<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to
Commission File Number: 0-23930
-------
TARGETED GENETICS CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1549568
----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(206) 623-7612
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 36,450,077
------------------------------------- -----------------------------------
(Class) (Outstanding at August 7, 2000)
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TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended June 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets at June 30, 2000 and December 31, 1999 3
b) Condensed Statements of Operations for the three and six
months ended June 30, 2000 and 1999 4
c) Condensed Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 5
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
</TABLE>
* No information is provided due to inapplicability of the item.
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TARGETED GENETICS CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ---------------
ASSETS (Unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,940,524 $ 4,100,798
Securities available for sale 1,531,800 3,052,471
Accounts receivable 1,355,028 1,837,212
Prepaid expenses and other 533,414 269,864
------------- -------------
Total current assets 31,360,766 9,260,345
Property, plant and equipment, net 3,612,857 4,021,466
Other assets 374,334 410,667
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$ 35,347,957 $ 13,692,478
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,275,412 $ 2,278,338
Accrued payroll and other liabilities 722,957 1,181,555
Deferred revenue 385,000 -
Current portion of long-term obligations 1,041,230 1,160,174
------------- -------------
Total current liabilities 4,424,599 4,620,067
Long-term obligations 2,320,891 2,106,897
Shareholders' equity:
Preferred stock, 6,000,000 shares authorized
Series A preferred stock, $.01 par value; 800,000
shares authorized, none outstanding - -
Series B convertible exchangeable preferred stock,
$.001 par value; 12,015 shares authorized, issued
and outstanding at June 30, 2000 and at
December 31, 1999 12,823,066 12,390,513
Common stock, $.01 par value, 80,000,000 shares
authorized, 36,439,977 and 34,019,175 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 126,895,329 98,122,922
Accumulated deficit (111,112,571) (103,532,432)
Accumulated other comprehensive loss (3,357) (15,489)
------------- -------------
Total shareholders' equity 28,602,467 6,965,514
------------- -------------
$ 35,347,957 $ 13,692,478
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
3
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TARGETED GENETICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Collaborative agreements $ 1,310,769 $ 1,418,392 $ 3,073,466 $ 2,623,117
Collaborative agreements with affiliates 441,799 - 854,060 -
Total revenue 1,752,568 1,418,392 3,927,526 2,623,117
Operating expenses:
Research and development 4,538,044 3,482,494 8,255,800 6,660,454
Technology license fee - 3,200,000 - 3,200,000
General and administrative 1,091,622 654,385 2,198,573 1,440,850
----------- ----------- ----------- -----------
Total expenses 5,629,666 7,336,879 10,454,373 11,301,304
----------- ----------- ----------- -----------
Loss from operations (3,877,098) (5,918,487) (6,526,847) (8,678,187)
Equity in loss of joint venture (607,537) - (1,171,531) -
Investment income 463,503 94,381 679,257 221,155
Interest expense (64,344) (54,383) (128,465) (105,703)
----------- ----------- ----------- -----------
Net loss (4,085,476) (5,878,489) (7,147,586) (8,562,735)
Accretion of dividend on preferred stock (216,025) - (432,553) -
----------- ----------- ----------- -----------
Net loss applicable to common stock $(4,301,501) $(5,878,489) $(7,580,139) $(8,562,735)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.12) $ (0.19) $ (0.21) $ (0.28)
=========== =========== =========== ===========
Shares used in computation of
basic and diluted net loss per share 36,415,401 30,804,745 35,619,386 30,730,523
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
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TARGETED GENETICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
---------------------
Net loss $(7,580,139) $(8,562,735)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of joint venture 1,171,531 -
Depreciation and amortization 730,501 744,633
Accretion on preferred stock 432,553 -
Technology fee paid with common stock and warrants - 3,200,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 482,184 (899,204)
Increase (decrease) in accounts payable
and accrued liabilities 88,802 (377,095)
Decrease (increase) in other assets (262,017) 117,244
Increase in accrued interest on
securities available for sale 12,691 76,015
----------- -----------
Net cash used in operating activities (4,923,894) (5,701,142)
Investing activities:
---------------------
Investment in unconsolidated joint venture (1,171,531) -
Maturities and sales of securities available for sale 1,520,112 6,881,277
Purchases of securities available for sale - (500,922)
Purchases of property, plant and equipment (388,867) (1,015,326)
----------- -----------
Net cash provided by (used in) investing activities (40,286) 5,365,029
Financing activities:
---------------------
Net proceeds from sale of capital stock 28,772,407 3,833
Proceeds from leasehold improvement and equipment financing 671,594 960,283
Payments under capital leases and installment loans (640,095) (508,279)
----------- -----------
Net cash provided by financing activities 28,803,906 455,837
----------- -----------
Net increase in cash and cash equivalents 23,839,726 119,724
Cash and cash equivalents, beginning of period 4,100,798 1,870,841
----------- -----------
Cash and cash equivalents, end of period $27,940,524 $ 1,990,565
=========== ===========
Supplemental disclosure of cash:
Equipment financed through capital lease $ 82,241 $ 121,705
Interest paid on capital lease and installment loans 89,088 99,163
</TABLE>
The accompanying notes are an integral part of this statement.
