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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997.
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 0-28272
AVIGEN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3647113
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer identification No.)
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1201 HARBOR BAY PARKWAY, SUITE 1000, ALAMEDA, CALIFORNIA 94502
(Address of principal executive offices and zip code)
(510) 748-7150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 of 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
amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of September 22, 1997, was approximately $32,798,610 based
upon the closing sale price of the registrant's Common Stock as reported on the
NASDAQ National Market System on such date. The number of outstanding shares
of the Registrant's Common Stock as of September 22, 1997 was 7,288,580.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts III
and IV of this Form 10-K Report: The definitive Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled to be held on November 21,
1997.
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business...........................................................................
Item 2. Properties.........................................................................
Item 3. Legal Proceedings..................................................................
Item 4. Submission of Matters to a Vote of Security Holders................................
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............
Item 6. Selected Financial Data............................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................
Item 8. Financial Statements and Supplementary Data........................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.........................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant.................................
Item 11. Executive Compensation.............................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................
Item 13. Certain Relationships and Related Transactions.....................................
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................
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Except for the historical information contained herein, this report contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed under the heading "Risk Factors."
PART I
RISK FACTORS
This section briefly discusses certain risks that should be considered by
stockholders and prospective investors in the Company. Many of these risks are
discussed in other contexts in other sections of this report.
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Gene therapy is a new and rapidly evolving technology. To date, there has
been only limited research and development in gene therapy using AAV vectors.
The Company is not aware of any gene therapy products which have obtained
marketing approval from the United States Food and Drug Administration ("FDA").
Because there is only limited research regarding the safety and efficacy of AAV
vectors, the Company believes that clinical trials will proceed more slowly
than clinical trials involving traditional drugs and biologics.
Avigen is at an early stage of development. All of the Company's potential
products are in research or early preclinical development. There can be no
assurance that the Company's research and development activities will be
completed successfully or will support the initiation of clinical trials or
that any proposed products will prove to be efficacious or safe. Before
obtaining regulatory approval for the commercial sale of any of its products
under development, the Company must demonstrate through preclinical studies and
clinical trials that the proposed product is safe and efficacious for its
intended use. None of the Company's proposed products has been tested in
humans. There can be no assurance that the Company will not encounter problems
with the clinical trials which will require the Company to delay, suspend or
terminate such trials. All of the Company's products in research and
development may prove to have undesirable and unintended side effects or other
characteristics that may prevent or limit their commercial use. Even if
successfully developed, there can be no assurance that any potential products
will be cleared for marketing by United States or foreign regulatory
authorities or that such products can be manufactured at acceptable cost or
that any approved products can be successfully marketed. Products resulting
from the Company's research and development efforts, if any, are not expected
to be commercially available and revenues from the sale of any such products
are not expected for at least the next several years.
HISTORY OF LOSSES
To date, the Company has been engaged in research and development activities
and has not generated any revenues from product sales. The process of
developing the Company's products will require significant research and
development, preclinical testing and clinical trials, as well as regulatory
approval. These activities, together with the Company's general and
administrative expenses, are expected to result in operating losses for the
foreseeable future. The Company's ability to achieve profitability is
dependent, in part, on its ability to successfully complete development of its
proposed products, obtain required regulatory approvals and manufacture and
market its products directly or through partners. There can be no assurance
that the Company will achieve revenues or profitability in the future.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funding in order to complete
the research and development activities currently contemplated and to
commercialize its proposed products. The Company anticipates that its existing
capital resources will be adequate to fund its capital needs for at least the
next 12 months. The Company's future capital requirements will depend on many
factors, including continued scientific progress in research and development
programs, the scope and results of preclinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved
in filing, prosecuting and enforcing patent claims, competing technological
developments, the cost of manufacturing scale-up, the cost of commercialization
activities and other factors which may not be within the Company's control.
The Company intends to seek additional funding through public or private
equity or debt financing, when market conditions allow. If additional funds are
raised by issuing equity securities, further dilution to the existing
stockholders may result. There can be no assurance that the Company will be
able to enter into such collaborative or financing
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arrangements on acceptable terms or at all. Without such additional funding,
the Company may be required to delay, reduce the scope of or eliminate one or
more of its research or development programs.
NEED FOR ESTABLISHMENT OF CORPORATE PARTNER RELATIONSHIPS
The Company does not currently have a corporate partner relationship with
respect to any of its technologies or potential products. Given the very high
cost of funding clinical trials and bringing a proposed product through the
governmental approval process to the commercial market, the Company believes
that successful development and commercialization of its technologies and
products will depend in large part on the establishment of one or more such
relationships. There can be no assurance that the Company will be able to
establish such relationships on favorable terms, if at all. In addition, the
failure to raise needed future capital could put the Company at a disadvantage
with respect to negotiating favorable terms with such potential corporate
partners.
NEED TO OBTAIN RIGHTS TO PROPRIETARY GENES AND TECHNOLOGY
A number of the gene sequences or proteins encoded by certain of those
sequences that the Company is investigating or may use in its products are or
may become patented by others. As a result, the Company may be required to
obtain licenses to such gene sequences or proteins or other technology in order
to test, use or market such products. For example, in connection with its
anemia program, the Company anticipates that it may need to obtain a license to
a gene for erythropoietin. There can be no assurance that the Company will be
able to obtain such a license on terms favorable to the Company, if at all. In
connection with the Company's efforts to obtain rights to such gene sequences
or proteins, the Company may find it necessary to convey rights to its
technology to others.
The Company has entered into agreements for the license from third parties of
certain technologies related to its gene therapy product development programs.
Certain of these license agreements provide for the achievement of development
milestones at various times beginning in February 1997, which were amended
extending the date to December 31, 1997. In the event the Company fails to
achieve such milestones or to obtain extensions, certain of the license
agreements may be terminated by the licensor with relatively short notice to
the Company. Termination of any of the Company's license agreements could have
a material adverse effect on the Company's business.
Some of the Company's gene therapy products may require the use of multiple
proprietary technologies. Consequently, the Company may be required to make
cumulative royalty payments to several third parties. Such cumulative royalties
could be commercially prohibitive. While the Company believes the third parties
will be motivated to adjust the royalty structure under such circumstances,
there can be no assurance that the Company will be able to successfully
negotiate such royalty adjustments.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success is dependent on acceptance of its gene therapy
products. The Company believes that recommendations by physicians and health
care payors will be essential for market acceptance of its gene therapy
products. In the past, concerns have arisen regarding the potential safety and
efficacy of gene therapy products derived from pathogenic viruses such as
retroviruses and adenoviruses. While the Company's proposed gene therapy
products are derived from AAV which is a non-pathogenic virus, there can be no
assurance that physicians and health care payors will conclude that the
technology is safe. In addition, health care payors can indirectly affect the
attractiveness of the Company's proposed products by regulating the maximum
amount of reimbursement they will provide for such proposed products. There can
be no assurance that the Company's products will achieve significant market
acceptance among patients, physicians or third party payors, even if necessary
regulatory and reimbursement approvals are obtained. Failure to achieve
significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The production and marketing of the Company's proposed products and its
ongoing research and development activities are subject to extensive regulation
by governmental authorities in the United States and foreign countries. At the
present time, the Company believes that its products will be regulated as
biologics by the FDA and comparable foreign regulatory bodies. Gene therapy is,
however, a relatively new technology and has not been extensively tested in
humans. The regulatory requirements governing gene therapy products are
uncertain and are subject to change. No gene therapy products have been
approved to date in the United States or any foreign country. Failure to comply
with applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against the Company.
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The Company is currently conducting preclinical studies and is planning
clinical trials of its AAV vectors. Prior to marketing in the United States,
any drug developed by the Company must undergo rigorous preclinical and
clinical testing and an extensive regulatory approval process implemented by
the FDA under the federal Food, Drug and Cosmetic Act. Satisfaction of such
regulatory requirements, which includes satisfying the FDA that the product is
both safe and efficacious, typically takes several years or more depending on
the type, complexity and novelty of the product, and requires a substantial
commitment of resources. The Company may encounter significant delays or
excessive costs in its efforts to secure regulatory approvals, particularly
because gene therapy is a novel method of treatment and regulatory requirements
are evolving and uncertain. Preclinical studies must be conducted in
conformance with the FDA's Good Laboratory Practices regulations. Before
commencing clinical trials, the Company must submit to and receive FDA
authorization of an investigational new drug application ("IND"). There can be
no assurance that submission of an IND would result in FDA authorization to
commence clinical trials.
Clinical trials must meet FDA regulatory requirements for Institutional
Review Board ("IRB") oversight and informed consent and good clinical practice
regulations. The Company has limited experience in conducting preclinical
studies and no experience in conducting clinical trials necessary to obtain
regulatory approval. There can be no assurance that those clinical trials can
be conducted at preferred sites, sufficient test subjects can be recruited or
clinical trials will be started or completed successfully in a timely fashion,
if at all. Furthermore, the FDA may suspend clinical trials at any time if it
believes the subjects participating in such trials are being exposed to
unacceptable health risks or if it finds deficiencies in the IND or conduct of
the investigation. There can be no assurance that the Company will not
encounter problems in clinical trials which cause the Company or the FDA to
delay, suspend or terminate such trials.
In addition to the FDA requirements, the National Institutes of Health
("NIH") has established guidelines for research involving recombinant DNA
molecules, which are utilized by the Company in its research. These guidelines
apply to recombinant DNA research which is conducted at or supported by the
NIH. Under current guidelines, proposals to conduct clinical research involving
gene therapy at institutions supported by the NIH must be approved by the NIH's
Recombinant DNA Advisory Committee.
There can be no assurance that any product developed by the Company will
prove to be safe and efficacious in clinical trials or will meet all of the
applicable regulatory requirements necessary to receive marketing approval.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory
approvals. If regulatory approval is granted for a product, such approval will
be limited to those disease states and conditions for which the product is
useful, as demonstrated through clinical trials. Furthermore, approval may
require ongoing requirements for postmarketing studies. Even if a product is
approved for marketing, the product, its manufacturer and its manufacturing
facilities are continuously subject to review and periodic inspections.
Discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
In order to market its products outside of the United States, the Company
also must comply with numerous and varying foreign regulatory requirements,
implemented by foreign health authorities, governing the design and conduct of
human clinical trials and marketing approval. The approval procedure varies
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA approval. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA approval set forth above, and approval by the FDA does not ensure
approval by the health authorities of any other country.
UNCERTAINTY OF PRODUCT PRICING AND THIRD PARTY REIMBURSEMENT
The business and financial condition of biotechnology companies such as the
Company are affected by the efforts of government and third party payors to
contain or reduce the cost of health care through various means. In the United
States, there have been and will continue to be a number of federal and state
proposals to implement government control on pricing. In addition, the emphasis
on managed care in the United States has increased and will continue to
increase the pressure on the pricing of pharmaceutical products. While the
Company cannot predict whether any legislative or regulatory proposals will be
adopted or the effect such proposals or managed care efforts may have on its
business, the announcement of such proposals or efforts could have a material
adverse effect on the Company's ability to raise capital, and the adoption of
such proposals could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, in both the United
States and elsewhere, sales of medical products and treatments are dependent,
in part, on the availability of reimbursement to the consumer from third-party
payors, such as government and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products and services.
If the Company succeeds in bringing its proposed products to the market, there
can be no assurance that these products will be considered cost-effective and
that reimbursement to the consumer will be available or will be sufficient to
allow the Company to sell its products on a competitive basis.
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COMPETITION
The field of gene therapy is new and rapidly evolving, and is expected to
undergo significant technological change in the future. The Company believes
its primary competitors in the AAV gene therapy market are Genetic Therapy,
Inc. (acquired by Sandoz, Ltd.), Genzyme Corporation, and Targeted Genetics
Corporation. In addition, competition from fully integrated pharmaceutical
companies and other biotechnology companies is expected to increase,
particularly as large pharmaceutical companies acquire smaller gene therapy
companies. Most of these companies have significantly greater financial
resources and expertise than the Company in research and development,
preclinical studies and clinical trials, obtaining regulatory approvals,
manufacturing, marketing and distribution. One of these companies is supporting
clinical studies for use of AAV vectors in the treatment of cystic fibrosis.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical companies.
Academic institutions, governmental agencies and other public and private
research organizations also conduct research, seek patent protection and
establish collaborative arrangements for product development and marketing. In
addition, these companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
The Company is aware that other companies are conducting clinical trials and
preclinical studies for viral and non-viral gene therapy products. These
companies include Cell Genesys, Inc., GeneMedicine, Inc., Systemix, Inc.,
Viagene, Inc. (acquired by Chiron Corporation) and Vical Incorporated. Avigen
believes the primary competitive factors for success in the gene therapy field
will be product efficacy, safety, manufacturing capability, the timing and
scope of regulatory approvals, the timing of market introduction, marketing and
sales capability, reimbursement coverage, price and patent position. There can
be no assurance that the Company's competitors will not develop more effective
or more affordable products, or achieve earlier product commercialization than
the Company.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF OTHERS
To date, the Company has filed a number of patent applications in the United
States relating to the Company's technologies. In addition, the Company has
acquired exclusive and non-exclusive licenses to certain issued patents and
pending patent applications. There is no assurance that patents will issue from
these applications or that any patent will issue on technology arising from
additional research or, if patents do issue, that claims allowed will be
sufficient to protect the Company's technologies.
