Company expects to
begin planning in 1999 for a larger manufacturing facility capable of
supplying Phase III clinical trials and initial commercial requirements for
tgAAV-CF. The initial cost of this effort is expected to be funded by a $2
million loan provided by Medeva. In addition, the Company may elect to sell to
Medeva $1.5 million of common stock at a 20% premium to the prevailing market
price at any time during a one-year period beginning in May 1999.
Based on its current plans for 1999, and assuming the receipt of all
contractual payments potentially payable under the Medeva agreement, the
Company believes that it has adequate funding to meet its cash needs until at
least the second quarter of 2000. The Company's business strategy contemplates
entering into additional agreements with corporate partners intended to
provide license fees, milestone payments, research and development funding
and, potentially, equity investment, all of which would be used to fund the
Company's ongoing operations. There can be no assurance, however, that the
Company will be successful in establishing any additional collaborative
relationships or that it will be successful in maintaining its existing
collaborative relationships. If the Company is not successful in its
partnering efforts, it will need to seek additional sources of equity capital
in the near future. Over the long term, regardless of any partnering success,
the Company expects that it will need to raise substantial additional funds to
continue the development and commercialization of its products. There can be
no assurance that adequate funds will be available to the Company when needed
or will be available on terms favorable to the Company. If at any time the
Company is unable to obtain sufficient funds, the Company will be required to
delay, restrict or eliminate some or all of its research or development
programs, dispose of assets or technology, or cease operations.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded computer chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activity.
The Company has commenced a phased effort to inventory, assess, remediate,
test, and implement all mission-critical applications affected by the Year
2000 Issue. Activities in each phase are generally concurrent. All phases of
the Year 2000 readiness effort are expected to be completed by the third
quarter of 1999. All parts of the Company are involved in the Year 2000
effort.
The Company has identified three potential areas of impact for review with
respect to the Year 2000 Issue: (1) information technology including computer
hardware, networked equipment, PC based software applications and financial
systems (IT systems), (2) operating equipment including research and
development and manufacturing equipment with embedded chips and software
(operations equipment) and (3) third party vendors, suppliers and
subcontractors (external agents). Because the Company has been in business for
a relatively short time, its exposure to the Year 2000 Issue is limited in
comparison to more established companies. Based on recent and ongoing
assessments, the Company believes that it will not be required to undertake
any major
20
<PAGE>
activities or incur any significant costs related to the Year 2000 Issue. If
the Company encounters significant unforeseen Year 2000 problems, in its IT
systems and equipment, operations equipment or with its external agents,
actual remediation costs could be significant.
For its IT systems exposure, the Company has completed its assessment of all
systems that could be affected by the Year 2000 Issue and classified its
systems as compliant, not compliant--compliance upgrade available and not
compliant--compliance upgrade/fix not yet available. All of the Company's
software applications are purchased from established vendors and substantially
all IT systems are in the compliant or not compliant--compliance upgrade
available categories. The Company expects to identify and implement
remediation for the systems that are categorized as not compliant--compliance
upgrade/fix not yet available before the end of the third quarter of 1999. The
Company is approximately 60% complete on the implementation phase for its IT
systems. Completion of this process for IT systems is expected by the third
quarter of 1999.
The remediation of operating equipment (research and development and
manufacturing equipment with embedded chips and software) is also an important
issue for the Company. The Company is fortunate in that most of its operating
equipment is relatively new, commonplace in the biotechnology industry, and,
as a result, supported and maintained by the original manufacturers. The
Company has completed the assessment of its operating equipment. No
significant Year 2000 issues have been identified that cannot be resolved
through minor hardware or software upgrades that are either currently
available or expected to be available soon. The Company has not yet begun the
implementation phase; however, because of the anticipated limited scope of the
project, it expects to be able to complete this phase no later than the third
quarter of 1999.
The Company has recently begun the process of querying all significant
external agents regarding the status of their IT systems with respect to the
Year 2000 Issue. To date, the Company has not become aware of any external
agent with a Year 2000 issue that would materially impact the Company's
operations. The Company expects to complete this evaluation process by second
quarter of 1999. To the extent any external agents currently have Year 2000
issues, the Company has no means of ensuring that such external agents will be
Year 2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company's
operations.
The Company will utilize both internal and external resources to replace,
test and implement software and hardware upgrades for Year 2000 modifications.
The total future cost of the Year 2000 project is expected to be less than
$100,000 and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue within an acceptable time frame. As noted above,
the Company has not yet completed all necessary phases of the Year 2000
program. In the event the Company does not complete the additional work
required, the Company's research and development activities may be adversely
impacted. In such event, the significance of the impact cannot be reasonably
estimated at this time.
The Company currently has no contingency plans in place in the event it is
unable to achieve Year 2000 readiness of its critical operations.
Additionally, the most reasonably likely worst case scenario has not yet been
clearly identified. The Company plans to evaluate the status of completion of
its Year 2000 efforts no later than June 30, 1999 and determine whether a
contingency plan is necessary. There can be no assurance that the Company will
be able to develop contingency plans that will adequately address all Year
2000 issues that may arise.
Factors Affecting Operating Results
We Expect To Need More Capital in the Future and Such Additional Capital May
Not Be Available. Developing and commercializing our potential products will
require substantial additional financial resources. Since Targeted Genetics
was formed, our losses have totaled $76.5 million. We expect continued
operating losses for the foreseeable future. Since we cannot expect internally
generated cash flow to fund development and
21
<PAGE>
commercialization of our products, we will look to outside sources for
additional funding. These sources could involve one or more of the following
types of transactions:
. technology partnerships,
. technology sales,
. technology licenses,
. issuing debt or
. equity arrangements.
We might not be able to raise money we need when we need it or on terms that
are acceptable to us. If we raise money by issuing more stock, we will dilute
the interests of our existing shareholders. Should we encounter cash flow
shortages at any time in the future, we may have to delay, scale back or
eliminate some or all of our research in our three areas of interest. If we
deplete all of our financial resources, we may be required to cease
operations. We estimate that we have sufficient funding from on-hand balances
and expected revenue to meet our expected needs until at least the second
quarter of 2000.
Our Products are in the Early Stage of Product Development and have
Technological Risk. We do not have products in the commercial markets. All of
our potential products (including our most advanced potential products: tgAAV-
CF, our cystic fibrosis product candidate, and tgDCC-E1A, our cancer product
candidate), are in research, development or early-stage clinical trials.
Additional research and development and testing are needed before we can apply
for regulatory approval of our potential products. We cannot be certain that
we will be successful developing, testing and gaining regulatory approval of
our products. If we are not successful in these efforts, our financial results
and our ability to raise additional capital could be adversely affected.
We Have a History of Losses and Uncertain Future Results. Our company has
generated small amounts of revenue and significant net losses since we began
business. We expect to continue to incur substantial additional losses over at
least the next several years. To be profitable we must successfully develop,
manufacture and obtain regulatory approval of our potential products. We
cannot be certain that our efforts to develop, manufacture and receive
regulatory approval will be successful. Additionally, we cannot be certain
that our potential products if approved will be accepted in the marketplace.
If our potential products are not successful in the marketplace, our financial
results and the continued viability of our company could be adversely
affected.
There are Uncertainties Relating to Clinical Trials. There is limited data
that supports our belief that gene and cell therapy treatment are both safe
and effective. We cannot be certain that clinical trials of our potential
products will demonstrate safety and efficacy. Furthermore, we cannot be
certain that we will not encounter unacceptable side effects or other problems
in clinical trials of our potential products. Should we encounter unacceptable
side effect or other problems in the clinical trials of our potential
products, we may have to delay or discontinue development of the potential
product that causes the side effects. If our clinical trials are not
successful, our financial results and the continued viability of our company
could be adversely affected.
We Could Experience Difficulties Accruing Patients for our Clinical
Trials. Identifying and qualifying patients to participate in testing our
potential products is critical to our near-term success. The timing of our
clinical trials depends on the speed at which we can recruit patients to
participate in testing our products. Delays in recruiting, or enrolling,
patients to test our products could result in increased costs, delays in
advancing our product development, delays in proving the usefulness of our
technology or termination of the clinical trials all together.
Our Patent Positions and Proprietary Rights are Uncertain. We own or have
licenses to patents on a number of genes, processes, practices and techniques
critical to our present and anticipated potential products. If we fail to
obtain and maintain patent protection for our technology, our business may be
adversely affected. Similarly, if our licensors fail to obtain and maintain
patent protection for technology licensed to our company, our business could
be adversely affected.
22
<PAGE>
Patent positions in the field of biotechnology are highly uncertain and
involve complex legal, scientific and factual questions. We cannot be certain
that any patent application relating to technology we use will result in a
patent being issued or that if issued that the patent will afford adequate
protection against our competitors.
As the biotechnology industry expands and more patents are issued, the risk
increases that other companies may claim that our processes and potential
products infringe on their patents. If we were to become involved in patent
litigation, it could result in substantial expense to the Company and
significant diversion of our technical and management efforts. Should we be
proven to have infringed on another company's patented processes or
technology, we could be required to obtain a license in order to continue
manufacturing or marketing the affected product or in order to use the
affected process. We cannot be certain that any license needed would be made
available to us on acceptable terms, if at all.
Our potential tgAAV-CF product uses our proprietary AAV delivery technology
to deliver a normal copy of a CFTR gene that we have rights to under a non-
exclusive license. This gene is the subject of an interference proceeding
declared by the USPTO to determine the priority of invention. While we do not
expect to directly participate in the CFTR gene interference proceedings, we
have an interest in the outcome. If the eventual outcome of the proceedings
does not favor our licensor, we would have to secure a license to the CFTR
gene from the prevailing party to continue with development of tgAAV-CF. Costs
associated with securing such a gene license may be substantial and could
include royalties in excess of those currently payable pursuant to our
existing CFTR gene license. We cannot be certain that the license would be
made available to us on acceptable terms, if at all. If we cannot secure such
a license on reasonable terms on a timely basis, our financial results and the
continued viability of our potential tgAAV-CF product could be adversely
affected.
We also rely on unpatented proprietary technology. Because this technology
does not benefit from the protection of patents, we cannot be certain that we
can meaningfully protect it from other companies.