5
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TARGETED GENETICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
------------------------------
The condensed financial statements included in this quarterly report have been
prepared by Targeted Genetics Corporation without audit, according to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. In the opinion of our
management, the financial statements reflect all adjustments (which consist
solely of normal recurring adjustments) necessary to present fairly the
financial position and results of operations as of and for the periods
indicated.
The results of operations for the three months and six months ended June 30,
2000 are not necessarily indicative of the results to be expected for the full
year.
Note 2. New Accounting Pronouncements
--------------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"), which provides the SEC's views
on applying generally accepted accounting principles to revenue recognition
issues. In June 2000, the SEC issued an update to SAB 101 which delays its
implementation date until no later than the fourth quarter of fiscal years
beginning after December 15, 1999. In response to SAB 101, we expect to change
our method for recording nonrefundable upfront license fee revenue upon receipt
to a more preferable method of deferring this revenue over the term of the
related collaborative agreements. While the SEC has not issued final guidance
with respect to implementing SAB 101, we have estimated the impact of this
change to be a cumulative charge of approximately $3.1 million, as of January 1,
2000, to reverse previously recognized up-front license fee revenue related to
our November 1998 Celltech cystic fibrosis collaboration. We expect to defer
this revenue prospectively over the remaining term of the Celltech collaboration
agreement. We anticipate implementing this change during the second half of
2000, pending additional SEC and industry guidance.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN 44), which clarifies their guidance for certain issues related
to the application of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The adoption of FIN 44 on July 1, 2000 will have no
impact on the our operating results or financial position and we do not expect
FIN 44 to impact the way we account for equity instruments in the future.
6
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Note 3. Sale of Common Stock
-----------------------------
On March 1, 2000, we completed the private placement of 2,164,285 shares of
our common stock to investors for an aggregate price of $30.3 million.
Note 4. Emerald Gene Systems
-----------------------------
In July 1999, Targeted Genetics and Elan Corporation, plc ("Elan") formed
Emerald Gene Systems, Ltd. ("Emerald"), a joint venture to develop enhanced gene
delivery technology and products utilizing our gene therapy expertise and Elan's
drug delivery expertise. We currently own an 80.1% interest in Emerald and Elan
owns 19.9% (non-voting). While we own 100% of the voting common shares, Elan
and its subsidiaries have retained significant minority investor rights that are
considered "participating rights" as defined by the FASB's Emerging Issues Task
Force Bulletin 96-16, Investors' Accounting for an Investee When the Investor
Has a Majority of the Voting Interest but the Minority Shareholder Has Certain
Approval or Veto Rights. Elan's participating rights prevent us from exercising
control over Emerald. Accordingly, we do not consolidate the financial
statements of Emerald but instead account for our investment in Emerald under
the equity method of accounting. Emerald's unaudited results for the three and
six months ended June 30, 2000 were as follows:
EMERALD GENE SYSTEMS, LTD.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 3,735 $ -
Prepaid expenses 1,003 2,250
------------ ------------
Total current assets 4,738 2,250
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,400 $ 6,350
Due to shareholders and related parties 289,922 738,346
------------ ------------
Total current liabilities 293,322 744,696
------------ ------------
Shareholders' equity:
Share capital 12,000 12,000
Contributed surplus 16,904,446 14,988,000
Accumulated deficit (17,205,032) (15,742,446)
------------ ------------
Total shareholders' deficit (288,584) (742,446)
------------ ------------
$ 4,738 $ 2,250
============ ============
</TABLE>
7
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EMERALD GENE SYSTEMS, LTD.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, 2000 June 30, 2000
------------------ ----------------
Revenue $ 156 $ 175
Operating expenses:
Research and development 755,322 1,448,050
General and administrative 3,309 14,711
--------- -----------
758,631 1,462,761
--------- -----------
Net loss $(758,475) $(1,462,586)
========= ===========
EMERALD GENE SYSTEMS, LTD.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