The patent application process takes several years and entails considerable
expense. The failure to obtain patent protection on the technologies underlying
the Company's proposed products may have a material adverse effect on the
Company's competitive position and business prospects. Important legal issues
remain to be resolved as to the scope of patent protection for biotechnology
products, and the Company expects that administrative proceedings, litigation
or both will be necessary to determine the validity and scope of its and
others' biotechnology products. Such proceedings or litigation may require a
significant commitment of the Company's resources in the future. If patents can
be obtained, there can be no assurance that any such patents will provide the
Company with any competitive advantage. For example, there can be no assurance
that others will not independently develop similar technologies, others will
not duplicate any technology developed by the Company, or any such patent will
not be invalidated in litigation. In addition, two of the Company's patent
applications are co-owned with co-inventors. Under the terms of agreements with
such co-inventors, the Company has an option to obtain an exclusive, worldwide,
transferable, royalty-bearing license for such technology, and is currently in
discussions with one of the co-inventors to obtain such a license. In the event
the Company is unable to negotiate exclusive rights to such co-owned
technology, each co-inventor may have rights to independently make, use, offer
to sell or sell the patented technology. Commercialization, assignment or
licensing of such technology by a co- inventor could have a material adverse
effect on the Company's business, financial condition and results of
operations.
There can be no assurance that third parties will not assert patent or other
intellectual property infringement claims against the Company with respect to
its products or technology or other matters. There may be third-party patents
and other intellectual property relevant to the Company's products and
technology which are not known to the Company. Although no third party has
asserted that the Company is infringing such third party's patent rights or
other intellectual property, there can be no assurance that litigation
asserting such claims will not be initiated, that the Company would prevail in
any such litigation, or that the Company would be able to obtain any necessary
licenses on reasonable terms, if at all. Any such claims against the Company,
with or without merit, as well as claims initiated by the Company against third
parties, can be time-consuming and expensive to defend or prosecute and to
resolve. If competitors of the Company prepare and file patent applications in
the United States that claim technology also claimed by the Company, the
Company may have to participate in interference proceedings declared by the
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the outcome is favorable
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to the Company. In addition, to the extent outside collaborators apply
technological information developed independently by them or by others to the
Company's product development programs or apply Avigen's technologies to other
projects, disputes may arise as to the ownership of proprietary rights to such
technologies.
The Company also relies on a combination of trade secret and copyright law,
employee and third-party nondisclosure agreements and other protective measures
to protect intellectual property rights pertaining to its products and
technologies. There can be no assurance that these measures will provide
meaningful protection of the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the Company will be able to protect its
intellectual property successfully.
LACK OF MANUFACTURING AND SALES AND MARKETING EXPERIENCE
The Company has no experience in, and currently lacks the resources and
capability to, manufacture or market any of its proposed products on a
commercial basis. In addition, the Company's proprietary process for
manufacturing AAV vectors has not yet implemented the FDA's regulations
concerning Current Good Manufacturing Practices ("cGMP"). Initially, the
Company anticipates that it will be dependent to a significant extent on
collaborative partners or other entities for commercial scale manufacturing of
its products. In the event the Company decides to establish a commercial scale
manufacturing facility, the Company will require substantial additional funds
and personnel and will be required to comply with extensive regulations
applicable to such facility. There can be no assurance that the Company will be
able to develop adequate commercial manufacturing capabilities either on its
own or through third parties. In addition, the Company does not anticipate
establishing its own sales and marketing capabilities in the foreseeable
future. There can be no assurance that the Company will be able to develop
adequate marketing capabilities either on its own or through third parties.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain members of its management and
research and development staff. The loss of any of these persons could have a
material adverse effect on the Company's business. In addition, the Company
relies on consultants and advisors to assist the Company in formulating its
research and development strategy. Recruiting and retaining qualified technical
and managerial personnel will also be critical to the Company's success. There
can be no assurance that the Company will be successful in attracting and
retaining skilled personnel who generally are in high demand in the
pharmaceutical and biotechnology industries. The loss of certain key employees
or the Company's inability to attract and retain other qualified employees
could have a material adverse effect on the Company's business. A majority of
the Company's scientific advisors are engaged by the Company on a consulting
basis and are employed on a full-time basis by employers other than the Company
and some have consulting or other advisory arrangements with other entities
that may conflict or compete with their obligations to the Company.
SIGNIFICANT PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The manufacture and sale of medical products entail significant risk of product
liability claims. The Company currently does not carry product liability
insurance although it intends to obtain such coverage prior to commencing
clinical trials. There can be no assurance that such coverage will be adequate
to protect the Company from any liabilities it might incur in connection with
the use or sale of the Company's products. In addition, the Company may require
increased product liability coverage as additional products are commercialized.
Such insurance is expensive and in the future may not be available on
acceptable terms, if at all. A successful product liability claim or series of
claims brought against the Company in excess of its insurance coverage could
have a material adverse effect on the Company's business and results of
operations. The Company must indemnify certain of its licensors against any
product liability claims brought against them arising out of products developed
by the Company under these licenses.
HAZARDOUS MATERIALS
The Company's research and development efforts involve the use of hazardous
materials, chemicals and various radioactive compounds. The Company is subject
to federal, state and local laws and regulations governing the storage, use,
and disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company. The Company may incur substantial
costs to comply with environmental regulations if the Company develops its own
commercial manufacturing facility.
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CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER
PROVISIONS AND DELAWARE LAW
The Company's officers, directors and principal stockholders beneficially own
approximately 17% of the Company's Common Stock. As a result, such persons may
have the ability to effectively control the Company and direct its affairs and
business. Such concentration of ownership may also have the effect of delaying,
deferring or preventing a change in control of the Company. In addition, the
Company's Board of Directors have the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be materially adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock. Furthermore, certain
provisions of the Company's Restated Certificate of Incorporation may have the
effect of delaying or preventing changes in control or management of the
Company, which could adversely affect the market price of the Company's Common
Stock. In addition, the Company is subject to the provisions of Section 203 of
the Delaware General Corporation Law (the "Delaware Law"), an anti-takeover
law.
VOLATILITY OF STOCK PRICE
The Company believes that various factors, including announcements of
technological innovations or regulatory approvals, results of clinical trials,
announcements of new products by the Company or by its competitors, healthcare
or reimbursement policy changes by governments or insurance companies,
developments in relationships with corporate partners or a change in securities
analysts' recommendations, may cause the market price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the shares of biotechnology and healthcare companies in
particular, have experienced extreme price fluctuations. These broad market and
industry fluctuations may materially adversely affect the market price of the
Company's Common Stock. Beginning November 19, 1996, contractual restrictions
on the sale of approximately 3,646,559 shares of Common Stock otherwise
eligible for sale subject to compliance with Rule 144 or Rule 701 expire.
ITEM. 1 BUSINESS
THE COMPANY
Avigen is a leader in the development of gene therapy products derived from
adeno-associated virus ("AAV") for the treatment of inherited and acquired
diseases. The Company's proposed gene therapy products are designed for in vivo
administration to achieve the production of therapeutic proteins within the
body. The Company is developing two broad-based proprietary gene delivery
technologies: AAV vectors and the Targeted Vector Integration ("TVI") system.
The Company believes AAV vectors can be used to deliver genes for the treatment
of brain, liver and prostate cancer, anemia, hemophilia, hyperlipidemia and
metabolic storage diseases. The Company also believes its TVI system will allow
it to pursue more effective treatments for blood cell-related diseases,
including sickle cell anemia, beta-thalassemia and human immunodeficiency virus
("HIV") infection.
AAV Vectors. The Company's gene therapy products are based on gene delivery
systems called vectors. AAV vectors are derived from AAV, a common
non-pathogenic human virus, and take advantage of the natural efficiency with
which viruses deliver genes to cells. To produce an AAV vector, the virus is
modified by removing the viral genes and replacing them with genes for
therapeutic proteins. The Company believes that AAV vectors combine desirable
properties of viral and non-viral vectors and may offer several potential
advantages over other gene therapy vectors. These advantages include efficient
delivery of genes to both dividing and non-dividing target cells, absence of
viral genes that may be responsible for causing an undesirable immune response,
in vivo administration to patients, higher levels of gene expression and
improved stability allowing AAV vectors to be stored and handled like more
traditional pharmaceutical products. Due to the complex replication cycle of
the natural virus, AAV vectors have been difficult to produce. Avigen believes
that its proprietary manufacturing process will simplify manufacturing and
purification and achieve increased yield of high purity AAV vectors.
In spite of the potential advantages, the use of AAV vectors for gene therapy
also presents potential disadvantages. Since the genome of the natural AAV
virus is relatively small, the amount of the genetic material that can be
included in an AAV vector is limited. Therefore, large genes cannot be
delivered by AAV vectors. In addition, in vivo administration of AAV vectors
may result in the production of antibodies which may limit the effectiveness of
repeat
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dosing of these vectors. Furthermore, direct administration of AAV vectors may
result in their distribution to inappropriate tissues.
TVI System. The Company's proprietary TVI system utilizes components of AAV
to integrate large segments of DNA at a specific location on human chromosome
19. There are 23 pairs of chromosomes in human cells. Integration is essential
for certain gene therapy applications where the genes must be passed on to the
progeny of the cell. The Company believes gene therapy vectors that integrate
at a specific site, such as the site on chromosome 19 where the non-pathogenic
AAV normally integrates, will have an increased safety profile relative to
vectors that integrate randomly. The Company also believes that the ability to
integrate large segments of DNA could lead to gene therapy applications
involving the delivery of multiple genes or requiring precise or controllable
gene regulation.
Product Development. Based on encouraging results in animal models, the
Company has initiated two preclinical development programs using AAV vectors
for the treatment of brain tumors and anemia. Additionally, the Company has a
number of research programs and collaborations intended to generate product
development candidates for liver and prostate cancer, hemophilia,
hyperlipidemia, metabolic storage diseases, hemoglobin disorders and HIV
infection. Avigen believes that the number of potential applications for gene
therapy will increase significantly as advances are made in the area of
genomics. These advances are enabling scientists to link diseases to specific
gene defects. As more genes are discovered, the need for improved gene delivery
technologies is expected to increase. With the identification of new
disease-related genes, the Company believes that its AAV vectors and its TVI
system will provide it with significant opportunities for new gene therapy
products.
Corporate Partnering Opportunities. The Company is seeking to develop
long-term strategic collaborations with pharmaceutical companies that can
provide funding for research and development activities and clinical trials as
well as access to complementary technologies, including gene sequences. The
Company believes that its broad-based proprietary gene delivery technologies
can be used to deliver a number of different genes, giving rise to multiple
product and corporate partnering opportunities.
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GENE THERAPY BACKGROUND
Gene therapy is an approach to the treatment of inherited and acquired
diseases whereby genes are delivered into patients' cells in order to direct
the cells to produce therapeutic proteins. Genes are regions of DNA that
contain the instructions that direct cells to produce proteins, one of the
basic building blocks of all cells. Each cell in the body has the ability to
produce proteins necessary for cellular structure, growth and function. The
process that results in protein production by the cell is known as gene
expression. By directing the cells to produce proteins, gene therapy offers the
opportunity to correct defects or diseases at the molecular level. All gene
therapy approaches contain three key components: (i) the vector, (ii) the gene
cassette, and (iii) the target cell.
Vectors. One of the most critical factors for the success of gene therapy
products is the development of vectors that can practically, efficiently and
safely deliver genes into cells. The process of gene transfer may be
accomplished in vivo (by administering the vector directly to patients) or ex
vivo (by removing patients' cells and combining them with vector). Viral
vectors are derived from naturally occurring viruses. Non-viral vectors are
produced by standard recombinant DNA techniques.
Viral vectors take advantage of the natural efficiency with which viruses
transport their own genetic information into cells. Viral vectors are
constructed by removing some or all of the viral genes and replacing them with
a gene cassette. Viral vectors have been the most extensively studied method of
gene delivery, and most gene therapy applications currently undergoing clinical
evaluation involve the use of viral vectors. However, viral vectors currently
under clinical investigation have limitations which may affect their safety or
efficacy. Viral vectors based on retroviruses ("retroviral vectors"), for
example, require that target cells be dividing or multiplying to achieve gene
delivery. Because most target cells in the body are not dividing or divide very
slowly and because retroviruses become rapidly inactivated in the blood, most
clinical applications currently under evaluation employing retroviral vectors
involve a complex and expensive procedure whereby patient cells are removed and
the gene is delivered to these cells ex vivo.
Another type of viral vector is derived from adenovirus. Adenoviral vectors
are capable of efficiently delivering genes to several dividing and
non-dividing cell types. However, adenoviral vectors contain and express genes
from the naturally occurring virus, and as a result, the body's immune system
is triggered following their administration. This immune response is believed
to limit the length of time that gene expression can be maintained in the
target cell.
Additional safety issues have been raised by the use of retroviral and
adenoviral vectors since both vectors are derived from pathogenic viruses.
During the manufacture of these vectors, there is a possibility of generating a
small amount of the natural virus. Although considered a low risk, such a
possibility necessitates additional costly product testing. In addition,
retroviral vectors randomly integrate the gene cassette into the target cell.
Any gene therapy approach that involves the random integration of genetic
material into the target cell's DNA could, theoretically, cause the activation
of another gene involved in the development of cancer or the inactivation of a
beneficial gene. It is generally believed that such events would be rare.
Non-viral vectors are produced by standard recombinant DNA techniques and are
delivered to target cells either unmodified ("naked DNA") or combined with
lipids (e.g., liposomes) or proteins designed to facilitate the entry of DNA
into the cells. Because they have no components derived from viruses, they are
perceived to be safer. In addition, non-viral vectors are capable of delivering
large segments of DNA to target cells. However, non-viral vectors are
relatively inefficient at delivering genes to cells, and in general, have
resulted in temporary or low levels of gene expression in target cells.