There is Inherent Uncertainty in the Governmental Regulatory Requirements
and the Approval Process can be Lengthy. The regulatory process in the gene
and cell therapy industry is costly and time-consuming and subject to
unanticipated delays. Accordingly, there is significant uncertainty as to the
cost and timing of obtaining regulatory approvals for clinical trials and for
approval of manufacturing or marketing our potential products. Additionally we
cannot be certain that we will be able to obtain the necessary regulatory
approvals for manufacturing or marketing any of our potential products. If we
receive regulatory approval of a potential product, later discovery of
previously unknown problems or failure to comply with applicable regulatory
requirement may result in restrictions on our ability to market the product up
to and including the risk of mandatory withdrawal of the product from the
market.
All manufacturing operations are subject to the FDA's current Good
Manufacturing Practice (cGMP) requirement on an ongoing basis. Our business
strategy currently anticipates that we will have the ability to manufacture
product that meets cGMP. We cannot be certain that we will be able to attain
or maintain compliance with these cGMP requirements.
Our Success Depends upon the Success of our Partners. Our strategy is to
enter into commercialization collaborations with corporate partners. In our
commercialization efforts, we aim to leverage our technology with our partner
companies' mature marketing and distribution capabilities. Therefore, we will
depend on our collaborative partners to successfully commercialize our
potential products. While we believe that these collaborative partners will be
motivated to commercialize our potential products, we cannot be certain that
our current and potential future partners will commit sufficient resources to
commercializing our technology on a timely basis. Furthermore, we cannot be
certain that present or future collaborators will not pursue alternative
approaches in preference to potential products being developed in
collaboration with us.
Our Market is Extremely Competitive. We are experiencing intense competition
both from companies developing gene and cell therapy technologies and from
those using more traditional approaches to treating human diseases. Many of
our competitors have substantially more financial and infrastructure resources
including larger research and development staffs, and more experience and
capabilities in researching, developing and
23
<PAGE>
testing products in clinical trials, in obtaining FDA and other regulatory
approvals, and in manufacturing, marketing and distribution of products.
Consequently, our competitors may succeed in commercializing products more
rapidly than we commercialize our potential products. Additionally our
competitors may also manufacture and market competitive products more
successfully than we manufacture our potential products. Should either
scenario come to pass these developments could render our potential products
less competitive or obsolete.
We Must Keep Up With 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. Rapid technological development
could result in our actual and proposed technologies, products or processes
becoming obsolete.
We are Dependent on Key Personnel and Scientific Collaborators. Our success
will depend in large part on our ability to attract and retain key employees
and scientific collaborators. We cannot be certain that we will be successful
in retaining our existing personnel or in attracting additional qualified
employees. Our company also depends on the continued availability of outside
scientific collaborators who perform research and develop processes to advance
and augment our internal research efforts. We cannot be certain that we will
be successful in maintaining our relationships with scientific collaborators
or that we will be successful in establishing collaborations with additional
key scientific collaborators, or that inventions or processes developed by our
collaborators will become our property.
We Have No Commercial Manufacturing or Marketing Capability. We currently do
not have the capacity to make large-scale clinical or commercial quantities of
our potential products. Our current facilities and staff will need to be
expanded, or supplemented through the use of contract providers, to achieve
large-scale clinical or commercial production volumes of our potential
products. In addition, we have no experience in sales and marketing. To market
any products that may result from our development programs, we will have to
develop marketing and sales capabilities, either on our own or in conjunction
with others. We cannot be certain that we will be successful in obtaining or
developing the necessary manufacturing or marketing capabilities. Furthermore,
our dependence on third parties to make, market and sell our potential
products may hinder or possibly prevent us from developing and delivering our
potential products on a timely and competitive basis.
We Depend on the Use of Hazardous Materials To Develop our Products. Our
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and radioactive compounds. Although
we believe that our safety procedures for handling and disposing of such
materials are compliant with applicable laws and regulations, we cannot
eliminate the risk of accidental contamination or injury from hazardous
materials. In the event of a hazardous materials accident, we could be held
liable for any resulting damages. Our liability in an accident involving
hazardous materials could exceed our financial resources.
We Have Limited Product Liability Insurance. Our business activities expose
us to the risk of liability claims or product recalls and any adverse
publicity that might result from a liability claim against us. We currently
have only limited amounts of product liability insurance. Product liability
insurance is expensive and we cannot be certain that it will continue to be
available or on acceptable terms. A product liability claim or product recall
could have an adverse effect on our business, our financial condition and on
our continued viability as a company.
24
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of many
factors including those set forth under the caption "Factors Affecting
Operating Results--We Expect to Need More Capital in the Future and Such
Additional Capital May Not Be Available."
Interest Rate Sensitivity
Short-Term Investments Owned By the Company. As of December 31, 1998, the
Company had short-term investments of $10.1 million. These short-term
investments consisted of highly liquid investments with original maturities at
the date of purchase of between four months and two years with an average
maturity of less than 1 year. These investments are subject to interest rate
risk and will fall in value if market interest rates increase.
A sensitivity analysis was performed on the Company's investment portfolio
as of December 31, 1998. This sensitivity analysis was based on a modeling
technique that measured the hypothetical market value change that would result
from an increase in market interest rates of plus 100 or plus 200 basis points
over a six month and twelve month time horizon. The market value changes of a
100 or 200 basis point increase in short-term treasury security yields were
not material due to the limited duration of the Company's portfolio.
We expect to have the ability to hold most of these investments until
maturity, and therefore we would not expect the realized value of these
investments to be affected to any significant degree by the effect of a sudden
change in market interest rates. Declines in interest rates over time would,
however, reduce our interest income.
Outstanding Debt of the Company. As of December 31, 1998, we had outstanding
debt related to equipment leases and leasehold improvements of approximately
$1.8 million at fixed interest rates of up to 16.73%. Because the interest
rates on our debt are fixed, a hypothetical 10 percent decrease in interest
rates would not have a material impact on our financial position. Increases in
interest rates could, however, increase the interest expense associated with
our future borrowings, if any. We do not hedge against interest rate
increases.
Market and Credit Risk
The Company does not use derivative financial instruments in its investment
portfolio to manage interest rate risk. The Company does, however, limit its
exposure to interest rate and credit risk by establishing and strictly
monitoring clear policies and guidelines for its fixed income portfolios. At
the present time the maximum average duration of the investment portfolio is
limited to 1 year. The guidelines also establish credit quality standards,
limits on exposure to duration and credit risk criteria. The Company's
exposure to market and credit risk is not expected to be material.
Equity Price Risk
The Company's equity price risk is limited to an immaterial equity interest
we have in another biotechnology company. Accordingly, we do not hedge against
equity price changes.
Foreign Currency Exchange Rate Risk
All of our revenue is realized in dollars and substantially all of our
revenue is from Medeva's United States based operations. Therefore, we do not
believe that we have any significant direct foreign currency exchange rate
risk. Accordingly, we do not hedge against foreign currency exchange rate
changes.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 as of December 31, 1998 and 1997, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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 at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Seattle, Washington
February 5, 1999
26
<PAGE>
TARGETED GENETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 1,870,841 $ 1,011,845
Securities available for sale.................... 10,085,955 4,025,976
Prepaid expenses and other....................... 489,767 248,278
------------ ------------
Total current assets........................... 12,446,563 5,286,099
Property, plant and equipment, net................. 3,299,253 3,927,533
Other assets....................................... 458,267 553,452
------------ ------------
$ 16,204,083 $ 9,767,084
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable................................. $ 1,664,074 $ 1,352,297
Accrued payroll and other liabilities............ 486,206 275,876
Current portion of long-term obligations......... 1,171,836 1,030,562
------------ ------------
Total current liabilities...................... 3,322,116 2,658,735
Long-term obligations.............................. 900,208 1,516,762
Shareholders' equity:
Preferred stock, $.01 par value, 6,000,000 shares
authorized,
none outstanding................................ -- --
Common stock, $.01 par value, 40,000,000 shares
authorized,
30,652,375 and 20,211,114 outstanding at
December 31, 1998
and 1997, respectively.......................... 88,455,138 73,401,141
Accumulated deficit.............................. (76,501,784) (67,814,735)
Accumulated other comprehensive income........... 28,405 5,181
------------ ------------
Total shareholders' equity..................... 11,981,759 5,591,587
------------ ------------
$ 16,204,083 $ 9,767,084
============ ============
</TABLE>
See accompanying notes to the financial statements
27
<PAGE>
TARGETED GENETICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Collaborative agreements............ $ 7,192,048 $ 888,335 $ 1,202,965
Investment income................... 440,478 650,892 923,720
Other............................... 318,204 439,250 127,493
----------- ------------ ------------
Total revenue..................... 7,950,730 1,978,477 2,254,178
----------- ------------ ------------
Expenses:
Research and development............ 13,327,152 13,043,288 11,502,584
In-process research and development. -- -- 13,517,911
General and administrative.......... 3,045,835 2,784,806 2,874,316
Interest............................ 264,792 338,157 397,409
----------- ------------ ------------
Total expenses.................... 16,637,779 16,166,251 28,292,220
----------- ------------ ------------
Net loss.............................. $(8,687,049) $(14,187,774) $(26,038,042)
=========== ============ ============
Basic and diluted net loss per share.. $ (0.33) $ (0.70) $ (1.59)
=========== ============ ============
Shares used in computation of basic