June 30, 2000
-------------
Operating activities:
---------------------
Net loss $(1,462,586)
Adjustments to reconcile net loss to net cash
used in operating activities:
Changes in operating assets and liabilities:
Decrease in accounts payable and accrued liabilities (451,374)
Decrease in other assets 1,248
-----------
Net cash used in operating activities (1,912,712)
Financing activities:
---------------------
Net proceeds from additional equity investment 1,916,447
-----------
Net cash provided by financing activities 1,916,447
-----------
Net increase in cash and cash equivalents 3,735
Cash and cash equivalents, beginning of period -
-----------
Cash and cash equivalents, end of period $ 3,735
===========
8
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Note 5. Subsequent Events
--------------------------
On July 17, 2000, we entered into a lease for approximately 75,000 square feet
of future manufacturing space in Bothell, Washington. Subject to adjustments in
the timing of tenant improvements, the lease on this facility will commence on
October 1, 2000 for a term of fifteen years, with one five-year extension
option. The average annual rent payment for this facility will be approximately
$1,350,000 during the fifteen-year lease term.
On July 21, 2000, we exercised our option to require Elan to purchase $5 million
of Targeted Genetics common stock. In accordance with the terms of the stock
purchase agreement between Targeted Genetics and Elan, on August 8, 2000, we
issued to Elan 382,739 shares of our common stock at $13.06 which represents a
premium to market price.
We announced on August 9, 2000 that we plan to acquire 100% of the outstanding
capital stock and assume all outstanding options to purchase capital stock of
Genovo, Inc., a privately held biotechnology company specializing in viral gene
delivery, in exchange for approximately 6.6 million shares of Targeted Genetics
common stock. The shares to be exchanged to acquire Genovo include
approximately 1 million shares to be issued directly to Biogen, Inc., a major
publicly held biotechnology company, in exchange for returning rights to certain
Genovo technology to Targeted Genetics. We will account for the acquisition as
a purchase. We will incur one-time acquisition costs and integration-related
charges associated with the transaction. We anticipate allocating a portion of
the purchase price to in-process research and development, which will be
expensed upon the consummation of the transaction. This transaction is subject
to Hart-Scott-Rodino review.
We also announced on August 9, 2000 that we had entered into definitive
agreements to establish a multi-product development and commercialization
collaboration with Biogen. Under the terms of the agreements, Targeted Genetics
will develop up to four new gene therapy products for Biogen. The specific
genes to be delivered are to be determined by Biogen and Targeted Genetics over
the next three years. In addition, Targeted Genetics will provide process
development assistance related to Biogen's manufacturing of an existing gene
therapy product currently in clinical development for the treatment of glioma,
resulting in a total of up to five products covered by the collaboration. Under
the terms of the agreements, Biogen will pay Targeted Genetics an up-front
payment of $8 million, ongoing research and development funding, and milestone
payments related to the development of up to five products. Biogen's funding
under the agreement also includes commitments to loan up to $10 million over the
next five years and to purchase up to $10 million in Targeted Genetics common
stock, each at the option of Targeted Genetics.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. In making these statements, we rely on a
number of assumptions and make predictions about the future. Our actual results
could differ materially from our expectations for a number of reasons, including
the risks described in the section below entitled "Factors Affecting Our
Operating Results, Our Business and Our Stock." You should not rely unduly on
these forward-looking statements, which apply only as of the date of this
report. We undertake no duty to publicly announce or report revisions to these
statements as new information becomes available that would cause us to change
our expectations of the future.
Results of Operations
---------------------
Revenue for the quarter ended June 30, 2000 increased to $1.8 million from
$1.4 million for the second quarter of 1999. Revenue for the six months ended
June 30, 2000 increased to $3.9 million from $2.6 million for the same period in
1999. The revenue increases for both the second quarter of 2000 and the six-
month period ended June 30, 2000 were due to increases in revenue from Emerald
Gene Systems, our gene delivery joint venture with Elan Corporation, plc.