In contrast to retroviral and adenoviral vectors, AAV vectors are derived
from a non-pathogenic human virus to which the majority of the population has
been exposed. In spite of its name, AAV is genetically unrelated to adenovirus.
AAV, as it exists in nature, can only reproduce in the presence of another
virus. AAV vectors are derived from AAV by removing all of the viral genes and
replacing them with an appropriate gene cassette. The Company believes that AAV
vectors offer several potential advantages over other viral and non- viral
vectors. These advantages include efficient delivery of genes to both dividing
and non-dividing target cells, absence of viral genes that may be responsible
for causing an undesirable immune response, in vivo administration to patients,
higher levels of gene expression and improved stability allowing AAV vectors to
be manufactured, stored and handled like more traditional pharmaceutical
products. The Company believes that AAV vectors combine the desired properties
of viral and non-viral vectors and may offer a safer and more practical
alternative to the other gene therapy vectors. Two clinical trials evaluating
AAV vectors manufactured by another company for the treatment of cystic
fibrosis are currently being conducted.
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Gene Cassette. Packaged inside a gene therapy vector is the gene cassette,
containing the gene for a desired therapeutic protein and the control elements
which direct protein production by the cell. The design of the gene cassette
depends on the therapeutic application. The gene may be a naturally occurring
gene for a therapeutic protein (e.g., erythropoietin or factor VIII), one that
sensitizes cancer cells to chemotherapy (a "suicide gene") or a man-made gene
with novel anti-viral properties. The control elements that regulate expression
of the delivered genes are equally important in the success of gene therapy
products. Certain control elements permit gene expression in many cell types
while other cell-specific control elements direct expression only in a
particular type of cell. The Company believes that inclusion of the
cell-specific control elements in a gene therapy vector may increase safety in
certain gene therapy applications by limiting gene expression to a desired
organ or tissue.
Target Cells. The three major types of cell targets for gene therapy are
differentiated cells, cancer cells and stem cells. Differentiated cells
constitute the majority of cells in the body, including cells in muscle, heart,
skin, brain and liver. The Company's research has demonstrated that AAV vectors
are well-suited for gene delivery to specific differentiated cell types. These
cell types have limited, if any, capacity to divide or multiply. To be
effective in clinical applications involving differentiated cells, a gene
therapy vector must be capable of efficiently delivering genes to a
sufficiently large number of non-dividing cells to produce appropriate levels
of the therapeutic protein. Similarly, for cancer cells, an effective gene
therapy vector must be able to efficiently deliver genes to a significant
number of cells within a tumor. The Company believes that AAV vectors may be
useful for the treatment of several cancer types. Stem cells are cells that
give rise to differentiated cells. Bone marrow stem cells, which give rise to
the mature red and white cells in the blood, are the most extensively studied
stem cell target for gene therapy. To be effective for gene therapy
applications involving stem cells, a gene therapy vector must be capable of
integrating or inserting its gene cassette into the genome of the stem cell.
Therefore, as the stem cells multiply and divide, the gene cassette will be
passed on to subsequent generations of cells. The Company believes the
shortcomings of current gene therapy approaches limit their applications to
stem cells and is developing its TVI system to address these needs.
AVIGEN TECHNOLOGY
AAV VECTORS
AAV vectors are emerging as a promising gene delivery system because they
combine the efficiency with which viral vectors deliver their DNA to cells with
a potential safety profile closer to that of non-viral vectors. A major
limitation in the development of clinical applications for AAV vectors has been
the lack of an efficient production method. Current methods, in general, result
in low yields of AAV vectors and require the input of an infectious virus, most
commonly adenovirus, to initiate vector replication. The Company has developed
a proprietary manufacturing process which allows for the more efficient
production of larger quantities of AAV vectors and does not require the use of
an infectious virus, thereby eliminating some potentially harmful contaminants.
The Company believes that its process will simplify manufacturing and
purification of AAV vectors for clinical trials. In addition, the Company
believes that its proprietary process will result in a product that will be
safer and, as a result, more commercially viable than AAV vectors produced by
commonly employed methods.
TARGET VECTOR INTEGRATION (TVI) SYSTEM
The Company's proprietary TVI system utilizes components of AAV to integrate
large segments of DNA at a specific location on human chromosome 19.
Integration is essential for gene therapy applications where the gene cassette
is delivered to a cell which is capable of multiplying and dividing and where
the gene cassette must be passed on to the progeny of the cell. In addition,
the ability to target integration of a gene cassette to a specific site on a
chromosome may increase the predictability of therapeutic protein production
and the product safety profile. Delivering large segments of DNA is important
for gene therapy applications that require the delivery of several genes or
regulatory elements too large to be accommodated in the current generation of
gene therapy vectors.
The Company's TVI system utilizes the AAV ITR and Rep proteins to achieve
site-specific integration of DNA segments. The Company believes that no current
gene therapy vectors are capable of achieving site-specific integration. Avigen
scientists have demonstrated that large segments of DNA attached to an AAV ITR
can be targeted for integration into human chromosome 19 in the presence of Rep
proteins; however, these results have not been independently verified.
Development of TVI technology is at an early stage and several issues remain
to be addressed. The Company is currently developing methods to incorporate TVI
into novel gene therapy vectors for the delivery of genes into target cells.
Because several genes and control elements could be incorporated into a single
gene therapy vector, the Company believes gene therapy applications could be
developed involving precise gene regulation or complex control systems,
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such as gene activation with orally active drugs (so-called "gene switches").
Initially, the Company is focusing on developing TVI vectors to deliver genes
to bone marrow stem cells for the treatment of hemoglobinopathies (sickle cell
anemia and beta-thalassemia) and Acquired Immune Deficiency Syndrome ("AIDS").
PRODUCT DEVELOPMENT PROGRAMS
The Company has selected its product development programs based on
experimental data that demonstrate the feasibility of gene delivery to specific
target cells. The Company believes that its technologies may be used with
several different genes, giving rise to multiple product and corporate
partnering opportunities. Avigen believes that further advances in genomics,
including the sequencing, mapping and identification of genes linked to
diseases, may offer other product opportunities. The following table summarizes
the Company's current product development programs:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AAV VECTOR-BASED GENE THERAPY PROGRAMS
- -----------------------------------------------------------------------------------------------------
PROGRAM INDICATION TARGET CELL STATUS(1)
------- ---------- ----------- ------
<S> <C> <C> <C>
Cancer Brain Tumors Tumor Preclinical
Hepatocellular Tumor Research
Carcinoma
Prostate Cancer Tumor Research
Blood Diseases Anemia(2) Muscle Preclinical
Hemophilia Muscle/Liver Research
Metabolic Diseases Hyperlipidemia Muscle Research
Storage Diseases Muscle Research
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TVI-BASED GENE THERAPY PROGRAMS
- -----------------------------------------------------------------------------------------------------
PROGRAM INDICATION TARGET CELL STATUS(1)
-------- ---------- ----------- ------
<S> <C> <C> <C>
Blood Diseases Anemia(3) Bone Marrow Stem Research
Cells
Infectious Diseases HIV Bone Marrow Stem Research
Cells
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) "Research" indicates activities related to designing, constructing and
testing vectors in specific target cell types in order to evaluate
gene expression. "Preclinical" indicates in vitro and animal studies
to evaluate efficacy, pharmacology and toxicology.
(2) Includes programs utilizing delivery of an erythropoietin gene for the
treatment of renal failure, sickle cell anemia and beta- thalassemia.
(3) Includes programs utilizing delivery of a hemoglobin gene for the
treatment of sickle cell anemia and beta-thalassemia.
CANCER
Avigen has focused on the treatment of cancer as one of its earliest
applications of AAV gene therapy. Cancer is currently the second-leading cause
of death in the United States with 1.2 million cases diagnosed each year and
more than 500,000 deaths annually. Greater than 2.3 million cases are diagnosed
each year worldwide. Conventional strategies for treatment of cancer include
surgery, radiation therapy and chemotherapy. Potential gene therapy strategies
for cancer include the delivery of genes to tumor cells which increase the
susceptibility of these cells to the cytotoxic effect of drugs ("suicide gene
therapy"), the delivery of genes to tumor cells to enhance their destruction by
the body's immune system ("immunotherapy") and the delivery of genes to tumor
cells that directly promote cell death. The Company is in the process of
developing AAV vectors to treat solid tumors in the brain, liver and prostate.
Brain Tumors. Primary brain tumors represent a significant health problem
with an incidence estimated to be approximately 18,000 new cases annually in
the United States. Glioblastoma multiforme ("GBM"), a type of brain tumor,
represents 20-30% of all such tumors. Patients with GBM have a particularly
grim prognosis, with a median survival rate of approximately ten months after
surgery and high-dose radiation. Systemically administered chemotherapy has not
significantly increased either survival or quality of life. After recurrence of
GBM, the median survival rate is approximately nine months even with treatment.
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In collaboration with investigators in the Department of Neurosurgery at
Nagoya University, Japan, the Company has demonstrated the efficacy of AAV
vector-based gene therapy for GBM in an experimental animal model. For this
initial study, the Company designed and produced an AAV vector containing the
gene for the enzyme, thymidine kinase ("TK"). When expressed in dividing cells
such as tumor cells, the TK gene renders these cells sensitive to the toxic
effect of the FDA-approved antiviral drug, ganciclovir ("GCV"). TK converts the
relatively non-toxic GCV into by-product which is toxic to the dividing tumor
cells. Following a single injection of an AAV-TK vector into brain tumors
arising from human glioma cells implanted in the brains of mice, a significant
reduction in tumor size was observed in all animals that also received GCV. In
addition, there was evidence of a "bystander effect" whereby tumor cells that
did not receive the TK gene but that were in contact with cells that did were
also killed. The Company believes that the bystander effect significantly
contributes to the efficacy of this therapeutic strategy.
The Company believes that this approach offers the potential for increased
efficacy and decreased toxicity as compared to the systemic administration of
chemotherapeutic agents. The AAV vector can be injected directly into the tumor
or applied to the surgical field following removal of the tumor. In addition,
the toxic by-product of GCV only kills dividing cells, sparing the surrounding
non-dividing brain cells, and is produced only in response to the systemic
administration of GCV. Therefore, the Company believes that potential side
effects can be reduced or eliminated by controlling the administration of GCV.
Clinical trials are currently being performed by investigators at several
academic institutions in collaboration with another gene therapy company to
evaluate suicide gene therapy using retroviral vectors to deliver the TK gene.
However, since retroviral vectors generally are ineffective when administered
directly into the body, these protocols involve the delivery of mouse cells
that produce the retroviral vectors into the brains of patients. The Company
believes that its AAV vector approach offers a safer and potentially more
effective alternative with greater potential for commercialization.
The Company is also investigating the utility of combining the suicide gene
strategy with immunotherapy. The Company through its collaborators at Nagoya
University has demonstrated that AAV vectors can be used to deliver and achieve
the simultaneous expression of both the TK gene and an immunostimulatory
lymphokine gene in tumor cells in vitro. The Company's collaborators are
currently evaluating the effects of using AAV vectors to deliver the genes for
immunostimulatory factors to mice with experimentally-induced brain tumors. The
Company believes that this combined approach may increase the efficacy and the
potential utility of AAV vectors for the treatment of brain tumors.
Hepatocellular Carcinoma. Hepatocellular carcinoma, or liver cancer, is among
the most common form of cancer worldwide. Based on industry sources, the
Company believes that there are over 10,000 new cases of liver cancer in the
United States each year. Current therapeutic modalities include surgical
resection, regional chemotherapy or tumor embolization. Long-term survival
rates are poor.
An Avigen collaborator and scientific advisor at the University of
California, San Francisco ("UCSF") has demonstrated that AAV vectors can
deliver the TK gene to human hepatoma cells in tissue culture and sensitize
them to the toxic effects of GCV. In addition, those studies employed a
hepatoma-specific promoter which restricted expression of the TK gene to
hepatoma cells. This collaborator is currently evaluating the efficacy of the
Company's AAV-TK vectors in animal models of hepatoma. As part of this
collaboration, the Company has also constructed and produced an AAV vector
containing both the TK gene and the gene for the immunostimulatory lymphokine,
interleukin-2 ("IL-2"), under control of the hepatoma-specific promoter. It is
believed that the inclusion of IL-2 may increase the effectiveness of this
approach by initiating a systemic immune response to the tumor. Residual tumor
can then be eliminated by the administration of GCV.
Prostate Cancer. Prostate cancer is the most common cancer among American men
and is second only to lung cancer as a cause of male cancer deaths. The
American Cancer Society has estimated that there will be 300,000 cases
diagnosed in the United States in 1997 and 40,000 deaths. Currently, prostate
cancer is responsible for about 3% of all deaths in men over 55 years of age.
Because the incidence of prostate cancer increases more rapidly with age than
any other form of cancer and the average age of American men is rising, the
number of United States patients with prostate cancer is expected to rise
steadily over the next decade.
Present therapy for prostate cancer depends on the stage or extent of disease
at the time of diagnosis. Until recently, the diagnosis of prostate cancer was
generally made by the detection of a nodule or mass on routine rectal
examination or during evaluation for difficulty with urination. The development
of sensitive blood tests to detect prostate cancer and the utilization of
sonogram detection systems have increased the diagnosis of prostate cancer,
particularly in individuals with early stage disease. Approximately 50% of
patients are diagnosed when the disease is still localized to
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the prostate. Such patients generally have the option of surgical removal of
the prostate or externally applied radiation therapy. Although either of these
treatment options results in long-term survival rates equal to or approaching
age-matched individuals without prostate cancer, these costly procedures may
result in significant treatment-related side effects, including impotence,
urinary incontinence and even death. Some clinicians recommend no treatment in
older patients because of the morbidity and cost.