and diluted net loss per share....... 26,637,823 20,196,325 16,407,928
=========== ============ ============
</TABLE>
See accompanying notes to the financial statements
28
<PAGE>
TARGETED GENETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
---------------------- Accumulated Comprehensive Shareholders'
Shares Amount Deficit Income Equity
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 12,317,183 $43,295,436 $(27,588,919) $ 66,319 $ 15,772,836
Sale of common stock,
net of issuance costs
of $1,476,779......... 4,025,000 14,623,221 -- -- 14,623,221
Issuance of common
stock in RGene
acquisition........... 3,636,364 14,854,546 -- -- 14,854,546
Exercise of stock
options............... 78,460 44,179 -- -- 44,179
Exercise of warrants... 61,000 285,480 -- -- 285,480
Issuance of common
stock in payment for
consulting and license
fees.................. 18,461 12,500 -- -- 12,500
Unrealized losses on
securities available
for sale.............. -- -- -- (46,932) (46,932)
Net loss--1996......... -- -- (26,038,042) -- (26,038,042)
---------- ----------- ------------ -------- ------------
Balance at December 31,
1996................... 20,136,468 73,115,362 (53,626,961) 19,387 19,507,788
Exercise of stock
options............... 15,380 8,414 -- -- 8,414
Exercise of warrants... 59,266 277,365 -- -- 277,365
Unrealized losses on
securities available
for sale.............. -- -- -- (14,206) (14,206)
Net loss--1997......... -- -- (14,187,774) -- (14,187,774)
---------- ----------- ------------ -------- ------------
Balance at December 31,
1997................... 20,211,114 73,401,141 (67,814,735) 5,181 5,591,587
Sale of common stock
and warrants, net of
issuance costs of
$158,046.............. 8,666,667 12,841,954 -- -- 12,841,954
Sale of common stock to
Medeva PLC, net of
issuance costs of
$153,100.............. 750,000 1,129,400 -- -- 1,129,400
Issuance of RGene
milestone shares...... 875,134 1,000,000 -- -- 1,000,000
Exercise of stock
options............... 149,460 82,643 -- -- 82,643
Unrealized gains on
securities available
for sale.............. -- -- -- 23,224 23,224
Net loss--1998......... -- -- (8,687,049) -- (8,687,049)
---------- ----------- ------------ -------- ------------
Balance at December 31,
1998................... 30,652,375 $88,455,138 $(76,501,784) $ 28,405 $ 11,981,759
========== =========== ============ ======== ============
</TABLE>
See accompanying notes to the financial statements
29
<PAGE>
TARGETED GENETICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................... $ (8,687,049) $(14,187,774) $(26,038,042)
Adjustments to reconcile net loss
to net cash used in operating
activities:
In-process research and
development..................... -- -- 12,867,986
Depreciation and amortization.... 1,635,797 1,641,151 1,919,510
Expenses paid with common stock.. 1,000,000 -- 12,500
(Increase) decrease in prepaid
expenses and other.............. (202,967) 38,789 (201,575)
(Increase) decrease in accrued
interest on securities available
for sale........................ (65,746) 162,497 (72,570)
Increase (decrease) in current
liabilities..................... 485,259 (190,996) 1,141,275
------------ ------------ ------------
Net cash used in operating
activities.................... (5,834,706) (12,536,333) (10,370,916)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment......................... (238,623) (704,896) (1,542,594)
Purchases of securities available
for sale.......................... (17,664,960) (814,251) (23,574,123)
Maturities and sales of securities
available for sale................ 11,693,951 12,130,074 20,369,007
Net cash received in RGene
acquisition....................... -- -- 1,594,386
Increase in other assets........... (15,000) (50,000) (145,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities.......... (6,224,632) 10,560,927 (3,298,324)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from sale of capital
stock............................. 14,053,997 285,779 14,952,880
Proceeds from equipment financing
transactions...................... 176,289 468,363 1,097,588
Payments under capital leases and
loans............................. (1,311,952) (1,299,459) (1,003,474)
------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... 12,918,334 (545,317) 15,046,994
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 858,996 (2,520,723) 1,377,754
Cash and cash equivalents, beginning
of year............................. 1,011,845 3,532,568 2,154,814
------------ ------------ ------------
Cash and cash equivalents, end of
year................................ $ 1,870,841 $ 1,011,845 $ 3,532,568
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Equipment financed through renewal
of capital lease.................. 594,983 -- --
============ ============ ============
</TABLE>
See accompanying notes to the financial statements
30
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business Description
Targeted Genetics Corporation (the "Company") is developing gene therapy
products for the treatment of certain acquired and inherited diseases. The
Company was incorporated in the state of Washington in March 1989.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company previously reported as a development stage enterprise in
accordance with the Financial Accounting Standards Board's Statement No. 7,
Accounting and Reporting by Development Stage Enterprises. The Company has
commenced its principal operations, has generated significant revenue and,
therefore, beginning with the year ended December 31, 1998, the Company is no
longer a development stage enterprise.
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 as a component
of 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.
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 three 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.
Stock Compensation
In adopting the provisions of Statement No. 123 Accounting for Stock-Based
Compensation, the Company has elected to apply the disclosure-only provisions
and related interpretations for accounting for its stock option plans. The
Company does not recognize any compensation expense related to the plans since
all options are granted at fair market value on the date of grant.
Revenue Under Collaborative Agreements
Revenue under collaborative agreements is recognized as defined under the
terms of the respective collaborative agreements. Nonrefundable signing or
licensing fees that are not dependent on future performance
31
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
are recognized as revenue when received. Milestone revenue is recognized upon
the achievement of the related milestone and when collection is probable.
Revenue earned from the performance of research and development is recognized
ratably over the period in which the related work is performed. Advance
payments received in excess of amounts earned are classified as deferred
revenue.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 established new rules for the reporting
and display of comprehensive income and its components; however, it has no
impact on the reporting of net loss or shareholders' equity. Statement 130
requires unrealized gains or losses on the Company's securities available for
sale, which prior to adoption were reported separately in shareholders'
equity, to be reported as other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130.
Net Loss Per Share
Basic net loss per share is computed based upon the weighted average number
of common shares outstanding during the period. The Company's diluted net loss
per share is the same as its basic net loss per share because all stock
options, warrants and other potentially dilutive securities are antidilutive
and, therefore, excluded from the calculation of diluted net loss per share.
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.
3. Securities Available for Sale
All securities available for sale at December 31, 1998 mature within two
years. Securities available for sale consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. corporate securities... $ 3,873,109 $22,370 $ 71 $ 3,895,408
U.S. Treasury securities and
obligations of U.S.
government agencies........ 6,184,441 6,106 -- 6,190,547
----------- ------- ---- -----------
$10,057,550 $28,476 $ 71 $10,085,955
=========== ======= ==== ===========
December 31, 1997:
U.S. corporate securities... $ 2,485,485 $ 5,779 $133 $ 2,491,131
U.S. Treasury securities and
obligations of U.S.
government agencies........ 1,535,310 -- 465 1,534,845
----------- ------- ---- -----------
$ 4,020,795 $ 5,779 $598 $ 4,025,976
=========== ======= ==== ===========
</TABLE>
32
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unrealized gains and losses on securities available for sale consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
All gains (losses).......................... $ 37,909 $(15,564) $(20,729)
Less reclassifications to net loss:
Gross realized gains...................... (19,940) (4,448) (27,300)
Gross realized losses..................... 5,255 5,806 1,097
-------- -------- --------
Unrealized gains (losses)................... $ 23,224 $(14,206) $(46,932)
======== ======== ========
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- -----------
<S> <C> <C>
Furniture and equipment............................. $4,240,248 $ 5,648,213
Leasehold improvements.............................. 4,625,027 4,484,365
---------- -----------
8,865,275 10,132,578
Less accumulated depreciation and amortization...... 5,566,022 6,205,045
---------- -----------
$3,299,253 $ 3,927,533
========== ===========
</TABLE>
The Company has leased furniture and equipment, primarily laboratory
equipment. The total cost of leased furniture and equipment capitalized at
December 31, 1998 and 1997 was $2,857,915 and $4,321,900, respectively, with
related accumulated depreciation of $1,553,880 and $2,788,565 at December 31,
1998 and 1997, respectively. The Company retired fully depreciated assets
totaling $2,132,560 during fiscal year 1998.
5. Long-Term Obligations
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred state sales tax............................ $ 308,609 $ 400,056
Installment note payable, effective rate of 16.73%,
due in monthly installments through 1999........... 58,060 403,335
Capitalized lease obligations (see note 9).......... 1,705,375 1,743,933
---------- ----------
2,072,044 2,547,324
Less current portion................................ 1,171,836 1,030,562
---------- ----------
$ 900,208 $1,516,762
========== ==========
</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 remaining obligation is payable over the next four years.
Principal payments related to the capital lease and notes-payable portions
of the long-term obligations are $1,056,543, $542,858, $145,295, and $18,739,
respectively, for each of the four years ending December 31, 2002.
33
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity
Warrants
In April 1998, the Company completed a private placement of common stock and
warrants, which resulted in net proceeds of approximately $12.8 million. A
total of 4,333,333 warrants were issued in the transaction, each having an
exercise price of $2.00 per share and expiring on April 17, 2003. All of these
warrants were outstanding at December 31, 1998. The Company has also issued a
total of 137,016 warrants related to equipment financing, collaborative and
license agreements. These warrants have a weighted average price of $4.77 per
share and expire from May 1999 to December 2003. At December 31, 1998,
4,470,349 shares of common stock were reserved for all outstanding warrants.
Shareholder Rights Plan
In October 1996, the Company adopted a Shareholder Rights Plan under which
it distributed a dividend of one right for each outstanding share of common
stock. The issuance of these rights had no dilutive effect, did not impact
reported earnings per share and is not taxable to the Company or the Company's
shareholders. These rights could cause substantial dilution to certain persons
or groups that attempt to acquire the Company on terms not approved by the
Board of Directors.
Stock Options
The Company has two stock option plans under which 2,800,000 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 the estimated fair value at the date of
grant as established by the Company's Board of Directors. As of December 31,
1998, options on 651,654 shares were available for future grant.