Increased revenue from our cystic fibrosis product development collaboration
with Celltech Group plc also contributed to our revenue increase for the six-
month period.
Research and development expenses for the quarter ended June 30, 2000
increased to $4.5 million from $3.5 million for the second quarter of 1999.
Research and development expenses increased to $8.3 million for the first six
months of 2000 from $6.7 million for the comparable period in 1999. The
increases in both periods are attributable to the hiring of additional research
scientists to support our Emerald collaboration and the hiring of additional
clinical and regulatory personnel to administer our cystic fibrosis and cancer
clinical trials, as well as to increased costs associated with our cancer and
preclinical hemophilia product development efforts. We expect to see continued
increases in quarterly costs associated with developing our gene therapy product
candidates for cancer, hemophilia, AIDS and arthritis. Our costs will also vary
depending on the level of clinical trial activity occurring in each quarter.
We had no technology license fee expenses in the second quarter or first
half of 2000. Technology license fees for the second quarter and first six
months of 1999 were attributable to a $3.2 million noncash charge related to the
issuance of stock and warrants to Alkermes, Inc. in exchange for an exclusive
sublicense to a patent for the manufacture of adeno-associated viral (AAV)
vectors, which we use in our cystic fibrosis, hemophilia, AIDS vaccine and
arthritis programs. We issued 500,000 shares of our common stock and warrants to
purchase up to 2,000,000 additional shares in exchange for this technology
license.
General and administrative expenses for the quarter ended June 30, 2000
increased to $1.1 million from $654,000 for the second quarter of 1999. General
and administrative expenses
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for the first six months of 2000 increased to $2.2 million from $1.4 million for
the comparable period in 1999. The increases in both periods reflect greater
investment in business development, shareholder communications costs and costs
of general support to our growing number of collaborative partnerships.
We recognized losses of $608,000 in the second quarter of 2000 and losses
of $1,172,000 in the first six months of 2000, representing our 80.1% share in
the losses of the Emerald joint venture.
Investment income for the quarter ended June 30, 2000 increased to $464,000
from $94,000 for the second quarter of 1999. Investment income for the first
six months of 2000 increased to $679,000 from $221,000 for the comparable period
in 1999. The increases in both periods resulted from the investment of the net
proceeds from our March 1, 2000 private placement of approximately 2.2 million
shares of our common stock.
Interest expense for the quarter ended June 30, 2000 increased to $64,000
from $54,000 for the second quarter of 1999. Interest expense for the first six
months of 2000 increased to $128,000 from $106,000 in the comparable period in
1999. The increases in both periods were due primarily to higher average
outstanding principal balances in 2000.
Financial Condition
-------------------
As of June 30, 2000, we had $29.5 million in cash, cash equivalents and
securities available for sale and $26.9 million in working capital. By
comparison, at December 31, 1999, we had $7.2 million in cash, cash equivalents
and securities and $4.6 million in working capital. The increases in cash and
working capital are attributable to our March 1, 2000 private placement of
approximately 2.2 million shares of our common stock, which provided net
proceeds of $28.2 million. These increases were partially offset by operating
losses, investments in capital equipment and principal payments on capital lease
obligations. We currently fund substantially all of our equipment purchases
with capital leases.
In conjunction with the Emerald joint venture, Elan agreed to loan us up to
$12 million, in the form of convertible debt bearing 12% interest per annum, to
fund our share of Emerald's research and development costs. Additionally, Elan
agreed to purchase $5 million worth of our common stock, at our election, on the
one-year anniversary of commencing the joint venture. As of June 30, 2000, we
have not drawn any proceeds under the loan agreement. On July 21, 2000, we
exercised our option to sell $5.0 million worth of Targeted Genetics common
stock to Elan. According to the terms of our agreement, on August 9, 2000 we
issued to Elan 382,739 shares of our common stock for $13.06 per share which
represents a premium to market price.
Since we began operations, our primary sources of revenue have been
research funding under collaborative agreements, license fees and income earned
from investments. These sources have covered approximately 20% of our expenses
since we started business. Gene therapy products are subject to long
development timelines and the risks of failure inherent in the development of
products based on innovative technologies. Although our technology appears
11
<PAGE>
promising, we do not know whether any commercially viable products will result
from our research and development activities. Because we do not anticipate that
we will have any product-related revenue for at least the next several years, we
expect to generate substantial additional losses in the future.