The Company is pursuing gene therapy as a treatment for early stage prostate
cancer. The Company's AAV vectors are well suited for treatment of prostate
cancer because prostate tumor cells divide extremely slowly and tumors are
frequently localized to a particular site. In addition, prostate tumors can be
easily accessed by direct injection.
In collaboration with investigators at Baylor College of Medicine, the
Company is evaluating the use of AAV vectors for the treatment of prostate
cancer. These investigators have demonstrated that following injection of an
AAV vector containing a "marker" gene directly into the prostate in mice,
expression of the marker protein is observed within the prostate epithelium.
Recently, they have also developed a model of prostate cancer in mice.
Currently, these investigators are evaluating the antitumor effects of direct
injection of an AAV vector containing the TK and IL-2 genes into these tumors.
They are also developing other strategies using AAV vectors containing tumor
suppressor genes. These vectors will incorporate a prostate-specific promoter
designed to limit gene expression to the prostate cells.
Blood Diseases
Anemia. Anemia results from a variety of inherited and acquired conditions
resulting in a reduction of the number of red blood cells and hemoglobin, the
red blood cell protein that carries oxygen. In the case of sickle cell anemia
and beta-thalassemia, two inherited diseases, anemia results from the
production of inadequate or abnormal hemoglobin molecules. In acquired cases
such as renal failure, AIDS or as the result of the administration of
chemotherapy for cancer, anemia is generally due to the inadequate production
of red blood cells.
Erythropoietin ("EPO") is the protein produced by the kidney that stimulates
cells in the bone marrow to produce red blood cells and is involved in the
production of hemoglobin. Recombinant human EPO, a drug first developed by
Amgen, Inc., is administered several times a week by injection for the
treatment of anemia secondary to renal failure, AIDS or chemotherapy.
Currently, there are approximately 140,000 renal failure patients receiving
dialysis in the United States and an equivalent number in Europe. It is
estimated that about 85,000 renal failure patients receiving dialysis are
presently receiving EPO worldwide. In addition, it is estimated that
approximately 50,000 AIDS patients are also currently being treated with EPO.
The incidence of anemia in the approximately 1 million cancer patients in the
United States is estimated at 14%, providing a potential additional 140,000
patients who also may be candidates for EPO therapy.
There are an estimated 60,000 patients with sickle cell anemia in the United
States. The Company believes that there are approximately 8,000 to 10,000 cases
of beta-thalassemia in the United States. Currently, there is no effective and
widely available therapy for beta-thalassemia and sickle cell anemia. Studies
in animals and clinical trials in a small number of patients suggest that
administration of large doses of EPO, either alone or in combination with other
agents, in certain individuals with beta-thalassemia and sickle cell anemia can
increase the production of functional hemoglobin molecules and perhaps
ameliorate the symptoms of disease.
Avigen scientists have demonstrated that biologically active levels of EPO
can be achieved in mice following a single intramuscular administration of an
AAV vector containing a gene for human EPO. Mice treated in this study showed a
dose-dependent increase in the amount of EPO in their serum and a proportional
increase in red blood cells. In this ongoing study, increased EPO levels and
red blood cell production have persisted undiminished for greater than five
months. The results of this study have not been independently verified.
Preclinical studies are currently planned to evaluate the efficacy of
intramuscularly administered AAV vectors containing the EPO gene in animal
models of renal failure and beta-thalassemia.
The Company is also developing a separate approach for the treatment of
sickle cell anemia and beta-thalassemia by delivering normal hemoglobin genes
to patients' defective bone marrow stem cells using TVI technology. Company
scientists are developing vectors to deliver large regions of the hemoglobin
gene "locus," containing the hemoglobin gene and the surrounding control
regions, for integration into human chromosome 19. All current applications for
treating bone marrow cells involve removing cells from the body. The Company
believes that potential treatments arising from this work will involve exposure
of patients' bone marrow stem cells ex vivo employing currently available
clinical procedures. The Company has entered into a collaboration with
Children's Hospital Los Angeles and Children's Hospital Oakland Research
Institute to develop an animal model for sickle cell anemia which will be
useful for testing vectors which incorporate the TVI system for the treatment
of this disease.
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Hemophilia. Hemophilia is a hereditary disorder characterized by the decrease
or absence of clotting factor activity in the plasma. The most common forms are
caused by a defect or deficiency in protein coagulation factor VIII
("hemophilia A") or factor IX ("hemophilia B"). Approximately 10,000
individuals, mostly male, are treated for hemophilia A and about 2,800
individuals are treated for hemophilia B in the United States. Worldwide, there
are about 80,000 hemophiliacs. Patients with either disease experience acute
and often life-threatening bleeding episodes and can also suffer joint
deformities from repeated bleeding into joints. Depending on the severity of
disease, treatment consists of either intermittent or chronic administration of
clotting factor which has either been purified from plasma or, more recently,
is in the form of a recombinant DNA-derived protein. Transmissions of viral
agents have been significantly reduced with the increased use of highly
purified or recombinant clotting factors.
The Company believes that AAV vectors may be useful to deliver the genes for
factor VIII or factor IX and achieve long-term expression in vivo. The Company
intends to initiate collaborations to evaluate the use of AAV vectors to
deliver the gene for factor VIII to muscle or liver in animals. In addition,
the Company intends to initiate parallel animal studies to evaluate the use of
AAV vectors to deliver the gene for factor IX.
Metabolic Diseases
Hyperlipidemia. Disorders of lipid metabolism contribute to a number of
common human diseases. Hyperlipidemia, characterized by elevation of
cholesterol or triglycerides in the blood, is a risk factor for atherosclerosis
which leads to heart attacks, strokes and peripheral vascular disease.
Elevation of triglycerides ("hypertriglyceridemia") often accompanies diabetes
and may contribute to the acceleration of atherosclerosis observed in that
patient population. In addition, high triglyceride levels, resulting from an
underlying genetic disease, can also lead to life-threatening pancreatitis,
which is frequently unresponsive to current therapies.
Treatment of elevated lipids has been shown to decrease the risk of
atherosclerosis. There is evidence that elevated triglycerides, particularly in
combination with low HDL cholesterol ("good cholesterol") in the blood is a
substantial risk factor associated with coronary artery disease. While dietary
control and exercise are important methods to treat high cholesterol, many
individuals do not achieve adequate results with these conservative measures.
Drug therapy for high cholesterol has been successful at reducing the
complications of atherosclerosis. Although drugs to lower blood triglycerides
are widely available, medical management of this condition is often problematic
and treatment regimens are often poorly tolerated by patients. The lack of a
uniformly effective therapy for hypertriglyceridemia provides a rationale for
development of novel, alternative treatments, including gene therapy.
Deficiency of the enzyme lipoprotein lipase ("LPL") is believed to be common
in patients with hypertriglyceridemia, and there may be a correlation between
decreased expression of LPL, which is normally produced in the muscle and fat,
and hypertriglyceridemia. Based on the Company's research demonstrating that
AAV vectors efficiently deliver genes to muscle resulting in sustained protein
production, the Company is working with a collaborator who intends to conduct
studies in animals to evaluate the effectiveness of delivering an AAV vector
containing the LPL gene to muscle to lower triglyceride levels.
Storage diseases. Storage diseases are a diverse set of inherited disorders
characterized by a deficiency of one of several proteins that are necessary for
the function of cellular lysosomes. Lysosomes are the compartments in all cells
that process macromolecules as a part of normal turnover and tissue remodeling.
Storage diseases are characterized by abnormal cell function and cell death
resulting in a variety of clinical manifestations such as progressive
neurologic dysfunction, including mental retardation, enlarged organs or
skeletal abnormalities. Gaucher's disease and Tay-Sachs disease are two of the
more well-known examples of this class of disease.
Based on the finding that long-term production of therapeutic proteins can be
obtained following the intramuscular injection of an AAV vector containing the
relevant gene, the Company has entered into two collaborations to evaluate this
approach for the treatment of storage diseases. In collaboration with
investigators at The Johns Hopkins School of Medicine, the Company is
initiating studies to evaluate gene therapy for the treatment of Pompe's
disease. This disease, caused by deficient production of the enzyme, acid
maltase, leads to lethal skeletal and cardiac abnormalities in affected
individuals. These investigators intend to determine whether, following the
intramuscular administration of an AAV vector containing the acid maltase gene,
the muscle will produce a sufficient amount of this enzyme to reverse or
prevent the manifestations of this disease. In collaboration with an
investigator at Childrens Hospital Los Angeles, the Company is currently
evaluating a similar approach for the treatment of deficiency of the enzyme
alpha-iduronidase (Hurler's disease). Although these conditions are rare, there
is currently no available treatment for these devastating diseases. In
addition, the Company believes that research on such conditions will benefit
the Company's product development efforts because the clinical endpoints are
relatively clear and measurable and the results are expected to be sufficiently
generalizable to allow for the design of AAV vector gene therapy for several
other diseases.
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Infectious Diseases
HIV. The Center for Disease Control estimates that there are 460,000 cases
of AIDS in the United States and 4.5 million cases worldwide. HIV, the cause
of AIDS, is spread by a transfer of bodily fluids primarily through sexual
contact, blood transfusions, sharing intravenous needles, accidental needle
sticks or transmission from infected mothers to newborns.
The Company is developing vectors incorporating TVI to deliver genes to bone
marrow stem cells. These cells can also be used as target cells for the
delivery of genes designed to protect blood cells from infection with HIV. As
in the case of thalassemia and sickle cell anemia, the Company believes that
potential treatments arising from this work will involve exposure of patients'
bone marrow stem cells to vector ex vivo. The Company is also participating in
a National Cooperative Drug Discovery Grant (NCDDG) program with Johns Hopkins
and The University of Alabama at Birmingham to utilize capsid targeted viral
inactivation technology for the treatment of AIDS. The NCDDG was recently
renewed for a four-year period. An anti-viral effect has been demonstrated in
tissue culture for a virus (Moloney murine leukemia virus) related to HIV. The
Company holds an exclusive, worldwide, royalty-bearing license to a patent
application relating to certain synthetic genes which direct the production of
proteins with specific antiviral properties. The Company believes such research
may lead to the development of proprietary hybrid genes that can be delivered
to bone marrow stem cells using its gene therapy vectors.
CORPORATE PARTNERING STRATEGY
The Company is actively seeking to develop long-term strategic collaborations
with pharmaceutical companies that can provide funding for research and
development activities and clinical trials. The Company believes that its
technologies are proprietary and broad-based and can be used with several
different genes, giving rise to multiple product and corporate partnering
opportunities.
The Company has initiated discussions with a number of pharmaceutical
companies in the United States, Europe and Asia. The Company has not entered
into any definitive agreements with respect to any corporate partnering
arrangements. Avigen's strategy is to contribute both technology and expertise
in the gene therapy field while seeking corporate partners who can provide
access to complementary technologies, including gene sequences. In addition,
the Company intends to rely on corporate partners, licensees or other entities
for marketing of its products, when and if such products achieve regulatory
approval. There can be no assurance, however, that the Company will be able to
reach satisfactory arrangements with such parties or that such arrangements
will be successful.
LICENSING AND RESEARCH AGREEMENTS
Research Corporation Technologies. In May 1992, the Company entered into a
license agreement with Research Corporation Technologies, Inc. ("RCT") for
rights to a patent and patent application relating to a cell-specific promoter
in AAV vectors. The license is exclusive and worldwide. In consideration for
the license, the Company paid an initial license fee and issued 247,949 shares
of its Common Stock. In addition, the Company is required under the agreement
to pay RCT royalties based on net sales of products which utilize the licensed
technology, with certain minimum annual royalty payments due beginning in 1999.
Avigen must exercise its best efforts to commercially develop, promote and sell
products covered by the licensed patent rights, and is obligated to file an IND
by the end of 1997 and a product license application or a new drug application
by the end of 2000. In the event the Company fails to achieve any of these
milestones by their applicable deadlines, the Company has the right to pay RCT
additional fees of up to $250,000 to extend certain of the deadlines for
specified periods. RCT may terminate the agreement if the Company becomes
insolvent or bankrupt or fails to perform any of its obligations under the
agreement.
The Johns Hopkins University. In November 1992, the Company entered into an
agreement with The Johns Hopkins University under which it issued an aggregate
of 152,702 shares of its Common Stock and agreed to make certain cash payments
in exchange for an exclusive, worldwide, royalty bearing license to a patent
application relating to certain synthetic genes which direct the production of
proteins with specific antiviral properties and which the Company believes may
be useful in its infectious disease programs. Under the agreement, Johns
Hopkins has control over the prosecution and maintenance of the licensed patent
application. The Company is obligated to exercise its best efforts to develop
and commercialize products which utilize the subject technology. Under the
terms of the agreement, as amended, the Company is required to meet the
following development milestones: initiation of large animal studies for a
licensed potential product by the end of 1997, submission to the FDA of at
least one clinical protocol utilizing a licensed potential product by the end
of 1998, initiation of at least one clinical study utilizing a licensed
potential product by the end of 1999 and receipt of FDA approval to market a
licensed product by the end of 2002. If the
14
<PAGE> 17
Company fails to perform any of its obligations under the agreement, Johns
Hopkins may terminate the agreement upon 60 days' written notice.
The Company has entered into other exclusive and nonexclusive license
agreements with certain research institutions and their representatives.
Although specific terms of the licenses vary, all of such licenses require the
Company to achieve certain development milestones. In addition, the agreements
require Avigen to pay certain license fees and royalties to the licensors. All
of the licenses provide for a term which extends for the life of the underlying
patent.