A summary of activity related to the Company's stock option plans follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance, December 31, 1995............................. 1,032,417 $2.87
Granted.............................................. 332,157 4.86
Exercised............................................ (78,460) 0.56
Canceled............................................. (71,700) 2.67
--------- -----
Balance, December 31, 1996............................. 1,214,414 3.57
Granted.............................................. 571,728 3.75
Exercised............................................ (15,380) 0.55
Canceled............................................. (74,060) 4.42
--------- -----
Balance, December 31, 1997............................. 1,696,702 3.62
Granted.............................................. 1,269,277 1.49
Exercised............................................ (149,460) .55
Canceled............................................. (955,933) 3.61
--------- -----
Balance, December 31, 1998............................. 1,860,586 $2.42
========= =====
</TABLE>
34
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Options for 628,785, 611,465 and 390,884, shares were exercisable at
December 31, 1998, 1997 and 1996, respectively. The following table summarizes
information related to outstanding and exercisable options at December 31,
1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- -------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Shares Price Life Shares Price
---------------- --------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.50--$1.10 245,590 $0.81 6.81 129,400 $0.60
1.22-- 1.22 470,500 1.22 9.14 113,955 1.22
1.38-- 1.94 491,077 1.80 9.23 29,652 1.72
2.50-- 4.75 412,530 3.94 6.92 201,360 3.74
5.00-- 6.25 240,889 5.07 6.25 154,418 5.11
--------- -------
$0.50--$6.25 1,860,586 $2.42 7.99 628,785 $2.88
========= =======
</TABLE>
In conformity with the provisions of Statement No. 123, Accounting for
Stock-Based Compensation, the Company has elected to follow the intrinsic
value method allowed under the statement for its stock option plans and
present pro forma disclosures using the fair value accounting approach. Had
compensation costs been recorded, the following amounts would have been
reported:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net loss--as reported.............. $(8,687,049) $(14,187,774) $(26,038,042)
Net loss--pro forma................ (9,512,398) (15,068,834) (26,558,542)
Basic net loss per share--as
reported.......................... (0.33) (0.70) (1.59)
Basic net loss per share--pro
forma............................. (0.36) (0.75) (1.62)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes multiple-option approach pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected dividend rate............................ nil nil nil
Expected stock price volatility................... .814 .696 .664
Risk-free interest rate........................... 5.38% 6.53% 6.03%
Expected life of options from vest date........... 3 years 3 years 3 years
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $1.11, $2.51 and $3.11, respectively, per share.
In February 1998, the Company offered active employees, except executive
officers, the opportunity to cancel previously awarded stock option grants
with exercise prices greater than the current market price of the Company's
common stock and be granted the same number of new options at the closing
market price on the grant date, February 20, 1998. Substantially all eligible
employees elected to replace their previously awarded stock option grants
resulting in the cancellation of options to purchase 531,550 shares at an
average price of $3.77 per share and the issuance of options to purchase the
same number of shares at $1.22 per share. Options awarded under this offer
vest over a three (3) year period, 25% at the end of six months after the
grant date, 25% upon the date twelve months after the grant date and 6.25% at
the end of each three-month period thereafter.
In January 1999, the Board of Directors of the Company unanimously approved
the adoption of the 1999 Stock Option Plan (the "1999 Plan"). The 1999 Plan
provides for option grants of a maximum of 1.5 million
35
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
shares of Common Stock to employees, directors and officers of the Company and
consultants, agents, advisors and independent contractors who provide services
to the Company. Additionally, the Board of Directors unanimously adopted an
amendment to Article 4 of the Company's Restated Article of Incorporate to
increase the number of authorized shares of Common Stock by 40,000,000 from
40,000,000 to 80,000,000. The 1999 Plan and the increase to the number of
authorized shares of Common Stock are subject to approval by the Company's
shareholders.
7. Collaborative Agreement with Medeva PLC
In November 1998, the Company entered into a series of agreements (the "CF
Agreements") with Medeva PLC ("Medeva") pursuant to which the two companies
are collaborating to develop on a worldwide basis the Company's tgAAV-CF gene
therapy product for the treatment of cystic fibrosis. Upon signing of the
CF Agreements, the Company received a license and technology access fee of $5
million and a milestone payment of $1 million related to the start of Phase I
clinical trials for the aerosolized version of the tgAAV-CF product. Medeva
has agreed to pay up to $5 million per year for three years to fund the
Company's tgAAV-CF research and development activities, including:
development, scale up and validation of manufacturing processes; development
and validation of analytical methods; conduct of certain Phase I clinical
trials; and other activities in support of product testing and
commercialization. In addition, Medeva has agreed to pay the costs of Phase II
and subsequent clinical trials of the product. Assuming successful development
and regulatory approval, Medeva will have the exclusive right to market the
product on a worldwide basis. Under a long-term supply agreement, the Company
will manufacture and supply bulk product to Medeva under a pricing formula
intended to compensate the Company with a fixed percentage of Medeva's net
product sales. The research and development funding agreement is effective
from October 1, 1998 to October 1, 2001 with options to extend the term if
both parties agree. The long-term supply agreement is effective for the term
of the patents covering the Company's tgAAV-CF technology. After November 23,
1999, Medeva has the option to terminate at will any portion of the CF
Agreements with 180 days advance notice. Should Medeva exercise this right to
terminate the CF Agreements, all rights related to tgAAV-CF technology would
return to the Company. In 1998, the Company recognized $7.0 million of revenue
under the CF Agreements with Medeva, representing 88% of the Company's total
revenue.
Under a separate agreement, Medeva agreed to purchase common stock of the
Company at a total price of $3 million. Medeva purchased 750,000 shares of
common stock at a price of $2.00 per share upon signing of the agreement,
representing half of its commitment under this stock purchase agreement. The
market value of the common shares purchased was $1.71 per share. Accordingly,
the Company recognized $217,500 of the $1.5 million stock purchase payment as
collaborative agreement revenue in the fourth quarter of 1998. The remaining
$1.5 million purchase is at the Company's option, between May 23, 1999 and May
23, 2000, at a price representing a 20% premium to the prevailing market price
of the stock.
Additionally, Medeva agreed under certain circumstances to loan the Company
up to $12 million to partially finance the cost of establishing manufacturing
facilities for the production of tgAAV-CF. The first $2 million can be drawn
beginning in May 1999 to finance a facility for the supply of bulk product to
be used in Phase III clinical trials and for initial commercial launch.
Interest on this loan is payable annually in arrears at a rate which is 150
basis points over the one-month LIBOR rate, but not less than 5% nor more than
7% per annum. The remaining $10 million may be loaned to the Company by
Medeva, in certain circumstances, for the establishment of a manufacturing
facility to meet the long-term commercial requirements for the bulk tgAAV-CF
product. If both parties agree to a loan, the loan will be made on
commercially reasonable terms as negotiated by the parties.
36
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Acquisition of RGene Therapeutics, Inc.
On June 19, 1996, the Company completed its acquisition of RGene
Therapeutics, Inc. ("RGene"), a privately-held gene therapy company. The
Company issued 3,636,364 shares of common stock in exchange for all the
outstanding capital stock of RGene at approximately $4.08 per share.
The acquisition was accounted for as a purchase and the consideration issued
by the Company was allocated to tangible and intangible assets acquired based
on their estimated fair values on the acquisition date. The aggregate purchase
price was allocated to RGene's tangible and intangible assets based on their
relative fair values. The amount allocated to acquired in-process research and
development was written off to operations in 1996. The allocation of the
aggregate purchase price was as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 3,911,901
Other current assets........................................ 392,174
In-process technology....................................... 13,517,911
-----------
$17,821,986
===========
</TABLE>
As part of the original merger agreement, the Company agreed to pay up to $5
million in additional common stock to RGene's stockholders based on the
achievement of certain clinical and business-related milestones prior to
December 31, 1998. In October 1998, based upon the start of Phase II clinical
trials of the Company's tgDCC-E1A cancer product candidate, a $1 million
milestone payment became due. A total of 875,134 shares of common stock,
valued at approximately $1.14 (the average closing price of the stock for the
most recent 30 trading days) were issued to former RGene stockholders in
payment of this obligation. The expense associated with the milestone payment
was recorded as research and development expense.
9. Commitments
The Company leases its research and office facilities under two
noncancellable operating leases which expire beginning March 31, 2004. The
leases may be extended under specific renewal options at the then prevailing
fair market value rental rate.
Future minimum rental payments under noncancellable leases at December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Operating Capital
---------- ----------
<S> <C> <C>
Year Ending December 31:
1999.............................................. $ 595,273 $1,144,291
2000.............................................. 617,713 584,201
2001.............................................. 634,451 152,351
2002.............................................. 664,447 19,180
2003.............................................. 681,185 --
Thereafter........................................ 177,810 --
---------- ----------
Total minimum lease payments........................ $3,370,879 1,900,023
==========
Less amount representing interest................... 194,648
----------
Present value of minimum capitalized lease payments. $1,705,375
==========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1998,
1997 and 1996 was $533,000, $533,000 and $432,000, respectively.
37
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Employee Retirement Plan
The Company sponsors an Employee Retirement Plan in accordance with Section
401(k) of the Internal Revenue Code. All employees 21 years old or older are
eligible to participate in the plan. Contributions made into the plan are at
the discretion of the Company's Board of Directors. The Company incurred
$99,426 and $81,364 of expense in 1997 and 1996 related to contributions to
the plan. There were no contributions to the plan made by the Company in 1998.
11. Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards of
$59.9 million and research and experimental credit carryforwards of $1.6
million. The carryforwards are available to offset future federal income taxes
and begin to expire in 2008. The Company has provided a valuation allowance to
offset the excess of deferred tax assets over the deferred tax liabilities due
to the uncertainty of realizing the benefits of the net deferred tax asset.
The valuation allowance increased by $2.8 million and $5.0 million during 1998
and 1997, respectively.
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $20,354,000 $17,866,000
Research and experimental credit carryforwards... 1,628,000 1,439,000
Depreciation..................................... 721,000 559,000
Other............................................ 97,000 135,000
----------- -----------
Total deferred tax assets.......................... 22,800,000 $19,999,000
=========== ===========
Valuation allowance for deferred tax assets........ $22,800,000 $19,999,000
=========== ===========
</TABLE>
Utilization of federal income tax carry forwards is subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986. The
Company's past sales and issuances of common stock have resulted in "ownership
changes" as defined under Section 382, resulting in limitations on the future
use of $29.3 million of carry forwards. At December 31, 1998, the Company
calculated its annual limitation to be approximately $2.9 million. However,
this annual limitation is not expected to have a material adverse effect on
the Company's utilization of its net operating loss and research credit
carryforwards.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
(a) The information required by this item concerning the Company's directors
is incorporated by reference from the section captioned "ELECTION OF
DIRECTORS" in the Company's definitive Proxy Statement for the annual meeting
to be held on May 5, 1999.
(b) The information required by this item concerning the Company's executive
officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "EXECUTIVE COMPENSATION" in the Company's definitive Proxy
Statement for the annual meeting to be held on May 5, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "PRINCIPAL TARGETED GENETICS SHAREHOLDERS" in the Company's
definitive Proxy Statement for the annual meeting to be held on May 5, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Financial Statements are submitted in Item 8 of this report.