We currently estimate that, based on our current planned rate of spending,
our existing cash, cash equivalents and securities available for sale, together
with the funding expected to be provided by our existing collaborative partners,
will be sufficient to meet our operating and capital requirements well into
2002. Although we expect to generate additional funding from new collaborative
relationships before that time, we may not be successful in establishing
additional collaborative relationships or in maintaining our existing ones. The
assumed levels of revenue and expense underlying our estimates may not be
accurate. Whether or not our assumptions prove to be accurate and regardless of
our partnering success, we expect that we will need to raise substantial
additional funds to continue developing and commercializing our products.
Recent Accounting Changes
-------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"), which provides the SEC's views
on applying generally accepted accounting principles to revenue recognition
issues. In June 2000, the SEC issued an update to SAB 101, which delays its
implementation date until no later than the fourth quarter of fiscal years
beginning after December 15, 1999. In response to SAB 101, we expect to change
our method for recording nonrefundable up-front license fee revenue to a more
preferable method of deferring this revenue over the term of the related
collaborative agreements. While the SEC has not issued final guidance with
respect to implementing SAB 101, we have estimated the impact of this change to
be a cumulative charge of approximately $3.1 million, as of January 1, 2000, to
reverse previously recognized up-front license fee revenue related to our
November 1998 Celltech cystic fibrosis collaboration. We expect to defer this
revenue prospectively over the remaining term of the Celltech collaboration
agreement. We anticipate implementing this change during the second half of
2000, pending additional SEC and industry guidance.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN 44), which clarifies guidance for certain issues related to
the application of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The new guidance under FIN 44 would not have
impacted our historical accounting for equity instruments and we do not believe
that FIN 44 will have an impact on accounting for future equity instruments.
Factors Affecting Our Operating Results, Our Business and Our Stock Price
-------------------------------------------------------------------------
In addition to the other information contained in this quarterly report,
you should read and consider the following risk factors. If any of these risks
actually occur, our business, financial condition or operating results could be
adversely affected and the trading price of our stock could decline.
12
<PAGE>
If we are unable to secure financing on terms acceptable to us for future
capital needs, we will be unable to fund continuing operations.
Developing and commercializing our potential products will require
substantial additional financial resources. Because we cannot expect internally
generated cash flow to fund development and commercialization of our products,
we will look to outside sources for 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.
If we cannot obtain additional financing when needed or on acceptable
terms, we will be unable to fund continuing operations. In addition, if we
raise additional funds by issuing equity securities, our shareholders will
likely experience significant dilution of their ownership interest.
We have a history of losses and may never become profitable, which could result
in a decline in the value of our common stock and a loss of your investment.
We have generated small amounts of revenue and incurred significant net
losses since we began business. As of June 30, 2000, we have incurred
cumulative losses totaling $111.2 million. We expect to continue to incur
substantial additional losses in the future, due primarily to the following
factors:
. all of our products are in a testing phase and have not received
regulatory approval; and
. we will likely spend significant amounts on operating expenses.
We may never generate profits, and if we do become profitable, we may be
unable to sustain or increase profitability on a quarterly or annual basis. As
a result, the trading price of our stock could decline and you could lose all or
part of your investment.
If our clinical trials are unsuccessful or we do not receive regulatory approval
for our products, which are in the early stage of product development, we may be
unable to generate sufficient revenue to maintain our business.
We do not yet have products in the commercial markets. All of our
potential products, including tgAAV-CF, our cystic fibrosis product candidate,
tgDCC-E1A, our cancer product candidate, our hemophilia A product candidate, our
arthritis product candidate and our pre-clinical AIDS vaccine candidate are in
research and development or in early-stage clinical trials. We cannot apply for
regulatory approval of our potential products until we have performed additional
research and development and testing. Our clinical trials may not demonstrate
the
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safety and efficacy of our potential products, and we may encounter unacceptable
side effects or other problems in the clinical trials. Should this occur, we may
have to delay or discontinue development of the potential product that causes
the problem. After a successful clinical trial, we cannot market products in the
United States until we receive regulatory approval. If we are unable to gain
regulatory approval of our products after successful clinical trials and then
commercialize and sell those products, we may be unable to introduce and sell a
quantity of products sufficient to maintain our business or secure additional
financing to fund our operations.