The failure to achieve any required development milestones or to negotiate
appropriate extensions of any of the Company's license agreements or to make
all required milestone and royalty payments when due and the subsequent
decision of any such institution to terminate such license could have a
material adverse effect on the Company.
The Company has also entered into agreements with certain research
institutions and corporate entities with respect to its research and
development efforts. Under such agreements the Company has provided specific
vectors and other materials for research purposes conducted at the direction of
a principal investigator. Generally, the agreements also provide that: (i) the
Company remains the sole and exclusive owner of the transferred materials; (ii)
ownership of improvements will be determined under patent law principles, based
upon the parties' relative contributions to the improvements; and (iii) the
Company has the right to prosecute patents on jointly-owned improvements.
Although specific terms of each agreement vary, the Company is generally
granted, with respect to jointly owned improvements, an irrevocable,
nonexclusive, royalty-free license and an option to negotiate in good faith an
exclusive license at royalty rates to be mutually agreed upon. There can be no
assurance that exclusive rights to any such improvements can be obtained on
terms acceptable to the Company, if at all. In addition, the Company engages
from time to time in discussions with other prospective academic partners
regarding potential research and development projects and may, in the future,
enter into arrangements in addition to those described above.
University of Manitoba. In February 1994, the Company entered into an
agreement with the University of Manitoba for an exclusive, worldwide license
to patent applications relating to a prostate-specific promoter for use in gene
therapy. On March 20, 1997, the Company ended its license for a prostate
cancer gene promoter from the University of Manitoba. Experimental data did
not sufficiently support the feasibility of this project to justify paying
continuing license fees and patent prosecution costs.
MANUFACTURING
The Company has developed a proprietary manufacturing process for AAV
vectors. The Company believes it currently has the capacity to manufacture AAV
vectors in amounts sufficient to conduct clinical trials, but it will be
required to implement cGMP policies and procedures prior to manufacturing
material for preclinical studies and clinical trials. The Company believes that
its manufacturing process will simplify manufacturing and purification and will
allow the Company to produce amounts of AAV vector required for clinical
trials. The processes used by the Company are new, however, and there can be no
assurance that such processes will be feasible or cost-effective.
Avigen currently does not operate manufacturing facilities for commercial
production of its gene therapy products. Avigen's strategy for the manufacture
of its gene therapy products may be to enter into alliances with pharmaceutical
and other biotechnology companies. In addition, the Company does not have, and
has no intention of developing, the facilities necessary to perform cell
processing which may be required for TVI. The Company intends to rely on
corporate partners or others for such cell processing. There can be no
assurance that the Company will be able to negotiate satisfactory arrangements
with such parties, that such arrangements will be successful or that its
corporate partners will be able to develop adequate manufacturing capabilities
for commercial scale production. In the event the Company decides to establish
a commercial scale manufacturing facility, the Company will require substantial
additional funds and personnel and will be required to comply with extensive
regulations applicable to such facility.
GOVERNMENT REGULATION
The production and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, pharmaceutical products are subject
to rigorous regulation by the FDA under the federal Food, Drug, and Cosmetic
Act. Biological products, in addition to being subject to certain provisions of
this act, are also regulated under the Public Health Service Act. These laws
and the regulations promulgated thereunder govern, among other things, testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and
15
<PAGE> 18
promotional practices and import and export of drugs and biological products.
In general, the Center for Biologics Evaluation and Research holds primary
responsibility for the regulation of biological products and has handled the
IND submissions of most gene therapy products to date. At the present time, the
Company believes that its products will be regulated as biologics by the FDA
and comparable foreign regulatory bodies. Gene therapy is, however, a
relatively new technology and has not been extensively tested in humans. The
regulatory requirements governing gene therapy products are uncertain and are
subject to change. No gene therapy products have been approved to date in the
United States or any foreign country.
Under the NIH Guidelines for Research Involving Recombinant DNA Molecules,
clinical protocols involving human gene transfer conducted at institutions
receiving NIH funds cannot be initiated without simultaneous submission of
information describing the proposed clinical protocol to both NIH/ORDA and the
FDA. Submission to NIH/ORDA shall be for registration purposes and
determination regarding the necessity of full RAC review and
approval/disapproval. Full RAC review of an individual human gene transfer
protocol can be initiated by the NIH Director or recommended to the NIH
Director by three or more RAC members or other Federal agencies. An individual
human gene transfer protocol that is recommended for full RAC review should
represent novel characteristics deserving of public discussion. Prior to
submission of a human gene transfer experiment to NIH/ORDA, the Principal
Investigator must obtain Institutional Biosafety Committee approval from each
institution that will handle recombinant DNA material that is to be
administered to human subjects and Institutional Review Board approval from
each institution in which human subjects will undergo gene transfer.
Submission of human gene transfer protocols to the FDA will be in the form of
an IND application. The review process conducted by NIH/ORDA and the FDA is
unpredictable and may result in considerable time and expense to the Company.
The steps required before a new drug, including a biologic, may be marketed
in the United States generally include (i) preclinical laboratory tests and
preclinical animal studies, (ii) the submission to the FDA of an IND
application for human clinical testing, which must become effective before
human clinical trials commence, (iii) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the product, (iv) the
submission to the FDA of a Product License Application and Establishment
License Application ("PLA/ELA") for a biologic and (v) FDA approval of the
PLA/ELA prior to any commercial sale or shipment of the biologic. The FDA has
proposed regulations that would eliminate the separate requirement for an ELA
for certain biotechnology products, including certain recombinant DNA products,
that satisfy the regulatory definition of a "well-characterized product." The
FDA, however, has indicated that gene therapy products are not considered
"well-characterized" at this time.
Domestic manufacturing establishments are subject to inspections at any time
by the FDA and must comply with cGMP regulations enforced by the FDA through
its facilities inspection program. Manufacturers of biological products also
must comply with FDA general biological product standards. In addition, the
Company must obtain a drug manufacturing license from the State of California
for any of its products administered to humans, including products intended for
clinical trials.
Preclinical safety studies include laboratory evaluation of the product, as
well as animal studies to assess the potential safety and, if possible,
efficacy of the product. Preclinical studies must be conducted by laboratories
that comply with FDA regulations regarding Good Laboratory Practices. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND, which must become
effective before human clinical trials may be commenced. The IND will become
automatically effective 30 days after its receipt by the FDA unless the FDA
indicates prior to the end of the 30-day period that it does not wish the
trials to proceed as outlined in the IND. In such case, the IND sponsor and the
FDA must resolve any outstanding concerns before clinical trials can proceed.
There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials.
Clinical trials must be conducted in accordance with FDA's Good Clinical
Practice regulations and must be approved by the IRB at the institution where
the study will be conducted. The IRB will consider, among other things, safety
and ethical issues, proper informed consent of the human subjects, possible
issues relating to health care costs and potential liability of the
institution. The IRB may require changes in a protocol, and there can be no
assurance that an IRB will permit any given study to be initiated or completed.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. Phase I typically involves the initial introduction of the
drug into patients primarily to determine the drug's metabolism,
pharmacokinetics and pharmacological actions in humans and the side effects
associated with increasing doses. Phase II typically involves studies in a
limited patient population to (i) determine the efficacy of the drug for
specific indications, (ii) determine dosage tolerance and optimal dosage and
(iii) further identify possible adverse effects and safety risks. If the drug
is found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to evaluate efficacy and safety
within an expanded patient population typically at
16
<PAGE> 19
geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing will be completed successfully within
any specific time period, if at all, with respect to any of the Company's
products subject to such testing. Furthermore, the FDA may suspend clinical
trials at any time on various grounds, including a finding that patients are
being exposed to an unacceptable health risk. FDA regulations also subject
sponsors of clinical investigations to numerous regulatory requirements related
to, among other things, selection of qualified investigators, proper monitoring
of investigations, record keeping and record retention and notice to
investigators and FDA of any death or adverse serious reaction. In addition,
the FDA may require post marketing clinical studies (Phase IV) which will
require extensive patient monitoring and recordkeeping and may result in
restricted marketing of the product for an extended period of time.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the biologic. The
testing and approval process is likely to require substantial time and effort
and there can be no assurance that any approval will be granted on a timely
basis, if at all. The FDA may deny a PLA/ELA if applicable regulatory criteria
are not satisfied, require additional testing or information, or require
postmarketing testing and surveillance to monitor the safety or efficacy of a
product. Moreover, if regulatory approval of a biologic is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for PLA/ELA approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform to cGMP, which must be followed at all times. In complying with
standards set forth in these regulations, manufacturers must continue to expend
time, financial resources and effort in the area of production and quality
control.
In accordance with the Orphan Drug Act, the FDA may grant Orphan Drug status
to certain drugs intended to treat a "rare disease or condition" defined as a
disease or condition which affects fewer than 200,000 people in the United
States, or which affects more than 200,000 people for which the cost of
developing and marketing the drug will not be recovered from sales of the drug
in the United States. An approved Orphan Drug may provide certain benefits
including exclusive marketing rights in the United States to the drug for the
approved indication for seven years following marketing approval and federal
income tax credits for certain clinical trial expenses. The Company believes
that some of its future products may qualify for Orphan Drug status but there
can be no assurance that such products will receive FDA approval. In addition,
there is no assurance that potential benefits provided by the Orphan Drug Act
will not be significantly limited by amendment by the United States Congress
and/or reinterpretation by the FDA.
For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing clinical
trials and marketing approval for pharmaceutical products. In Europe, the
approval process for the commencement of clinical trials varies from country to
country. The foreign regulatory approval process includes all of the risks
associated with FDA approval set forth above.
In addition to regulations enforced by the FDA, the Company also is 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. The Company's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, it could be held liable for any damages that result from
accidental contamination or injury and any such liability could exceed the
resources of the Company.
PATENTS AND INTELLECTUAL PROPERTY
Patents and other proprietary rights are important to the Company's business.
The Company's policy is to file patent applications and protect technology,
inventions and improvements to inventions that are commercially important to
the development of its business. The Company also relies on trade secrets,
know-how, continuing technology innovations and licensing opportunities to
develop and maintain its competitive position.
The Company has one issued U. S. patent and 6 pending U. S. patent
applications, all of which have been foreign filed. Two of the patent
applications are co-owned with co-inventors. The Company has one exclusive
worldwide license to a patent, an exclusive license to one U. S. patent and
three worldwide exclusive licenses to patent applications. The Company also has
a non-exclusive license to one U. S. patent. There is no assurance that
patents will issue from these applications or that any patent will issue on
technology arising from additional research or, if patents do issue, that
claims allowed will be sufficient to protect the Company's technology. The
patent application process takes several years and entails considerable
expense. In addition, with respect to each of the Company's co-owned patent
applications, the Company has an option to obtain an exclusive, worldwide,
transferable, royalty-bearing license
17
<PAGE> 20
for such technology, and is currently in discussions with one of the
co-inventors to obtain such a license. In the event the Company is unable to
negotiate exclusive rights to such co-owned technology, each co-inventor may
have rights to independently make, use, offer to sell or sell the patented
technology. Commercialization, assignment or licensing of such technology by a
co-inventor could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure to obtain patent
protection on the Company's technologies or proposed products may have a
material adverse effect on the Company's competitive position and business
prospects.
The patent positions of pharmaceutical and biotechnology firms are generally
uncertain and involve complex legal and factual questions. To date, there has
emerged no consistent policy regarding the breadth of claim allowed in
biotechnology patents. Patent applications in the United States are maintained
in secrecy until a patent issues, and the Company cannot be certain that others
have not filed applications for technology covered by the Company's patent
applications or that the Company was first to file patent applications for such
technology. Competitors may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to
compounds or processes that block or compete with those of the Company.
There can be no assurance that third parties will not assert patent or other
intellectual property infringement claims against the Company with respect to
its products or technology or other matters. There may be third-party patents
and other intellectual property relevant to the Company's products and
technology which are not known to the Company. A number of the gene sequences
or proteins encoded by certain of those sequences that the Company is
investigating or may use in its products are or may become patented by others.
As a result, the Company may be required to obtain licenses to such gene
sequences or other technology in order to test, use or market products that
contain proprietary gene sequences or encode proprietary proteins. For example,
in connection with its anemia program, the Company anticipates that it may need
to obtain a license to a gene for human erythropoietin. There can be no
assurance that the Company will be able to obtain this or any other license on
terms favorable to the Company, if at all.
Patent litigation is becoming more widespread in the biotechnology industry.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company, to protect trade secrets owned by the
Company, or to determine the scope and validity of proprietary rights of third
parties. Although no third party has asserted that the Company is infringing
such third party's patent rights or other intellectual property, there can be
no assurance that litigation asserting such claims will not be initiated, that
the Company would prevail in any such litigation, or that the Company would be
able to obtain any necessary licenses on reasonable terms, if at all. Any such
claims against the Company, with or without merit, as well as claims initiated
by the Company against third parties, can be time-consuming and expensive to
defend or prosecute and to resolve. If competitors of the Company prepare and
file patent applications in the United States that claim technology also
claimed by the Company, the Company may have to participate in interference
proceedings declared by the Patent and Trademark Office to determine priority
of invention, which could result in substantial cost to the Company, even if
the outcome is favorable to the Company. In addition, to the extent outside
collaborators apply technological information developed independently by them
or by others to the Company's product development programs or apply Avigen's
technologies to other projects, disputes may arise as to the ownership of
proprietary rights to such technologies.