<TABLE>
<CAPTION>
Page(s) in
10-K
----------
<S> <C>
Report of Ernst and Young LLP, Independent Auditors................. 26
Balance Sheets at December 31, 1998 and 1997........................ 27
Statements of Operations for the years ended December 31, 1998,
1997, and 1996..................................................... 28
Statements of Shareholders' Equity for the period from December 31,
1995 through December 31, 1998..................................... 29
Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996..................................................... 30
Notes to Financial Statements....................................... 31-38
</TABLE>
2. 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.
3. Exhibits
<TABLE>
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (G)
3.2 Amended and Restated Bylaws (Exhibit 3.2) (G)
4.1 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (C)
Genetics Corporation, issued to MMC/GATX Partnership No. 1 on
December 27, 1993, as amended (Exhibit 4.1)
4.2 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (A)
Genetics Corporation, issued to LINC Capital Management, Ltd. on
December 27, 1993 (Exhibit 4.2)
4.3 Warrant to Purchase 18,701 shares of the Common Stock of Targeted (B)
Genetics Corporation, issued to MMC/GATX Partnership No. 1 on
November 30, 1994 (Exhibit 4.3)
4.4 Warrant to Purchase 21,315 shares of the common stock of Targeted (C)
Genetics Corporation, issued to Financing for Science
International, Inc. on November 30, 1995 (Exhibit 4.6)
4.5 Rights Agreement, dated as of October 17, 1996, between Targeted (F)
Genetics Corporation and ChaseMellon Shareholder Services (Exhibit
2.1)
4.6 Warrant to purchase 50,000 shares of the Common Stock of Targeted (H)
Genetics Corporation, issued to the Burnham Institute on March 15,
1997 (Exhibit 4.1)
4.10 Warrant to purchase 25,000 shares of the Common Stock of Targeted (K)
Genetics Corporation, issued to Francis Chisari on May 15, 1997
(Exhibit 4.1)
10.1 Form of Indemnification Agreement between the registrant and its (A)
officers and directors (Exhibit 10.6)
10.2 Form of Senior Management Employment Agreement between the (G)
registrant and its executive officers (Exhibit 10.2)
10.3 Gene Transfer Technology License Agreement, dated as of February (A)
18, 1992, between Immunex Corporation and Targeted Genetics
Corporation* (Exhibit 10.8)
10.4 License Agreement, dated as of August 14, 1992, between Leland (A)
Stanford Junior University and Targeted Genetics Corporation*
(Exhibit 10.10)
</TABLE>
40
<PAGE>
<TABLE>
<C> <S> <C>
10.5 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)
10.6 Non-exclusive Patent License Agreement, dated as of December 25, (A)
1993, between The University of Florida Research Foundation, Inc.
and Targeted Genetics Corporation* (Exhibit 10.14)
10.7 Research and Exclusive License Agreement, dated as of January 1, (A)
1994, between Targeted Genetics Corporation and the Fred
Hutchinson Cancer Research Center* (Exhibit 10.19)
10.8 PHS Patent License Agreement--Exclusive, dated as of March 10, (A)
1994, between National Institutes of Health Centers for Disease
Control and Targeted Genetics Corporation* (Exhibit 10.15)
10.9 Exclusive License Agreement, dated as of March 14, 1994, between (A)
Medical College of Ohio and Targeted Genetics Corporation*
(Exhibit 10.16)
10.10 License Agreement, dated as of March 28, 1994, between Targeted (A)
Genetics Corporation and the University of Michigan* (Exhibit
10.18)
10.11 Exclusive License Agreement dated as of March 28, 1994, between (A)
the Fred Hutchinson Cancer Research Center and Targeted Genetics
Corporation* (Exhibit 10.20)
10.12 Exclusive License Agreement, dated as of August 25, 1994, between (B)
Targeted Genetics Corporation and the Fred Hutchinson Cancer
Research Center* (Exhibit 10.20)
10.13 Patent and Technology License Agreement effective as of March 1, (D)
1994, by and among the Board of Regents of the University of
Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.*
(Exhibit 10.29)
10.14 First Amended and Restated License Agreement effective October 12, (D)
1995 between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc.* (Exhibit 10.30)
10.15 Amendment to the First Amended and Restated License Agreement (E)
between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc., dated as of June 19, 1996* (Exhibit
10.1)
10.16 Second Amendment to the First Amended and Restated License
Agreement between The University of Tennessee Research
Corporation and RGene Therapeutics, Inc., dated as of April 17,
1998*
10.17 Exclusive Sublicense Agreement effective July 23, 1996 by and (G)
between Alkermes, Inc. and Targeted Genetics Corporation.*
(Exhibit 10.20)
10.18 Revised License Agreement effective October 1, 1996, by and (G)
between the University of Pittsburgh--of the Commonwealth System
of Higher Education and Targeted Genetics Corporation* (Exhibit
10.21)
10.19 Agreement dated as of May 28, 1996 by and between RGene (D)
Therapeutics, Inc. and Laboratoires Fournier S.C.A.* (Exhibit
10.32)
10.20 Master Agreement, dated as of November 23, 1998, by and between (L)
the Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.1)
10.21 License and Collaboration Agreement, dated as of November 23, (L)
1998, by and between the Company and Medeva Pharmaceuticals,
Inc.* (Exhibit 1.2)
10.22 Supply Agreement, dated as of November 23, 1998, by and between (L)
the Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.3)
10.23 Common Stock Purchase Agreement, dated as of November 23, 1998, by (L)
and between the Company and Medeva Pharmaceuticals, Inc. and
Medeva PLC* (Exhibit 1.4)
10.24 Credit Agreement, dated as of November 23, 1998, by and between (L)
the Company and Medeva Pharmaceuticals, Inc. and Medeva PLC*
(Exhibit 1.5)
</TABLE>
41
<PAGE>
<TABLE>
<C> <S> <C>
10.25 License Agreement, dated as of March 15, 1997, between the Burnham (J)
Institute and Targeted Genetics Corporation* (Exhibit 10.23)
10.26 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)
10.27 First Amendment to Olive Way Building Lease, dated as of December (B)
10, 1994, between Targeted Genetics Corporation and Metropolitan
Federal Savings and Loan Association (Exhibit 10.22)
10.28 Second Amendment to Olive Way Building Lease, dated as of June 12, (G)
1996, between Targeted Genetics Corporation and Ironwood
Apartments, Inc. (successor in interest to Metropolitan Federal
Savings and Loan Association) (Exhibit 10.25)
10.29 Third Amendment to Olive Way Building Lease, dated as of October
30, 1998, between Targeted Genetics Corporation and Ironwood
Apartments, Inc. (successor in interest to Metropolitan Federal
Savings and Loan Association)
10.30 Office Lease, dated as of October 7, 1996, by and between Benaroya (G)
Capital Company, LLC and Targeted Genetics Corporation (Exhibit
10.26)
10.31 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A)
December 27, 1993 (Exhibit 10.22)
10.32 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as (A)
of December 27, 1993 (Exhibit 10.23)
10.33 Master Equipment Lease Agreement, dated as of October 17, 1995, (C)
between Financing for Science International, Inc. and Targeted
Genetics Corporation (Exhibit 10.28)
10.34 1992 Restated Stock Option Plan (K)
10.35 Stock Option Plan for Nonemployee Directors (Exhibit 10.34) (J)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
- --------
* Confidential treatment has been granted by or requested from the
Securities and Exchange Commission for portions of these exhibits.
(A) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 33-77054) filed on March
30, 1994, as amended.
(B) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(C) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(D) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 333-03592) filed on April
16, 1996, as amended.
(E) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(F) Incorporated by reference to the designated exhibit included with the
Company's Form 8-A filed October 22, 1996.
(G) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(H) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending March 31,
1997.
(I) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1997.
42
<PAGE>
(J) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(K) Incorporated by reference to the designated exhibit included with the
Company's Form S-8 Registration Statement (No. 333-58907) filed on July
10, 1998.
(L) Incorporated by reference to the designated exhibit included with the
Company's Form 8-K filed January 6, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TARGETED GENETICS CORPORATION
/s/ H. Stewart Parker
By: _________________________________
H. Stewart Parker
President and Chief Executive
Officer
Date: March 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ H. Stewart Parker President and Chief March 5, 1999
____________________________________ Executive Officer,
H. Stewart Parker Director (Principal
Executive Officer)
/s/ James A. Johnson Senior Vice President, March 5, 1999
____________________________________ Finance and
James A. Johnson Administration, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial
and Accounting Officer)
/s/ Jeremy L. Curnock Cook Chairman of the Board, March 5, 1999
____________________________________ Director
Jeremy L. Curnock Cook
/s/ Jack L. Bowman Director March 5, 1999
____________________________________
Jack L. Bowman
/s/ James D. Grant Director March 5, 1999
____________________________________
James D. Grant
/s/ Louis P. Lacasse Director March 5, 1999
____________________________________
Louis P. Lacasse
/s/ Mark Richmond, Ph.D. Director March 5, 1999
____________________________________
Mark Richmond, Ph.D.