Delays or unexpected costs in obtaining approval of our potential products or
complying with governmental regulatory requirements could decrease our ability
to generate revenue and make funding our operations more difficult.
The regulatory process in the gene and cell therapy industry is costly,
time consuming and subject to unpredictable delays. Accordingly, we cannot
predict with any certainty how long it will take or how much it will cost to
obtain regulatory approvals for clinical trials or for manufacturing or
marketing our potential products. Delays in bringing a potential product to
market or unexpected costs in obtaining regulatory approval could decrease our
ability to generate revenue and make it more difficult to obtain additional
financing necessary to fund our operations. In addition, all manufacturing
operations are subject on an ongoing basis to the current Good Manufacturing
Practices requirement of the Food and Drug Administration. While we currently
anticipate that we will be able to manufacture product that meets this
requirement, we may be unable to attain or maintain compliance with current or
future Good Manufacturing Practices requirements. If we discover previously
unknown problems after we receive regulatory approval of a potential product or
fail to comply with applicable regulatory requirements, we may suffer
restrictions on our ability to market the product, including mandatory
withdrawal of the product from the market. This, or an unexpected increase in
the cost of compliance, could decrease our ability to generate revenue.
Failure to recruit patients could delay or prevent clinical trials of our
potential products, which could cause a delay or inability to introduce products
to market and a resulting decrease in our ability to generate revenue.
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 altogether. If we are unable to timely introduce
potential products to market after successful clinical trials, our ability to
generate revenue may decrease and we may be unable to secure additional
financing.
We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.
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Our success depends in part on our ability to protect our proprietary
rights. We own or have licenses to patents on a number of genes, processes,
practices and techniques critical to our present and potential products. If we
fail to obtain and maintain patent protection for our technology, our
competitors may market competing products that threaten our market position.
The failure of our licensors to obtain and maintain patent protection for
technology they license to us could similarly harm our business. Patent
positions in the field of biotechnology are highly uncertain and involve complex
legal, scientific and factual questions. Our patent applications may not result
in issued patents. Even if we secure a patent, the patent may not afford
adequate protection against our competitors.
We also rely on unpatented proprietary technology. Because this technology
does not benefit from the protection of patents, we may be unable to
meaningfully protect this proprietary technology from unauthorized use or
misappropriation by a third party.
Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our proprietary rights.
As the biotechnology industry expands, the risk increases that other
companies may claim that our processes and potential products infringe on their
patents. Defending these claims would be costly and would likely divert
management's attention and resources away from our operations. If we infringe
on another company's patented processes or technology, we may have to pay
damages or obtain a license in order to continue manufacturing or marketing the
affected product or using the affected process. We may be unable to obtain a
license on acceptable terms.
Our potential tgAAV-CF product uses our proprietary AAV delivery technology
to deliver a normal copy of a CFTR gene to which we have rights under a
nonexclusive license. The United States Patent and Trademark Office has
declared an interference proceeding to determine the priority of invention of
this gene. If the eventual outcome 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. The costs of licensing the CFTR gene could be
substantial and could include royalties greater than those we currently pay. If
we cannot secure this license on acceptable terms and on a timely basis, we may
be unable to develop or deliver our potential tgAAV-CF product, which could
result in decreased ability to generate revenue and difficulty in obtaining
additional financing to fund our operations.
If we or our business partners are unable to successfully market and distribute
our potential products, our business will fail.
We have no experience in sales and marketing. To market any products that
may result from our development programs, we will need to develop marketing and
sales capabilities, either on our own or with others. We intend to enter into
collaborations with corporate partners to utilize the mature marketing and
distribution capabilities of our partners. While we believe that these
collaborative partners will be motivated to market and distribute our potential
products, our current and potential future partners may not commit sufficient
resources to commercializing our technology on a timely basis. Furthermore, our
present or future collaborators may develop or
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market competing products. If our business partners do not successfully market
and distribute our products and we are unable to develop sufficient marketing
and distribution capabilities on our own, our business will fail.
The intense competition and rapid technological change in our market may result
in pricing pressures and failure of our potential products to achieve market
acceptance.
We presently face competition from other companies developing gene and cell
therapy technologies and from companies using more traditional approaches to
treating human diseases. Most of our competitors have substantially more
experience and financial and infrastructure resources than we do in the
following areas:
. Research and development;
. Clinical trials;
. Obtaining FDA and other regulatory approvals;
. Manufacturing; and
. Marketing and distribution.