The Company also relies on a combination of trade secret and copyright law,
employee and third-party nondisclosure agreements, and other protective
measures to protect intellectual property rights pertaining to its products and
technology. There can be no assurance, however, that these agreements will
provide meaningful protection of the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the Company will be able to protect its
intellectual property successfully.
PRODUCT LIABILITY INSURANCE
The manufacture and sale of medical products entail significant risk of
product liability claims. The Company currently does not carry product
liability insurance, although it intends to obtain such coverage prior to
beginning clinical trials. There can be no assurance that such coverage will be
adequate to protect the Company from any liabilities it might incur in
connection with the sale of the Company's products. In addition, the Company
may require increased product liability coverage as products are
commercialized. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product liability claim
or series of claims brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business and
results of operations.
EMPLOYEES
18
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As of September 22, 1997, the Company had 38 full-time employees, 11 of whom
have Ph.D. or M.D. degrees, including 29 employees in research and development,
and 9 in general administration and finance. The Company also relies on several
part-time employees and consultants. None of the Company's employees is
represented by a collective bargaining agreement nor has the Company ever
experienced a work stoppage. The Company believes that its relationship with
its employees is good.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board, consisting of
experts in the field of medicine, genetics and molecular biology, which reviews
and evaluates the Company's research programs and advises the Company with
respect to technical matters in fields in which the Company is involved. The
members of the Scientific Advisory Board are prominent scholars in their field
and, as a result, may serve as consultants to a wide variety of companies. The
Company's Scientific Advisory Board includes:
Gary J. Kurtzman, M.D., is Chairman of the Scientific Advisory Board. Dr.
Kurtzman serves as Vice President, Research and Development for the Company.
Jef D. Boeke, Ph.D., is a professor of Molecular Biology and Genetics at The
Johns Hopkins University School of Medicine. Dr. Boeke co- invented the capsid
targeted viral inactivation technology that provides a basis for Avigen's
antiviral product development program. and has authored more than 100
publications.
Katherine A. High, M.D., is the William H. Bennett Associate Professor of
Pediatrics at the University of Pennsylvania and the Director of Research of
the Hematology Division at Children's Hospital of Philadelphia. She is an
expert in both the basic science and clinical aspects of hemophilia.
Mark A. Israel, M.D., is Professor of Neurological Surgery and Pediatrics and
Director, the Preuss Laboratory of Molecular Neuro-oncology at the University
of California, San Francisco. Dr. Israel's research focuses on the molecular
and cellular biology of tumors of the nervous system.
Yuichi Iwaki, M.D., Ph.D., serves as a director of the Company.
Y. W. Kan, M.D., D.Sc., is the Louis K. Diamond Professor of Hematology at
the University of California at San Francisco. He also is an Investigator of
the Howard Hughes Medical Institute. Dr. Kan was the 1991 recipient of the
Albert Lasker Clinical Medical Research Award and is noted as a leader in the
fields of sickle cell anemia and thalassemia.
Keiya Ozawa, M.D., Ph.D., is a professor of Molecular Biology, Institute of
Hematology, at Jichi Medical School in Japan, where he has established a
research and preclinical program in gene therapy. Dr. Ozawa is regarded as one
of the leading authorities on gene therapy in Japan and is responsible for
drafting the Japanese government's gene therapy guidelines.
Jeffrey M. Rosen, Ph.D., is a professor of Cell Biology at Baylor College of
Medicine. Dr. Rosen is an internationally recognized expert in the field of
gene expression, and his research focuses primarily on the mechanisms of
tissue-specific gene expression in the mammary and prostate glands.
ITEM. 2 PROPERTIES
THE COMPANY
The Company's facility, located in Alameda, California, is an approximately
23,000 square foot facility leased through May 2003. The Company believes that
it will be able to renew the lease of this facility or find suitable alternate
facilities in the same general area without a material disruption of its
operations. Within the 23,000 square foot facility, the Company completed in
October 1996 of a 7,000 square foot expansion of its research and development
facilities and administration offices.
ITEM. 3 LEGAL PROCEEDINGS
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(a) No material legal proceedings to which Avigen was a party or of which
any of its property was the subject were pending during fiscal 1997.
(b) No material legal proceedings were terminated during fiscal 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM. 5 MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of the Company's common stock commenced trading in the
over-the-counter market on the NASDAQ National Market on May 22, 1996, under
the symbol "AVGN".
The Company has never paid cash dividends and does not anticipate paying cash
dividends in the forseeable future.
The following table sets forth, for fiscal periods indicated, the range of
high and low intraday sale prices available for the fiscal year 1996 and 1997.
<TABLE>
<CAPTION>
1996 High Low
---- ---- ---
<S> <C> <C>
Fourth Quarter (from May 22, 1996) $13.25 $6.78
</TABLE>
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
Year End 6/30/97 $7.375 $3.25
</TABLE>
As of September 22, 1997, there were approximately 152 holders of record of
the Company's Common Stock.
20
<PAGE> 23
ITEM. 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years ended June 30,
October 22, 1992 (Inception)
1997 1996 1995 to June 30, 1994
(in thousands, except share and per share data)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
- ----------------------------
Grant revenue $ 98 $ 87 $ 178 $---
Expenses:
Research and development 4,033 2,550 2,290 3,490
General and administrative 2,351 1,102 1,334 1,821
----------- ----------- ----------- -----------
6,384 3,652 3,624 5,311
----------- ----------- ----------- -----------
Loss from operations (6,286) (3,565) (3,446) (5,311)
Interest income (expense) (net) 710 (531) (8) (32)
Other income (expense) (2) (1) 189 --
----------- ----------- ----------- -----------
Net loss (5,578) $ (4,097) $ (3,265) $ (5,343)
----------- ----------- -----------
Net loss per share $ (.77) -- --
=========== ----------- -----------
Proforma
net loss per share -- $ (.80) (.62) --
----------- ----------- ----------- -----------
Shares used in per share
calculation 7,286,146 5,141,951 5,295,064 --
=========== =========== =========== ===========
Balance Sheet Data:
Cash, cash equivalents and
investments in marketable
securities 13,039 $ 16,443 $ 203 $ 244
Working capital 11,936 15,364 (916) (1,615)
Total assets 14,760 17,532 1,841 2,133
Capital lease obligations:
Current 396 31 4 5
Long-term 1,084 176 214 27
Deficit accumulated during
development stage (18,283) (12,705) (8,608) (5,343)
Stockholders' equity 12,341 16,027 184 (69)
</TABLE>
21
<PAGE> 24
ITEM. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
or contribute to such a difference include, but are not limited to, those
discussed herein and in "Risk Factors" in Part I.
OVERVIEW
Since its inception, the Company has devoted substantially all of its
resources to research and development activities. The Company is a development
stage company and has not received any revenue from the sale of products. The
Company does not anticipate generating revenue from the sale of products in the
foreseeable future. The Company expects its source of revenue, if any, for the
next several years to consist of government grants and payments under
collaborative arrangements. The Company has incurred losses since its inception
and expects to incur substantial losses over the next several years due to
ongoing and planned research and development efforts, including preclinical
studies and clinical trials. At June 30, 1997 the Company had an accumulated
deficit of $18.3 million.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1995, 1996 AND 1997.
Grant revenue decreased from $178,000 for the year ended June 30, 1995 to
$87,000 for the year ended June 30, 1996, and increased to $98,000 for the year
ended June 30, 1997. Grant revenue for 1995, 1996 and 1997 consisted of
reimbursements under a NIH grant. Revenues earned under research grants are
determined by the timing of the award from the issuing agency. As a result,
research grant revenue earned in one period is not predictive of research grant
revenue to be earned in future periods.
The Company's research and development expenses increased from $2.3 million
for the year ended June 30, 1995 to $2.6 million for the year ended June 30,
1996, and increased to $4.0 million for the year ended June 30, 1997. The
increase from fiscal 1995 to fiscal 1996 was due primarily to increases in
personnel in the fourth quarter of 1996. The increase from fiscal 1996 to
fiscal 1997 was due primarily to increases in personnel, employee related
expenses, outside labs, temporary employees and increases in depreciation
expense. The Company expects research and development spending to increase
significantly over the next several years as the Company expands research and
product development efforts.
General and administrative expenses decreased from $1.3 million for the year
ended June 30, 1995 to $1.1 million for the year ended June 30, 1996 and
increased to $2.4 million for the year ended June 30, 1997. The decrease from
fiscal 1995 to fiscal 1996 was primarily due to lower personnel and support
costs. The increase from fiscal 1996 to fiscal 1997 was due primarily to
increases in executive personnel and costs associated with operating as a
public company. General and administrative expenses are expected to increase
as the level of the Company's activities increases but to decrease as a
percentage of total expenses, with the expansion of the research and
development efforts.
Interest expense increased from $33,000 for the year ended June 30, 1995 to
$581,000 for the year ended June 30, 1996 and decreased to $70,000 for the year
ended June 30, 1997. The increase from fiscal 1995 to fiscal 1996 was due
primarily to the Company's bridge financing for the initial public offering.
Interest income increased from $25,000 for the year ended June 30, 1995 to
$50,000 for the year ended June 30, 1996 and increased to $780,000 for the year
ended June 30, 1997. The increase from fiscal 1995 to fiscal 1996 was due
primarily to the investment of the proceeds of the bridge financing for the
initial public offering. The increase from the fiscal 1996 to fiscal 1997 was
due primarily to the investment of the proceeds of the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company consummated an initial public offering (the
"Offering") of 2,500,000 shares of Common Stock which raised approximately
$17.7 million, net of expenses. In July 1996, the Company issued 250,000
additional shares of Common Stock in connection with the exercise of the
underwriters' over-allotment option. Net proceeds from such sale were
approximately $1,850,000.
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<PAGE> 25
Prior to May 1996, the Company financed its operations primarily through
private placements of Common Stock and Preferred Stock and a bridge financing
which was completed on March 29, 1996 (the "1996 Bridge Financing"). Through
March 31, 1996, the Company had raised approximately $11.0 million, net of
financing costs, from the sale of Common Stock and Preferred Stock and $1.9
million from the 1996 Bridge Financing.
In March 1996, the Company completed the 1996 Bridge Financing in which the
Company issued $1,937,500 principal amount of promissory notes (the "Notes")
and warrants to purchase 193,750 shares of Common Stock. The Notes accrued
interest at the rate of 12% per year and were paid in June 1996 with a portion
of the proceeds from the Company's initial public offering. The warrants
expire in March 2001. The warrants were assigned a value of $300,000. This
amount was reflected as a discount on the Notes and was accreted as additional
financing (interest) expense over the term of the Notes. In connection with
the 1996 Bridge Financing, the Company paid the placement agent a commission
equal to 10% of the gross proceeds and warrants to purchase 19,375 shares of
Common Stock. The placement agent warrants expire in May, 2001.
At June 30, 1997, the Company had cash, cash equivalents and investments in
marketable securities of approximately $13 million. The Company expects its
cash requirements to increase significantly in future periods. The Company will
require substantial funds to conduct the research and development activities
and preclinical studies and clinical testing of its potential products and to
market any products that are developed. The Company's facility is an
approximately 23,000 square foot facility leased through May 2003. The Company
believes that it will be able to renew the lease of this facility and find
suitable alternate facilities in the same general area without a material
disruption of its operations. Within the 23,000 square foot facility, the
Company completed in October 1996 with the commencement of a 7,000 square foot
expansion of its research and development facilities and administration
offices. The construction cost was approximately $500,000. In November 1996,
the Company secured a $2 million revolving line of credit with Wells Fargo
Bank. In May 1997 the Company secured a $2 million capital lease from which
$1.4 million was used as a sale-leaseback of existing equipment and for other
leasehold improvements. To the extent the Company decides to develop its own
manufacturing facilities, the Company would require substantial additional
capital. The Company's cash requirements may vary materially from those now
planned because of the results of research, development and clinical trials,
the time and costs involved in obtaining regulatory approvals, the cost of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in the Company's existing research relationships, the ability of the
Company to establish collaborative arrangements, the development of
commercialization activities and arrangements and the purchase of additional
capital equipment.
The Company believes that the available cash and cash equivalents and
short-term investments, will be sufficient to meet the Company's operating
expenses and capital requirements for at least the next 12 months. The Company
will be required to seek additional funds through public or private financings
or collaborative arrangements with corporate partners. Issuances of additional
equity securities could result in substantial dilution to stockholders. There
can be no assurance that additional funding will be available on terms
acceptable to the Company, if at all. The failure to fund its capital
requirements would have a material adverse effect on the Company's business.
ITEM. 8 FINANCIAL STATEMENTS
The financial statements required by this item are set forth beginning at
page F1 of this report.
ITEM. 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is hereby incorporated by reference from the
information contained in the Company's definitive Proxy Statement with respect
to the Company's Annual Meeting of Stockholders, to be held November 21, 1997
(the "Proxy Statement").
23
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from information contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is hereby incorporated by reference
contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from information contained in the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8K
The following documents are filed as part of this Report on Form 10-K:
(1) Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statements schedules have been omitted from this report
because the information is provided in the Financial Statements or
is not applicable.