Director
____________________________________
Martin P. Sutter
</TABLE>
44
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- -------------------- ----
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1)(G)
3.2 Amended and Restated Bylaws (Exhibit 3.2)(G)
4.1 Warrant to Purchase 11,000 shares of the Common Stock of
Targeted Genetics Corporation, issued to MMC/GATX Partnership
No. 1 on December 27, 1993, as amended (Exhibit 4.1)(C)
4.2 Warrant to Purchase 11,000 shares of the Common Stock of
Targeted Genetics Corporation, issued to LINC Capital
Management, Ltd. on December 27, 1993 (Exhibit 4.2)(A)
4.3 Warrant to Purchase 18,701 shares of the Common Stock of
Targeted Genetics Corporation, issued to MMC/GATX Partnership
No. 1 on November 30, 1994 (Exhibit 4.3)(B)
4.4 Warrant to Purchase 21,315 shares of the common stock of
Targeted Genetics Corporation, issued to Financing for Science
International, Inc. on November 30, 1995 (Exhibit 4.6)(C)
4.5 Rights Agreement, dated as of October 17, 1996, between
Targeted Genetics Corporation and ChaseMellon Shareholder
Services (Exhibit 2.1)(F)
4.6 Warrant to purchase 50,000 shares of the Common Stock of
Targeted Genetics Corporation, issued to the Burnham Institute
on March 15, 1997 (Exhibit 4.1)(H)
4.10 Warrant to purchase 25,000 shares of the Common Stock of
Targeted Genetics Corporation, issued to Francis Chisari on
May 15, 1997 (Exhibit 4.1)(K)
10.1 Form of Indemnification Agreement between the registrant and
its officers and directors (Exhibit 10.6)(A)
10.2 Form of Senior Management Employment Agreement between the
registrant and its executive officers (Exhibit 10.2)(G)
10.3 Gene Transfer Technology License Agreement, dated as of
February 18, 1992, between Immunex Corporation and Targeted
Genetics Corporation* (Exhibit 10.8)(A)
10.4 License Agreement, dated as of August 14, 1992, between Leland
Stanford Junior University and Targeted Genetics Corporation*
(Exhibit 10.10) (A)
10.5 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)
10.6 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)
10.7 Research and Exclusive License Agreement, dated as of January
1, 1994, between Targeted Genetics Corporation and the Fred
Hutchinson Cancer Research Center* (Exhibit 10.19)(A)
10.8 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)
10.9 Exclusive License Agreement, dated as of March 14, 1994,
between Medical College of Ohio and Targeted Genetics
Corporation* (Exhibit 10.16)(A)
10.10 License Agreement, dated as of March 28, 1994, between Targeted
Genetics Corporation and the University of Michigan* (Exhibit
10.18)(A)
10.11 Exclusive License Agreement dated as of March 28, 1994, between
the Fred Hutchinson Cancer Research Center and Targeted
Genetics Corporation* (Exhibit 10.20)(A)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- -------------------- ----
<C> <S> <C>
10.12 Exclusive License Agreement, dated as of August 25, 1994,
between Targeted Genetics Corporation and the Fred Hutchinson
Cancer Research Center* (Exhibit 10.20)(B)
10.13 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.* (Exhibit 10.29)(D)
10.14 First Amended and Restated License Agreement effective October
12, 1995 between The University of Tennessee Research
Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30)(D)
10.15 Amendment to the First Amended and Restated License Agreement
between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc., dated as of June 19, 1996* (Exhibit
10.1)(E)
10.16 Second Amendment to the First Amended and Restated License
Agreement between The University of Tennessee Research
Corporation and RGene Therapeutics, Inc., dated as of April
17, 1998*
10.17 Exclusive Sublicense Agreement effective July 23, 1996 by and
between Alkermes, Inc. and Targeted Genetics Corporation.*
(Exhibit 10.20)(G)
10.18 Revised License Agreement effective October 1, 1996, by and
between the University of Pittsburgh--of the Commonwealth
System of Higher Education and Targeted Genetics Corporation*
(Exhibit 10.21)(G)
10.19 Agreement dated as of May 28, 1996 by and between RGene
Therapeutics, Inc. and Laboratoires Fournier S.C.A.* (Exhibit
10.32)(D)
10.20 Master Agreement, dated as of November 23, 1998, by and between
the Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.1)(L)
10.21 License and Collaboration Agreement, dated as of November 23,
1998, by and between the Company and Medeva Pharmaceuticals,
Inc.* (Exhibit 1.2)(L)
10.22 Supply Agreement, dated as of November 23, 1998, by and between
the Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.3)(L)
10.23 Common Stock Purchase Agreement, dated as of November 23, 1998,
by and between the Company and Medeva Pharmaceuticals, Inc.
and Medeva PLC* (Exhibit 1.4)(L)
10.24 Credit Agreement, dated as of November 23, 1998, by and between
the Company and Medeva Pharmaceuticals, Inc. and Medeva PLC*
(Exhibit 1.5)(L)
10.25 License Agreement, dated as of March 15, 1997, between the
Burnham Institute and Targeted Genetics Corporation* (Exhibit
10.23)(J)
10.26 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)
10.27 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)
10.28 Second Amendment to Olive Way Building Lease, dated as of June
12, 1996, between Targeted Genetics Corporation and Ironwood
Apartments, Inc. (successor in interest to Metropolitan
Federal Savings and Loan Association) (Exhibit 10.25)G)
10.29 Third Amendment to Olive Way Building Lease, dated as of
October 30, 1998, between Targeted Genetics Corporation and
Ironwood Apartments, Inc. (successor in interest to
Metropolitan Federal Savings and Loan Association)
10.30 Office Lease, dated as of October 7, 1996, by and between
Benaroya Capital Company, LLC and Targeted Genetics
Corporation (Exhibit 10.26)(G)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
10.31 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of
December 27, 1993 (Exhibit 10.22)(A)
10.32 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as of
December 27, 1993 (Exhibit 10.23)(A)
10.33 Master Equipment Lease Agreement, dated as of October 17, 1995,
between Financing for Science International, Inc. and Targeted
Genetics Corporation (Exhibit 10.28)(C)
10.34 1992 Restated Stock Option Plan(K)
10.35 Stock Option Plan for Nonemployee Directors (Exhibit 10.34)(J)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
- --------
* Confidential treatment has been granted by or requested from the
Securities and Exchange Commission for portions of these exhibits.
(A) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 33-77054) filed on March
30, 1994, as amended.
(B) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(C) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(D) Incorporated by reference to the designated exhibit included with the
Company's Form S-1 Registration Statement (No. 333-03592) filed on April
16, 1996, as amended.
(E) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(F) Incorporated by reference to the designated exhibit included with the
Company's Form 8-A filed October 22, 1996.
(G) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
(H) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending March 31,
1997.
(I) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1997.
(J) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(K) Incorporated by reference to the designated exhibit included with the
Company's Form S-8 Registration Statement (No. 333-58907) filed on July
10, 1998.
(L) Incorporated by reference to the designated exhibit included with the
Company's Form 8-K filed January 6, 1999.
<PAGE>
EXHIBIT 10.16
TO
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1998
"[ * ]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE>
EXHIBIT 10.16
SECOND AMENDMENT TO THE FIRST AMENDED AND RESTATED
LICENSE AGREEMENT BETWEEN THE UNIVERSITY OF TENNESSEE
RESEARCH CORPORATION AND RGENE THERAPEUTICS, INC.
To All Those Concerned:
This is the Second Amendment to the First Amended And Restated License
Agreement between The University of Tennessee Research Corporation ("UTRC") and
RGene Therapeutics, Inc. ("RGENE") having an effective date of October 12, 1995,
as amended by an amendment dated as of June 19, 1996 (the "Agreement"). UTRC
and Targeted Genetics Corporation ("TGC"), a Delaware corporation and successor
to RGene, agree to amend the Agreement as of April 17, 1998, effective as of
April 17, 1998, as stated below.
1. The title of the Agreement is hereby amended to recite:
FIRST AMENDED AND RESTATED LICENSE AGREEMENT
BETWEEN
THE UNIVERSITY OF TENNESSEE RESEARCH CORPORATION
AND
TARGETED GENETICS CORPORATION
2. Because RGENE merged into TGC effective November 20, 1996 with TGC
succeeding as a matter of law to all the rights and obligations of RGENE,
including RGENE's rights and obligations under the Agreement, all references to
RGENE in the Agreement shall be changed to TGC.
3. The principal place of business and mailing address for TGC shall be changed
in the first paragraph of the Agreement and in Article 14.1A to:
Targeted Genetics Corporation
1100 Olive Way, Suite 100
Seattle, WA 98101-1827
4. Article 1.7 is hereby amended to recite:
"Licensed Fields" shall mean the applications of the Technology and the
Licensed Patent Rights included within the definitions of the First
Licensed Field, the Second Licensed Field, the Third Licensed Field, the
Fourth Licensed Field, and the Research Reagent Field, as set out below.
5. Article 1.8 is hereby amended to recite:
-1-
<PAGE>
"First Licensed Field" shall mean and include therapeutic and prophylactic
applications of the Technology and the Licensed patent Rights for:
A. all cancers except for Excluded Cancers (defined below); and
B. traumatic brain injuries; and
C. cardiac and cardiovascular diseases and disorders except for
infectious diseases of the cardiovascular system; and
D. all dystrophies or dystrophic diseases and disorders not specifically
included in the Second Licensed Field, the Third Licensed Field, the
Fourth Licensed Field, or the Excluded Fields; and
E. all non-sepsis related infectious diseases other than pulmonary
diseases; and
F. all therapeutic and prophylactic applications for:
(a) the following classifications of rheumatic diseases as set forth
in Table 105-1 ("Classification of the Rheumatic Diseases") of
The Merck Manual, Sixteenth Edition (Robert Berkow, M.D., Editor-
in-Chief; published by Merck Research Laboratories, Rahway, N.J.;
1992; pp. 1297-1300.):
I. Diffuse connective tissue diseases
II. Arthritis associated with spondylitis
III. Osteoarthritis, including osteoarthrosis and degenerative
joint diseases
IV. Arthritis, tenosynovitis, and bursitis associated with
infectious agents, excluding treatment of the underlying
infectious diseases themselves
V. Metabolic and endocrine diseases with rheumatic states,
including crystal induced conditions
VII. Neuropathic disorders
VIII. Bone and cartilage disorders associated with articular
manifestations
-2-
<PAGE>
IX. Nonarticular rheumatism; and
(b) osteogenesis imperfecta; and
(c) tendon, ligament, and cartilage repair and healing; and
(d) diseases and disorders of the following types of connective
tissues: white fibrous tissue in the form of tendons and
ligaments; hyaline cartilage; interarticular fibro-cartilage;
connecting fibro-cartilage; circumferential fibro-cartilage;
stratiform fibro-cartilage; yellow or elastic fibro-cartilage;
and
(e) all other diseases and disorders of joints and connective
tissues; and
G. all diseases and disorders of the central nervous system, including
cancers of the central nervous system and the brain, except for
cancers of the head and neck; and
H. all other immunologic and genetic diseases and disorders not
specifically included in the Second Licensed Field, the Third Licensed
Field, the Fourth Licensed Field, or the Excluded Fields and not
previously licensed to others as indicated by Appendix A, consisting
of excerpts from all licenses for the Licensed patent Rights granted
to third parties by UTRC (excluding the names of the licensees); and
I. all other therapeutic, prophylactic, and diagnostic applications not
specifically included in the Second Licensed Field, the Third Licensed
Field, the Fourth Licensed Field, or the Excluded Fields and not
previously licensed to others as indicated in Appendix A, consisting
of excerpts from all licenses for the licensed Patent Rights granted
to third parties by UTRC (excluding the names of the licensees).