Consequently, our competitors may be able to commercialize new products
more rapidly than we do, or manufacture and market competitive products more
successfully than we do. This could result in pricing pressures or our products
failing to achieve market acceptance.
In addition, 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 by our competitors could result in our actual
and proposed technologies, products or processes losing market share or becoming
obsolete.
If we do not attract and retain qualified personnel and scientific
collaborators, we will be unable to successfully and timely develop our
potential products and may be unable to generate sufficient revenue to maintain
our business.
Our future success depends in part on our ability to attract and retain key
employees. We have programs in place to retain personnel, including programs to
create a positive work environment and competitive compensation packages.
Because competition for employees in our field is intense, however, we may be
unable to retain our existing personnel or attract additional qualified
employees. If we experience turnover or difficulties recruiting new employees,
our research and development could be delayed and we could experience
difficulties in generating sufficient revenue to maintain our business.
Our success also depends on the continued availability of outside
scientific collaborators to perform research and develop processes to advance
and augment our internal research efforts. Competition for collaborators in
gene and cell therapy is intense. If we are unsuccessful in recruiting or
maintaining our relationships with scientific collaborators, we could experience
delays in our research and development or loss of access to important enabling
technology.
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Our limited manufacturing capability may limit our ability to successfully
introduce our potential products.
We currently do not have the capacity to manufacture large-scale clinical
or commercial quantities of our potential products. To do so, we will need to
expand our current facilities and staff or supplement them through the use of
contract providers. We may be unable to obtain or develop the necessary
manufacturing capabilities. If we cannot, we will be unable to introduce
sufficient product to sustain our business.
Our use of hazardous materials to develop our potential products exposes us to
liability risks and the risk of regulatory limitation of our use of these
materials, either of which could reduce our ability to generate revenue and make
it more difficult to fund our operations.
Our research and development activities involve the controlled use of
hazardous materials. Although we believe that our safety procedures for
handling and disposing of these materials comply with applicable laws and
regulations, we cannot eliminate the risk of accidental contamination or injury
from hazardous materials. If a hazardous material accident occurred, we would
be liable for any resulting damages. This liability could exceed our financial
resources. Additionally, hazardous materials are subject to regulatory
oversight. Accidents unrelated to our operations could cause federal, state or
local regulatory agencies to restrict our access to hazardous materials needed
in our research and development efforts. If our access to these materials is
limited, we could experience delays in our research and development programs.
Paying damages or experiencing delays caused by restricted access could reduce
our ability to generate revenue and make it more difficult to fund our
operations.
The costs of product liability claims and product recalls could exceed the
amount of our insurance, which could significantly harm our operating results or
our reputation and result in a decline in the value of our stock.
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, and the amounts of claims against us may exceed our insurance
coverage. Product liability insurance is expensive and may not continue to be
available on acceptable terms. A product liability claim not covered by
insurance or in excess of our insurance or a product recall could significantly
harm our financial results or our reputation. Either of these could result in a
decline in our stock price, and you could lose all or part of your investment.
Future acquisitions could be difficult to integrate, disrupt our business and
dilute shareholder value.
In order to expand our potential product candidates and gain access to new
technologies, we may acquire products, technologies or businesses that we
believe are complementary to our existing product development programs.
Acquisitions involve numerous risks, including
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. difficulties in assimilating the operations, technologies, products or
potential products and personnel of the acquired company;
. the potential loss of key employees of the acquired company;
. the diversion of our management's attention from our core business;
. the assumption of known and unknown liabilities;
. potentially dilutive issuances of equity securities; and
. acquisition- and integration-related costs and charges against
earnings.
Any of these factors could harm our business or operating results, which
could result in a decline in our stock price. In addition, we may be unable to
successfully integrate with our existing operations or gain any substantial
benefit from products, technologies or businesses that we acquire in the future,
notwithstanding the expenditure of a significant amount of time and financial,
personnel and other resources.
Market fluctuations or volatility could cause the market price of our common
stock to decline.
In recent years the stock market in general and the market for
biotechnology-related companies in particular have experienced extreme price and
volume fluctuations, often unrelated to the operating performance of the
affected companies. Our common stock has experienced, and is likely to continue
to experience, these fluctuations in price, regardless of our performance.
These fluctuations could cause the market price of our common stock to decline.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
This item discusses our exposure to market risk related to changes in
interest rates and to our credit risk.