(3) Exhibits
Exhibit
Number Exhibits
------ --------
3.1* Amended and Restated Certificate of Incorporation
3.2* Restated Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
10.2*o 1993 Stock Option Plan
10.3*o 1996 Equity Incentive Plan
10.4*o Form of Incentive Stock Option Grant
10.5*o Form of Nonstatutory Stock Option Grant
10.6*o 1996 Non-Employee Director Stock Option Plan
10.7* Form of Series C Investors' Rights Agreement
10.8* Form of Indemnification Agreement between the Registrant and its
directors and executive officers
10.9* Form of Common Stock Warrant
10.10* Form of Series A Preferred Stock Warrant
10.11* Form of Series B Preferred Stock Warrant
10.12* Form of Series C Preferred Stock Warrant
10.13* Form of Series D Preferred Stock Warrant
10.14* Form of Series A Preferred Stock Subscription Agreement
10.15* Form of Series B Preferred Stock Subscription Agreement
10.16* Form of Series C Preferred Stock Subscription Agreement
10.17* Form of Unit Purchase Agreement
24
<PAGE> 27
10.19* Form of Bridge Warrant
10.20* License Agreement between the Registrant and Research Corporation
Technologies, Inc., dated May 15, 1992, as amended as of March 21,
1996 and April 26, 1996
10.21* License Agreement between the Registrant and The Johns Hopkins
University, dated November 23, 1993, as amended as of March 21,
1996
10.22* License Agreement between the Registrant and The University of
Manitoba, dated February 2, 1994
10.23* Form of Underwriters' Warrant
10.24* Lease Agreement between Registrant and Redding Management, Inc.,
dated September 15, 1992, as amended June 30, 1995
10.25* Registration Rights Agreement between the Registrant and certain
stockholders named therein, dated November 1992
10.26* Registration Rights and Transfer Restriction Agreement between the
Registrant and Research Corporation Technologies, Inc., The
Indiana University Foundation and Arun Srivastava, dated May 15,
1992, as amended October 1992
10.27*o Employment Agreement dated August 10, 1992, between the Company
and John Monahan.
10.28*o Employment Agreement dated October 19, 1992, between the Company
and Wanda deVlaminck
10.29o Employment Agreement dated August 14, 1996, between the Company
and Thomas J. Paulson
10.30o Employment Agreement dated October 23, 1996, between the Company
and Robert M. Maurer
10.31o Employment Agreement dated December 13, 1993, between the Company
and Gary Kurtzman
10.32 Revolving line of credit signed November 22, 1996 with Wells Fargo
Bank
10.33 Equipment lease dated May 22, 1997 with Transamerica Business
Credit Corporation
11.1 Statement re: computation of net loss per share
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (Reference to the signature page herein)
27.1 Financial Data Schedule
_________________
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-3220) and incorporated herein by reference.
o Management Contract or Compensation Plan.
(b) The Company has filed no reports on Form 8-K.
25
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 of 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.
Dated: September 27, 1996 AVIGEN, INC.
By:
-----------------------------------
John Monahan, Ph.D.
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Monahan and Philip J. Whitcome, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
26
<PAGE> 29
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
--------- ----- ----
<S> <C> <C>
- ----------------------------------- President, Chief Executive Officer September 27, 1997
John Monahan, Ph.D. and Director (Principal Executive
Officer)
- ----------------------------------- Chief Financial Officer September 27, 1997
Thomas J. Paulson
- ----------------------------------- Controller (Principal Accounting September 27, 1997
Glenn Bauer Officer)
- ----------------------------------- Chairman of the Board September 27, 1997
Philip J. Whitcome, Ph.D.
- ----------------------------------- Director September 27, 1997
Zola Horovitz, Ph.D.
- ----------------------------------- Director September 27, 1997
Yuichi Iwaki, M.D., Ph.D.
- ----------------------------------- Director September 27, 1997
Richard T. Pratt
- ----------------------------------- Director September 27, 1997
John K.A. Prendergast, Ph.D.
- ----------------------------------- Director September 27, 1997
Lindsay A. Rosenwald, M.D.
- ----------------------------------- Director September 27, 1997
Leonard P. Shaykin
*By:
------------------------------
John Monahan, Ph.D.
Attorney-in-Fact
</TABLE>
27
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors.....................................................
Balance Sheets at June 30, 1997 and 1996...........................................
Statements of Operations for Years Ended June 30, 1997, 1996 and 1995..............
Statements of Stockholders' Equity for Years Ended June 30, 1997, 1996 and 1995....
Statements of Cash Flows for Years Ended June 30, 1997, 1996 and 1995..............
Notes to Financial Statements......................................................
</TABLE>
28
<PAGE> 31
FINANCIAL STATEMENTS
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
Years ended June 30, 1997 and 1996 and the period from
October 22, 1992
(commencement) through June
30, 1997 with Report of
Independent Auditors
29
<PAGE> 32
Avigen, Inc.
(a development stage company)
Financial Statements
Years ended June 30, 1997 and 1996 and the period from
October 22, 1992 (commencement) through June 30, 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors ........................................ 1
Audited Financial Statements
Balance Sheets ........................................................ 2
Statements of Operations .............................................. 3
Statements of Stockholders' Equity .................................... 4
Statements of Cash Flows .............................................. 7
Notes to Financial Statements .......................................... 9
</TABLE>
30
<PAGE> 33
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Avigen, Inc.
We have audited the accompanying balance sheets of Avigen, Inc. (a development
stage company) as of June 30, 1997 and 1996 and the related statements of
operations, stockholders' equity and cash flows each of the three years in the
period ended June 30, 1997 and for the period from October 22, 1992 (inception)
through June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Avigen, Inc. at June 30, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1997 and for the period from October
22, 1992 (inception) through June 30, 1997, in conformity with generally
accepted accounting principles.
Walnut Creek, California
August 15, 1997
31
<PAGE> 34
Avigen, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
1997 1996
--------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,407,057 $ 8,091,645
--------------------------------------
Investments in marketable securities 9,631,979 8,351,349
Total current assets 13,039,036 16,442,994
Property and equipment, net 1,651,205 1,053,438
Deposits and other assets 70,112 35,525
--------------------------------------
Total assets $ 14,760,353 $ 17,531,957
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 434,422 $ 701,885
Accrued compensation and related expenses 116,973 87,994
Other accrued liabilities 156,026 258,265
Current portion of capital lease obligations 395,736 31,061
--------------------------------------
Total current liabilities 1,103,157 1,079,205
Accrued rent 231,680 249,263
Capital lease obligations, less current portion 1,084,207 176,266
Commitments
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized, none
issued and outstanding at June 30, 1997 and 1996
Common stock, $.001 par value, 30,000,000 shares authorized,
7,288,580 shares issued and outstanding at June 30, 1997;
7,035,193 shares issued and outstanding at June 30, 1996
7,288 7,035
Additional paid-in capital 30,704,202 28,852,767
Deferred compensation (86,849) (127,453)
Deficit accumulated during the development stage (18,283,332) (12,705,126)
--------------------------------------
Total stockholders' equity 12,341,309 16,027,223
--------------------------------------
Total liabilities and stockholders' equity $ 14,760,353 $ 17,531,957
======================================
</TABLE>
See accompanying notes.
32
<PAGE> 35
Avigen, Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 22, 1992
(INCEPTION)
YEAR ENDED JUNE 30, THROUGH
1997 1996 1995 JUNE 30, 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Grant revenue $ 97,984 $ 87,402 $ 177,804 $ 363,190
Expenses:
Research and development 4,033,221 2,550,377 2,289,881 12,363,320
General and administrative 2,351,407 1,101,758 1,333,756 6,608,537
------------------------------------------------------------------
6,384,628 3,652,135 3,623,637 18,971,857
------------------------------------------------------------------
Loss from operations (6,286,644) (3,564,733) (3,445,833) (18,608,667)
Interest expense (69,978) (580,679) (33,892) (730,119)
Interest income 780,208 49,809 25,313 869,457
Other (expense) income (1,792) (1,632) 189,421 185,997
------------------------------------------------------------------
Net loss $ (5,578,206) $ (4,097,235) $ (3,264,991) $(18,283,332)
==================================================================
Net loss per share $ (.77)
=============
Pro forma net loss per share $ (.80) $ (.62)
==============================
Shares used in per share calculation 7,286,146 5,141,951 5,295,064
================================================
</TABLE>
See accompanying notes.
33
<PAGE> 36
Avigen, Inc.
(a development stage company)
Statements of Stockholders' Equity
Period from October 22, 1992 (inception) through June 30, 1997
<TABLE>
<CAPTION>
CLASS B
CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 22, 1992 (inception) -- $-- -- $-- -- $--
Issuance of common stock at $.004 per share in
November and December 1992 -- -- 896,062 896 -- --
Issuance of common stock at $.554 per share from
January to June 1993 for services rendered -- -- 20,316 20 -- --
Issuance of common stock at $.004 to $.222 per
share from November 1992 to March 1993 for cash -- -- 1,003,406 1,003 -- --
Issuance of Class B common stock at $.004 per share
in December 1992 for cash -- -- -- -- 90,293 90
Issuance of Series A preferred stock at $4.43 per
share from March to June 1993 for cash (net of
issuance costs of $410,900) 678,865 679 -- -- -- --
Issuance of Series A preferred stock at $3.85 per
share in March 1993 for cancellation of note
payable and accrued interest 68,991 69 -- -- -- --
Issuance of common stock at $.004 per share in
November 1993 pursuant to antidilution rights -- -- 22,869 23 -- --
Issuance of Series A preferred stock at $4.43 per
share from July to November 1993 for cash and
receivable (net of issuance costs of $187,205 418,284 418 -- -- -- --
Issuance of Series B preferred stock at $5.54 per
share in March 1994 for cash (net of issuance
costs of $34,968) 128,031 128 -- -- -- --
673,904
Net loss from inception to June 30, 1994 -- -- -- -- -- --
----------- --------- ----------- --------- ---------- -----------
Balance at June 30, 1994 1,294,171 1,294 1,942,653 1,942 90,293 90
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
CAPITAL COMPENSATION STAGE EQUITY
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at October 22, 1992 (inception) $ $ -- $ -- $ --
Issuance of common stock at $.004 per share in
November and December 1992 4,074 -- -- 4,970
Issuance of common stock at $.554 per share from
January to June 1993 for services rendered 11,230 -- -- 11,250
Issuance of common stock at $.004 to $.222 per
share from November 1992 to March 1993 for cash 54,267 -- -- 55,270
Issuance of Class B common stock at $.004 per share
in December 1992 for cash 310 -- -- 400
Issuance of Series A preferred stock at $4.43 per
share from March to June 1993 for cash (net of
issuance costs of $410,900) 2,595,922 -- -- 2,596,601
Issuance of Series A preferred stock at $3.85 per
share in March 1993 for cancellation of note
payable and accrued interest 265,833 -- -- 265,902
Issuance of common stock at $.004 per share in
November 1993 pursuant to antidilution rights 78 -- -- 101
Issuance of Series A preferred stock at $4.43 per
share from July to November 1993 for cash and
receivable (net of issuance costs of $187,205 1,665,795 -- -- 1,665,795
Issuance of Series B preferred stock at $5.54 per
share in March 1994 for cash (net of issuance
costs of $34,968) 637,904 -- -- 674,032
Net loss from inception to June 30, 1994 -- -- (5,342,900) (5,342,900)
----------- ----------- ----------- -----------
Balance at June 30, 1994 5,270,995 -- (5,342,900) (68,579)
</TABLE>
34
<PAGE> 37
Avigen, Inc.
(a development stage company)
Statements of Stockholders' Equity (continued)
Period from October 22, 1992 (inception) through June 30, 1997
<TABLE>
<CAPTION>
CLASS B
CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------ ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series C preferred stock at
$4.87 per share from July 1994 to June 1995
for cash and receivables (net of issuance
costs of $259,620)................................. 739,655 $ 740 - $ - - $ - $3,344,086
Issuance of Series C preferred stock at
$4.87 per share in June 1995 for
cancellation of notes payable...................... 35,500 35 - - - - 172,965
Net loss............................................. - - - - - - -
--------- ------- --------- ------- -------- ------- ----------
Balance at June 30, 1995............................... 2,069,326 2,069 1,942,653 1,942 90,293 90 8,788,046
Issuance of Series C preferred stock at
$4.87 per share in July 1995 for cash
(net of issuance costs of $26,000)................. 41,042 41 - - - - 173,959
Issuance of Series D preferred stock at
$7.09 per share from October 1995 to
February 1996 for cash (net of issuance
costs of $25,279).................................. 205,351 205 - - - - 1,430,005
Issuance of Series D preferred stock at
$7.09 per share in March 1996 in
settlement of accounts payable..................... 22,574 23 - - - - 160,027
Issuance of common stock at $.004 per share
in March 1996 pursuant to antidilution
rights............................................. - - 17,630 18 - - 60
Issuance of stock options in February 1996 in
settlement of certain accrued liabilities.......... - - - - - - 137,396
Conversion of Class B common stock to common stock... - - 231,304 231 (90,293) (90) (141)
Issuance of warrants to purchase common stock
in connection with 1996 bridge financing in
March 1996......................................... - - - - - - 300,000
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEFERRED DEVELOPMENT STOCKHOLDERS'
COMPENSATION STAGE EQUITY
-------------- ------------- -----------
<S> <C> <C> <C>
Issuance of Series C preferred stock at
$4.87 per share from July 1994 to June 1995
for cash and receivables (net of issuance
costs of $259,620)................................. $ - $ - $3,344,826
Issuance of Series C preferred stock at
$4.87 per share in June 1995 for
cancellation of notes payable...................... - - 173,000
Net loss............................................. - $(3,264,991) (3,264,991)
-------------- ----------- ----------
Balance at June 30, 1995............................... - (8,607,891) 184,256
Issuance of Series C preferred stock at
$4.87 per share in July 1995 for cash
(net of issuance costs of $26,000)................. - - 174,000
Issuance of Series D preferred stock at
$7.09 per share from October 1995 to
February 1996 for cash (net of issuance
costs of $25,279).................................. - - 1,430,210
Issuance of Series D preferred stock at
$7.09 per share in March 1996 in
settlement of accounts payable..................... - - 160,050
Issuance of common stock at $.004 per share
in March 1996 pursuant to antidilution
rights............................................. - - 78
Issuance of stock options in February 1996 in
settlement of certain accrued liabilities ......... - - 137,396
Conversion of Class B common stock to common stock... - - -
Issuance of warrants to purchase common stock
in connection with 1996 bridge financing in
March 1996......................................... - - 300,000
</TABLE>
35
<PAGE> 38
Avigen, Inc.