For the purposes of this Article 1.8 only, the term "Excluded Cancers"
shall be defined as hematological cancers and cancers of the lung, breast,
ovaries, colon (i.e. large intestine and rectum), pancreas, stomach, small
intestine, cervix uteri, mouth, head and neck.
6. Article 1.12 is hereby amended to recite:
"Excluded Fields" shall mean:
A. all applications for sepsis-related infectious diseases except sepsis-
related infectious diseases of the pulmonary system other than
bacterial pulmonary infections in cystic fibrosis patients; and
-3-
<PAGE>
B. all applications for cystic fibrosis and pulmonary diseases and
disorders in cystic fibrosis patients; and
C. all other applications previously licensed on an exclusive basis to
others as indicated in Appendix A, being excerpts from all licenses
for the Licensed Patent Rights granted to third parties by UTRC
(excluding the names of the licensees).
7. After Article 1.16, insert a new Article 1.17 to recite:
"Research Reagent Field" shall mean the sale for research purposes of
cationic lipid(s), reagent(s) and/or other products based on or
incorporating the Technology or described/claimed in the Licensed Patent
Rights.
8. The phrase "with the right to sell such Licensed Products" appearing in
Article 2.1A, B, E, F, G, and H is hereby amended to read "with the right to
manufacture, use and sell such Licensed products".
9. The term "co-exclusive" appearing in Article 2.1E and F is hereby changed to
"exclusive".
10. Delete everything after Article 2.1H in Article 2.1 and insert:
I. a right and license in the Territory to utilize the Technology in the
manufacture, use, and sale of Licensed Products for use in the
Research Reagent Field, with the right to make, use, and sell such
Licensed Products for use in the Research Reagent Field being
exclusive; and
J. a right and license in the Territory to manufacture, use, and sell
Licensed Products for use in the Research Reagent Field under the
issued patents included within the Licensed Patent Rights, with the
right to make, use and sell such Licensed Products for use in the
Research Reagent Field being exclusive.
The term "exclusive" as used in this Article 2.1 means that during the term
of this Agreement UTRC shall not sell or otherwise distribute Licensed
Products in the Territory for use in the First Licensed Field, the Third
Licensed Field, or the Research Reagent Field or license any third party to
make, use, sell, or otherwise distribute Licensed Products in the Territory
for use in the First Licensed Field, the Third Licensed Field, or the
Research Reagent Field.
The term "co-exclusive" as used in Article 2.1G and Article 2.1H means that
during the term of this Agreement UTRC shall not sell or otherwise
distribute Licensed Products in the Territory for use in the Fourth
Licensed Field or license any third party (other than Genzyme Corporation
or a successor or assignee of
-4-
<PAGE>
Genzyme Corporation) to make, use, sell, or otherwise distribute Licensed
Products in the Territory for use in the Fourth Licensed Field.
11. Delete Article 2.2B and redesignate Article 2.2C as Article 2.2B.
12. Article 2.3 through paragraph A is hereby amended to recite:
UTRC further expressly reserves for itself, for The University of
Tennessee, and for McMaster:
A. the non-exclusive right to utilize the Technology and the Licensed
Patent Rights in the First Licensed Field, the Third Licensed Field,
and the Research Reagent Field for any research (including commercial
research) and/or academic purpose;
13. Article 2.5 is hereby amended to recite:
To the extent of the license granted hereunder, TGC shall have the right in
the Territory to sublicense to third parties the right to make, use, and
sell Licensed Products for use in the Licensed Fields. All sublicenses
shall be subject to this Agreement in all respects and TGC shall be
responsible for the performance hereunder by any such sublicensee. TGC
shall give UTRC prompt notification of the identity and address of each
sublicensee and the scope of the sublicense, (e.g. field and territory)
within ten (10) days of granting a sublicense. No sublicense shall relieve
TGC of any obligations under this Agreement.
14. Add to the end of Article 2.7:
In the event such license to Aronex Pharmaceuticals, Inc. is terminated,
then TGC's sublicense shall be converted to a direct license from UTRC
under the terms and conditions of this Agreement.
15. Add to the end of Article 4.1A:
Upon execution of the Second Amendment to the Agreement, TGC shall pay to
UTRC a License Issue Fee in the amount of [ * ], with such payment being
neither refundable nor chargeable against future fees or royalties of any
type.
16. Article 4.1C through paragraph (1) is hereby amended to recite:
TGC shall pay to UTRC Running Royalties in an amount equal to [ * ] of
all Net Sales by TGC and Affiliate Sublicensees of Licensed Products
(except for Licensed Products in the Research Reagent Field) that are
covered by a claim of an issued
- ----------
[ * ] Confidential Treatment Requested
-5-
<PAGE>
and unexpired patent included within Licensed Patent Rights in the place of
manufacture, use, or sale, provided:
(1) If, in order to manufacture or sell any Licensed Product covered by
this Article 4.1C, TGC or any Affiliate Sublicensees are required to
obtain from one or more non-Affiliate third parties other royalty-
bearing license(s) for additional drug delivery technology, the
Running Royalty rate payable hereunder on Net Sales of that Licensed
Product shall be reduced by [ * ] for each such license actually
entered into by TGC or an Affiliate Sublicensee, provided that in no
event shall the Running Royalty rate be less than [ * ] of Net Sales
and further provided that the reduced Running Royalty rate shall apply
only to sales of that Licensed Product on which TGC or an Affiliate
Sublicensee actually owes and pays a royalty to a non-Affiliate third
party.
17. Article 4.1D through paragraph (1) is hereby amended to recite:
TGC shall pay UTRC Running Royalties in an amount equal to [ * ] of all
Net Sales by TGC and Affiliate Sublicensees of Licensed Products (except
for Licensed Products in the Research Reagent Field) that are not covered
by the provisions of Article 4.1C above during each calendar quarter during
the term of this Agreement, provided:
(1) If, in order to manufacture or sell any Licensed Product covered by
this Article 4.1D, TGC or any Affiliate Sublicensees are required to
obtain from one or more non-Affiliate third parties other royalty-
bearing license(s) for additional drug delivery technology, the
Running Royalty rate payable hereunder on Net Sales of that Licensed
Product shall be reduced by [ * ] for each such license actually
entered into by TGC or an Affiliate Sublicensee, provided that in no
event shall the Running Royalty rate be less than [ * ] of net Sales
and further provided that the reduced Running Royalty rate shall apply
only to sales of that Licensed Product on which TGC or an Affiliate
Sublicensee actually owes and pays a royalty to a non-Affiliate third
party.
18. The first clause of Article 4.1E is hereby amended to recite:
TGC shall pay to UTRC Sublicense Fees and Royalties received from other
than Affiliate Sublicensees as follows:
19. Article 4.1F is hereby amended to recite:
TGC shall pay to UTRC Annual License Maintenance Fees as follows:
- ----------
[ * ] Confidential Treatment Requested
-6-
<PAGE>
(1) [ * ] per year for each of the following years: 1995, 1996, 1997,
1998, 1999;
(2) [ * ] per year for each of the following years: 2000, 2001, 2002,
2003, and 2004; and
(3) [ * ] per year for 2005 and each year thereafter during the term of
this Agreement.
Annual License Maintenance Fees shall be paid by the last day of February
of the year to which they apply. The Annual License Maintenance Fee paid
for any year shall be creditable against the Running Royalties, Sublicense
Royalties, and License Milestone Payments accruing during that year.
Annual License Maintenance Fees for any year paid in excess of Running
Royalties and Sublicense Royalties for that year shall not be creditable to
Running Royalties and Sublicense Royalties for subsequent years.
20. After Article 4.1F, insert new parts G and H to recite:
G. TGC shall pay to UTRC License Milestone Payments as follows:
(1) [ * ] upon initiation of the first Phase II clinical trial
initiated by TGC for any Licensed Product in any of the First
Licensed Field, the Second Licensed Field, or the Third Licensed
Field;
(2) [ * ] upon initiation of the first Phase III clinical trial
initiated by TGC for any Licensed Product in any of the First
Licensed Field, the Second Licensed Field, or the Third Licensed
Field; and
(3) [ * ] upon initiation of the first Product License Application
approved for TGC for any Licensed Product in any of the First
Licensed Field, the Second Licensed Field, or the Third Licensed
Field.
The total amount of License Milestone Payments due under this Article
4.1G is [ * ].
H. TGC shall pay UTRC Running Royalties in an amount equal to [ * ] of
all Net Sales by TGC and Affiliate Sublicensees of Licensed Products
in the Research Reagent Field during each calendar quarter during the
term of this Agreement.
- ----------
[ * ] Confidential Treatment Requested
-7-
<PAGE>
21. Article 4.7 is hereby amended to recite:
Notwithstanding any provision herein to the contrary, the obligation to pay
royalties shall terminate as to each of the issued patents that may be
included within Licensed Patent Rights upon expiration of the patent, a
final decision of a court or governmental agency of competent jurisdiction
that the patent is invalid or unenforceable (which decision is unappeasable
or not appealed within the time allowed therefor) or an admission in
writing by the holder that the patent is invalid or unenforceable by
reissue, disclaimer or otherwise, except that royalties that have accrued,
but have not been paid prior thereto, shall be payable with the next
scheduled payment under the provisions of this Article.
22. The term "Third Licensed Field" appearing in Article 7.1 (line 15) is
hereby changed to "Fourth Licensed Field." The term "First Licensed Field"
appearing in Article 7.1 (line 11) and Article 7.2 (lines 5 and 7) is hereby
changed to read "First Licensed Field, the Third Licensed Field, or the Research
Reagent Field."