Interest Rate Sensitivity
-------------------------
Short-Term Investments
As of June 30, 2000, our short-term investments totalled $1.5 million
(about 5%) of our $29.5 million cash, cash equivalents and short-term investment
balance. Short-term investments consists of one highly liquid investment with a
current maturity of two months. Because we expect to hold this investment until
maturity, we do not expect the realized value of this investment to be affected
to any significant degree by a sudden change in market interest rates. None of
our short-term investments are held for trading purposes. We do not own
derivative financial instruments.
Long-Term Obligations
As of June 30, 2000, we had outstanding long-term obligations totaling $3.4
million, primarily related to capital equipment leases, leasehold improvements
and our loan agreement with Celltech, at fixed interest rates of up to 13.64%.
Because the interest rates on our long-term
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obligations are fixed, changes 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 any future borrowings. We do not
hedge against interest rate increases.
Market and Credit Risk
----------------------
We do not use derivative financial instruments in our investment portfolio
to manage interest rate risk. We limit our exposure to interest rate and credit
risk by establishing and strictly monitoring clear policies and guidelines for
our fixed income portfolios. At the present time we limit to one year the
maximum average maturity period of securities in our investment portfolio. Our
guidelines also establish credit quality standards, limits on exposure to
duration and credit risk criteria. We do not expect our exposure to market and
credit risk to be material.
Equity Price Risk
-----------------
Our equity investments are limited to our ownership of 80.1% of Emerald,
our joint venture with Elan, and an immaterial equity interest we have in a
privately-held biotechnology company. Accordingly, we do not hedge against
equity price changes.
Foreign Currency Exchange Rate Risk
-----------------------------------
We realize all of our revenue in dollars and receive substantially all of
our cash from Celltech's U.S.-based operations and Emerald's Bermuda-based
operations. Therefore, we do not have any significant direct foreign currency
exchange rate risk and we do not hedge against foreign currency exchange rate
changes.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held an annual meeting of our shareholders on May 12, 2000. Of the
36,362,679 shares outstanding as of the record date for the annual meeting,
(March 20, 2000), 29,725,264 shares, or 82% of the total shares eligible to vote
at the annual meeting, were represented in person or by proxy.
One matter was submitted to our shareholders for approval at the annual
meeting. Nelson L. Levy, H. Stewart Parker and Mark Richmond were elected as
directors of Targeted Genetics, each receiving greater than 91% of the votes
cast at the annual meeting.
No other matters were submitted to a vote of our shareholders.
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Item 6. Exhibits and Reports on Form 8-K
(a) See the Index to Exhibits included in this quarterly report.
(b) We did not file any current reports on Form 8-K during the quarter ended
June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARGETED GENETICS CORPORATION
-----------------------------
(Registrant)
Date: August 10, 2000 /s/ H. STEWART PARKER
------------------- -----------------------------
H. Stewart Parker, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 /s/ JAMES A. JOHNSON
------------------- -----------------------------
James A. Johnson, Senior Vice
President,
Finance and Administration,
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
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Targeted Genetics Corporation
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Note
<S> <C> <C>
3.1 Restated Articles of Incorporation
3.2 Amended and Restated Bylaws (Exhibit 3.2) (B)
4.1 Rights Agreement, dated as of October 17, 1996, between the Company and (A)
ChaseMellon Shareholder Services (Exhibit 2.1)
4.2 Registration Rights Agreement, dated as of July 21, 1999, by and (D)
among the Company and Elan International Services, Ltd. (Exhibit 1.2)
4.3 First Amendment of Rights Agreement, dated July 21, 1999, between the Company and (D)
ChaseMellon Shareholder Services (Exhibit 1.9)
4.4 Warrant Agreements to purchase 2,000,000 shares of common stock of the Company, (C)
issued to Alkermes, Inc. on June 9, 1999. (Exhibit 10.38)
10.1 Canyon Park Building Lease, dated as of June 30, 2000, between the Company and
CarrAmerica Corporation
27.1 Financial Data Schedule
</TABLE>
____________
(A) Incorporated by reference to the Company's Registration Statement on
Form 8-A, filed October 22, 1996.
(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, 1996,
filed on March 12, 1997.
(C) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1999, filed on August 5, 1999.
(D) Incorporated by reference to the designated exhibit included with the
Company's Current Report on Form 8-K, filed August 4, 1999.
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