23. Article 15.1 is hereby amended to recite:
During the term of this Agreement, the University of Tennessee, McMaster
and UTRC shall have a non-exclusive, non-transferable, royalty-free license
for research and academic purposes only to utilize any patented
improvements or modifications to the Technology or inventions within the
licensed Patent Rights developed during the term of this Agreement, wholly
or partly, by TGC or its employees, contractors, agents, or subsidiaries.
24. Appendix A of the Agreement is hereby amended to read as set forth in
Appendix A attached hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed the date first above written.
TARGETED GENETICS THE UNIVERSITY OF TENNESSEE
CORPORATION RESEARCH CORPORATION
By /s/ H. Stewart Parker By /s/ Ann J. Roberson
---------------------- --------------------
Printed Printed
Name H. Stewart Parker Name Ann J. Roberson
Title President and CEO Title President
Date 4-17-98 Date 4-24-98
-8-
<PAGE>
Approved by
MCMASTER UNIVERSITY
By /s/ M. R. McDermott
----------------------
Printed
Name Dr. M. R. McDermott
Title Director Research Contracts & Intellectual Property
Date 5/20/98
-9-
<PAGE>
APPENDIX A
ACTUAL GRANTS OF LICENSE AND FIELDS OF USE FOR DC-CHOL FOR
UTRC'S LICENSEES AS OF APRIL 17, 1998
LICENSEE A - ARONEX
2.1 UTRC hereby grants to ARONEX, and ARONEX hereby accepts from UTRC, upon the
terms and conditions herein specified and subject to the reservations set out
below, (a) a world-wide exclusive License to utilize the Technology in the
manufacture, use, and sale of Licensed Products for use in the Licensed Field
and (b) a world-wide exclusive License to manufacture, use and sell Licensed
Products for use in the Licensed Field under the issued patents included within
Licensed Patent Rights. The term "exclusive" as used in this Article 2.1 means
that UTRC shall not sell or otherwise distribute Licensed Products for use in
the Licensed Field or license third parties to sell or otherwise distribute
Licensed Products for use in the Licensed Field during the term of this
Agreement.
1.7 "Licensed Field" shall mean and include therapeutic and prophylactic
applications of the Technology and the Licensed Patent Rights for (a)
sepsis-related infectious diseases other than pulmonary diseases and (b)
lung, colon, breast, ovarian, and hematologic cancers.
1.8 "Excluded Fields" shall mean:
(a) the sale for research purposes of products based on or incorporating
the Technology or described/claimed in the Licensed Patent Rights; and
(b) all applications for immunologic or genetic disorders; and
(c) all applications for diseases and disorders of joints and connective
tissues, including but not limited to (1) all forms of arthritis; (2)
osteoporosis and other diseases of the bone; (3) tendon and ligament
repair and healing; (4) cartilage repair and healing; (5) radicular
and pseudoradicular syndromes; (6) systemic lupus erythematosus; (7)
scleroderma; (8) Sjogren's syndrome; and (9) aseptic loosening and
other causes of prosthetic orthopaedic failure; and
(d) all applications for pulmonary diseases or disorders other than lung
cancer; and
(e) all applications for cardiac diseases or disorders other hematologic
cancer; and
-10-
<PAGE>
(f) all applications for diseases and disorders of the skin except skin
cancer; and
(g) all applications for infectious diseases except sepsis-related
infectious diseases other than pulmonary diseases; and
(h) all other applications not specifically included in the Licensed
Field.
-11-
<PAGE>
LICENSEE D
2.1 UTRC hereby grants to LICENSEE D, and LICENSEE D hereby accepts from UTRC,
upon the terms and conditions herein specified and subject to the
reservations set out below and further subject to the royalty-free non-
exclusive license and other rights held by the United States Government (as
more fully set out in Article 2.3 below),
A. a world-wide license under the Patent Rights to manufacture, use, and
sell Licensed Products for use in the First Licensed Field with the
license to sell being exclusive; and
B. a world-wide non-exclusive License under the Patent Rights to
manufacture, use, and sell Licensed Products for use in the Second
Licensed Field;
The term "exclusive" as used in Article 2.1(a) above means that UTRC shall not
sell or otherwise distribute Licensed Products for use in the First Licensed
Field or license third parties to sell or otherwise distribute Licensed Products
for use in the First Licensed Field during the term of this Agreement, subject
to the provisions of Article 2.2 below.
1.6 "Licensed Fields" shall be defined as the First Licensed Field (defined
below) and the Second Licensed Field (defined below).
1.7 "First Licensed Field" shall mean and include therapeutic and prophylactic
applications for treating and/or preventing cystic fibrosis in humans,
including applications for treating and/or preventing bacterial pulmonary
infections in cystic fibrosis patients.
1.8 "Second Licensed Field" shall mean and include:
A. therapeutic and prophylactic applications for treating and/or
preventing all diseases and disorders of the pulmonary system except
for lung cancer and disease(s)/disorder(s) included in the First
Licensed Field; and
B. therapeutic and prophylactic applications for treating and/or
preventing sepsis-related and non-sepsis-related infectious diseases
of the lungs.
1.9 "Excluded Fields" shall mean:
A. the sale for research purposes of active cationic lipid(s) and/or
reagent(s) based on the Technology or described/claimed in the Patent
Rights; and
-12-
<PAGE>
B. any applications for immunologic or genetic disorders other than those
which may be specifically included in the First or Second Licensed
Fields; and
C. any applications for:
(1) the following classifications of rheumatic diseases as set forth
in Table 105-1 ("Classification of the Rheumatic Diseases") of
The Merck Manual, Sixteenth Edition (Robert Berkow, M.D., Editor-
in-Chief; published by Merck Research Laboratories, Rahway, N.J.;
1992; pp. 1297 - 1300.):
I. Diffuse connective tissue diseases
II. Arthritis associated with spondylitis
III. Osteoarthritis, including osteoarthrosis and degenerative
joint diseases
IV. Arthritis, tenosynovitis, and bursitis associated with
infectious agents, excluding treatment of the underlying
infectious diseases themselves
V. Metabolic and endocrine diseases with rheumatic states,
including
a.) crystal induced conditions
VII. Neuropathic disorders
VIII. Bone and cartilage disorders associated with articular
manifestations
IX. Nonarticular rheumatism; and
(2) osteogenesis imperfecta; and
(3) tendon, ligament, and cartilage repair and healing; and
(4) diseases and disorders of the following types of connective
tissues: white fibrous tissue in the form of tendons and
ligaments; hyaline cartilage; interarticular fibro-cartilage;
connecting fibro-cartilage; circumferential fibro-cartilage;
stratiformfibro-cartilage; yellow or elastic fibro-cartilage; and
(5) any other diseases and disorders of joints and connective
tissues; and
D. any applications for all cardiac and cardiovascular diseases and
disorders; and
-13-
<PAGE>
E. any applications for sepsis-related infectious diseases other than
those which may be specifically included in the First or Second
Licensed Fields; and
F. any applications for non-sepsis related infectious diseases other than
those which may be specifically included in the First or Second
Licensed Fields; and
G. any applications for skin diseases or disorders; and
H. any applications for cancer; and
I. any applications for diseases of the central nervous system; and
J. any applications for any dystrophic diseases or disorders; and
K. any other applications not specifically included in the Licensed
Fields.
-14-
<PAGE>
EXHIBIT 10.29
THIRD AMENDMENT TO LEASE AGREEMENT
This THIRD AMENDMENT TO LEASE AGREEMENT (this "Amendment") is entered into
as of October 30, 1998 by and between Ironwood Apartments, Inc., as successor to
Metropolitan Federal Savings and Loan Association ("Landlord") and Targeted
Genetics Corporation ("Tenant").
Landlord and Tenant are parties to that certain Olive Way Building lease
dated November 20, 1992, as modified by that certain First Amendment to Olive
Way Building Lease dated December 10, 1994 and that certain Second Amendment to
Lease Agreement executed on June 12, 1996 and May 22, 1996 (as modified, the
"Lease").
Section 4.02 of the Lease grants to Tenant three options to extend the
Lease term for 5 years each. Tenant has exercised the first of these three
options, leaving two remaining. The purpose of this Amendment to modify the
Lease to reflect exercise of that option.
Landlord and Tenant do hereby amend the Lease as follows:
1. EXTENSION. The term of the Lease is hereby extended for an additional 60
months to April 1, 2004. the rent for the extended term is set forth in Section
6.02 of the Lease.
2. NO OTHER AMENDMENTS. Except as modified by this Amendment and by the
Amendments referenced above, the lease remains in full force and effect and has
not been modified or amended.
DATED: October 30, 1998.
LANDLORD:
IRONWOOD APARTMENTS, INC.,
a Washington corporation
By: /s/ John Stone
--------------
John Stone, President
TENANT:
TARGETED GENETICS CORPORATION
By: /s/ James A. Johnson
--------------------
Its: Vice President, Finance
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF SPOKANE )
I certify that I know or have satisfactory evidence that John Stone is the
person who appeared before me, and said person acknowledged that he/she signed
this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the President of Ironwood Apartments, Inc. to
be the free and voluntary act of such party for the uses and purposes mentioned
in this instrument.
Dated: October 30, 1998
/s/ Durinda M. Howard
---------------------
(Signature of Notary Public)
Durinda M. Howard
-----------------
(Printed Name of Notary Public)
My Appointment expires: 2/27/99
-------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that James Johnson is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the Vice President of Targeted Genetics
Corporation to be the free and voluntary act of such party for the uses and
purposes mentioned in this instrument.
Dated: 11/27/98
--------
/s/ Gary Michael
----------------
(Signature of Notary Public)
Gary Michael
------------
(Printed Name of Notary Public)
My Appointment expires: 12-8-98
--------
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-83064, 333-03889, 333-28151 and 333-58907, and Form S-3 No.
333-51625) pertaining to the Targeted Genetics Corporation's 1992 Restated
Stock Option Plan and the Targeted Genetics Corporations' Stock Option Plan
for Nonemployee Directors and of our report dated February 5, 1999, with
respect to the financial statements of Targeted Genetics Corporation included
in the Annual Report (Form 10-K) for the year ended December 31, 1998.
Ernst & Young LLP
Seattle, Washington
March 8, 1999
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<PERIOD-START> JAN-01-1998 JAN-01-1997
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