(a development stage company)
Statements of Stockholders' Equity (continued)
Period from October 22, 1992 (inception) through June 30, 1996
<TABLE>
<CAPTION>
CLASS B
CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON STOCK
----------------------- ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Conversion of preferred stock to common stock in
May 196 (2,338,293) $(2,338) 2,355,753 $2,356 -- $ --
Issuance of common stock at $8.00 per share in
connection with the May 1996 initial public
offering (net of issuance costs of $798,414 and
underwriting discount of $1,500,000) -- -- 2,500,000 2,500 -- --
Proceeds from exercise of options in June 1996 -- -- 6,178 6 -- --
Repurchase of common stock -- -- (18,325) (18) -- --
Deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ------- --------- ------ ------ ------
Balance at June 30, 1996 -- -- 7,035,193 7,035 -- --
Issuance of common stock at $8.00 per share in
July 1996 in connection with the exercise of
underwriters' over-allotment option (net of
underwriting discount of $150,000) -- -- 250,000 250 -- --
Proceeds from exercise of options -- -- 3,387 3 -- --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ------- --------- ------ ------ ------
Balance at June 30, 1997 -- $ -- 7,288,580 $7,288 -- $ --
========== ======= ========= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
CAPITAL COMPENSATION STAGE EQUITY
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Conversion of preferred stock to common stock in
May 196 $ (1,005) $ -- $ -- $ (987)
Issuance of common stock at $8.00 per share in
connection with the May 1996 initial public
offering (net of issuance costs of $798,414 and
underwriting discount of $1,500,000) 17,699,086 -- -- 17,701,586
Proceeds from exercise of options in June 1996 2,793 -- -- 2,799
Repurchase of common stock (63) -- -- (81)
Deferred compensation 162,604 (127,453) -- (4,097,235)
Net loss -- -- (4,097,235) (4,097,235)
----------- ----------- ------------ ------------
Balance at June 30, 1996 28,852,767 (127,453) (12,705,126) 16,027,223
Issuance of common stock at $8.00 per share in
July 1996 in connection with the exercise of
underwriters' over-allotment option (net of
underwriting discount of $150,000) 1,849,750 -- -- 1,850,000
Proceeds from exercise of options 1,685 -- -- 1,688
Amortization of deferred compensation -- 40,604 -- 40,604
Net loss -- -- (5,578,206) (5,578,206)
----------- ----------- ------------ ------------
Balance at June 30, 1997 $30,704,202 $ (86,849) $(18,283,332) $12,341,309
=========== =========== ============ ============
</TABLE>
See accompanying notes.
36
<PAGE> 39
Avigen, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 22,
1992
(INCEPTION)
YEAR ENDED JUNE 30, THROUGH
1997 1996 1995 JUNE 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,578,206) $ (4,097,235) $ (3,264,991) $(18,283,332)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 558,499 412,107 367,710 1,675,050
Amortization of deferred compensation
40,604 35,151 -- 75,755
Write-off of organization costs -- -- 145,741 145,741
Noncash interest expense -- 493,750 -- 509,652
Common stock issued for services -- -- -- 11,250
Changes in operating assets and liabilities:
Prepaids, deposits and other assets (34,587) 11,206 9,869 (70,112)
Accounts payable, other accrued liabilities and
accrued compensation and related expenses
(340,723) 81,864 75,981 1,004,867
Accrued rent (17,583) 74,707 82,144 231,680
------------------------------------------------------------
Net cash used in operating activities (5,371,996) (2,988,450) (2,583,546) (14,699,449)
INVESTING ACTIVITIES
Purchases of property and equipment (1,156,266) (57,241) (144,299) (3,074,147)
Disposal of property and equipment -- 47,033 -- 47,033
Organization costs -- -- -- (218,601)
Purchase of marketable securities (22,513,754) (8,351,349) -- (30,865,103)
Sale of marketable securities 21,233,124 -- -- 21,233,124
------------------------------------------------------------
Net cash used in investing activities (2,436,896) (8,361,557) (144,299) (12,877,694)
FINANCING ACTIVITIES
Proceeds from notes payable -- 200,000 173,000 2,132,800
Repayment of notes payable -- (200,000) (889,800) (1,709,800)
Proceeds from 1996 bridge financing -- 1,937,500 -- 1,937,500
Payment of bridge financing costs -- (193,750) -- (193,750)
Repayment of 1996 bridge financing -- (1,937,500) -- (1,937,500)
Payments on capital lease obligations (164,670) (10,684) (6,640) (183,624)
Proceeds from sale-leaseback of equipment 1,437,286 -- -- 1,437,286
Proceeds from issuance of preferred stock, net of issuance
costs -- 1,738,304 3,411,148 9,884,477
Proceeds from issuance of common stock,
net of issuance costs and repurchases 1,851,688 17,704,382 -- 19,616,811
------------------------------------------------------------
Net cash provided by financing activities 3,124,304 19,238,252 2,687,708 30,984,200
</TABLE>
37
<PAGE> 40
Avigen, Inc.
(a development stage company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 22,
1992
(INCEPTION)
YEAR ENDED JUNE 30, THROUGH
1997 1996 1995 JUNE 30, 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents $(4,684,588) $ 7,888,245 $ (40,137) $ 3,407,057
Cash and cash equivalents, beginning of period 8,091,645 203,400 243,537 --
-------------------------------------------------------
Cash and cash equivalents, end of period
$ 3,407,057 $ 8,091,645 $ 203,400 $ 3,407,057
=======================================================
SUPPLEMENTAL DISCLOSURE
Issuance of preferred stock for cancellation
of accounts payable, notes payable and
accrued interest $- $ 160,050 $ 173,000 $ 598,952
Issuance of stock options for repayment of
certain accrued liabilities -- 137,396 -- 137,396
Issuance of warrants in connection with bridge
financing -- 300,000 -- 300,000
Deferred compensation related to stock option
grants -- 162,604 -- 162,204
Purchase of property and equipment under
capital lease financing -- -- 193,400 226,281
Cash paid for interest 69,978 86,929 33,892 236,369
</TABLE>
38
<PAGE> 41
Avigen, Inc.
(a development stage company)
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Avigen, Inc. (the "Company") was incorporated on October 22, 1992 in Delaware
for the purpose of development and commercialization of gene- based therapeutic
products.
The Company's activities since inception have consisted principally of
acquiring product rights, raising capital, establishing facilities and
performing research and development. Accordingly, the Company is considered to
be in the development stage.
Since inception, the Company has incurred cumulative net losses of
approximately $18.3 million. Management expects to incur additional losses for
at least the next several years to continue its research and development
activities, fund operating expenses, pursue regulatory approval and build
production, sales and marketing capabilities, as necessary. Accordingly,
management may seek to raise additional capital as required through the
issuance of equity or debt securities or through strategic alliances with other
entities.
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 could differ from those estimates.
39
<PAGE> 42
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company accounts for
its marketable securities in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's marketable securities consist principally of
available-for-sale government and corporate debt securities with a minimum
short-term rating of A1/P1 and a minimum long-term rating of A and with
maturities of less than one year. Realized and unrealized gains and losses have
been insignificant to the results of operations and financial position of the
Company. Total cash, cash equivalents, and marketable securities at cost which
approximates fair market value are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
Cash in banks $ 1,477,058 $ 91,645
Corporate debt securities 8,360,673 13,353,693
Federal Home Loan Mortgage Obligations -- 2,997,656
U.S. Treasury Notes 3,201,305 --
---------------------------
$13,039,036 $16,442,994
===========================
</TABLE>
GRANT REVENUE
Revenue consists of revenue from grants which are recognized in accordance with
the terms of the related agreements.
RESTRICTED CASH
Deposits and other assets include a $69,019 deposit maintained as a deposit for
an equipment lease.
40
<PAGE> 43
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets, which range from five to seven years, using the straight-line method.
Leasehold improvements and assets under capital leases are amortized over the
lives of the related leases or their estimated useful lives, whichever is
shorter, using the straight-line method.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment
losses to be recorded on long-lived assets used in operations, such as
property, equipment and improvements, and intangible assets, when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of the assets. The
adoption of this statement did not have a material effect on the Company's
financial statements.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
41
<PAGE> 44
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, warrants and
preferred stock) issued during the period commencing 12 months prior to the
initial filing of the Company's initial public offering at prices below the
public offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method for
stock options and warrants and the if-converted method for preferred stock).
Pro forma net loss per share, as presented in the accompanying statement of
operations, has been computed as described above and also gives effect,
pursuant to SEC policy, to common equivalent shares from convertible preferred
stock issued more than twelve months from the proposed initial public offering
that automatically converted upon completion of the Company's initial public
offering (using the if-converted method) from the original date of issuance.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share,"
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings (loss) per share and to restate all prior periods. Under the new
requirements for calculating primary earnings (loss) per share the dilutive
effect of stock options are excluded; however, currently stock options are
excluded from the computation as their effect is antidilutive, therefore, there
will be no impact on the Company for the adoption of SFAS 128.
42
<PAGE> 45
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
2. LICENSING AGREEMENTS
The Company has entered into various license agreements with universities and
medical research centers for the use of certain technologies related to its
gene therapy product development programs. Generally, such agreements require
the Company to pay the licensor a royalty on sales of products incorporating
the licensed technology. Certain of these agreements require the payment of
minimum royalties for specified periods and payments upon the achievement of
specified milestones. These agreements are generally cancelable by the Company
upon written notice without significant financial penalty, or by the licensor
if the Company does not meet development milestones specified in the
agreements.
Certain of these license agreements provide for the achievement of development
milestones at various times beginning in February 1997. In the event the
Company fails to achieve such milestones or to obtain extensions, certain of
the license agreements may be terminated by the licensor with relatively short
notice to the Company. Termination of any of the Company's license agreements
could have a material adverse effect on the Company's business.
The Company entered into an exclusive license agreement for the use of patented
technology with Research Corporation Technology ("RCT"). This agreement
requires the Company to achieve certain development milestones in order to
continue to use the technology. Avigen must exercise its best efforts to
commercially develop, promote and sell products covered by the licensed patent
rights, and is obligated to file an IND by the end of 1997 and a product
license application or a new drug application by the end of 2000. In the event
the Company fails to achieve any of these milestones by their applicable
deadlines, the Company has the right to pay RCT additional fees of up to
$250,000 to extend certain of the deadlines for specified periods. RCT may
terminate the agreement if the Company becomes insolvent or bankrupt or fails
to perform any of its obligations under the agreement.
3. NOTES PAYABLE
In March 1996, the Company completed a bridge financing pursuant to which the
Company issued $1,937,500 principal amount of bridge notes, including $295,000
to certain shareholders and members of the Board of Directors and warrants to
purchase 193,750 shares of common stock (see Note 5). The bridge notes were
paid, together with interest at the rate of 12% per annum, ten days following
the Company's May 1996 initial public offering.
43
<PAGE> 46
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. COMMITMENTS
LEASES
The Company leases its facility under a noncancelable operating lease
agreement. The lease agreement has variable payment terms; however, the Company
is recognizing rent expense on a straight-line basis over the life of the
lease. The lease expires in May 2003. The Company also has entered into various
capital leases for property and equipment. In May 1997, the Company completed
a sale-leaseback transaction for a portion of its property and equipment. The
property and equipment was sold at net book value; therefore, no gain or loss
was recognized from this transaction. The Company secured a $2 million capital
lease of which $1.4 million was used for this transaction, therefore, $600,000
is available for future financing as of June 30, 1997. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
--------------------------
<S> <C> <C>
Year ending June 30:
1998 $ 621,461 419,250
1999 621,461 419,250
2000 642,826 419,250
2001 -- 419,250
2002 -- 419,250
Thereafter -- 367,080
--------------------------
Total minimum lease payments 1,885,748 $ 2,463,330
===========
Less amount representing interest (405,805)
-----------
Present value of minimum lease payments 1,479,943
Less current portion of capital lease obligations (395,736)
-----------
Long-term capital lease obligations $ 1,084,207
===========
</TABLE>
Rent expense for fiscal year 1997 was $398,206 ($377,378 in 1996 and $342,361
in 1995).
44
<PAGE> 47
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. COMMITMENTS (CONTINUED)
LINE OF CREDIT
On November 22, 1996, the Company secured a revolving line of credit with
available funds of $2,000,000 and interest equivalent to prime rate. As of
June 30, 1997, no amounts have been drawn from these available funds. This
line of credit expires on September 30, 1997.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
In May 1996, the Company consummated an initial public offering of 2,500,000
shares of common stock which raised approximately $17.7 million, net of
expenses.
In May 1996, in contemplation of the initial public offering, the Company filed
an Amended and Restated Certificate of Incorporation to effect a one for 4.43
reverse stock split of all outstanding shares of common stock, preferred stock,
stock options and warrants. All shares and per share data in the accompanying
financial statements have been adjusted retroactively to give effect to the
reverse stock split. The Amended and Restated Certificate of Incorporation also
reduced the authorized stock of the Company such that the Company is authorized
to issue 5,000,000 shares of $.001 par value "blank check" preferred stock, and
30,000,000 shares of $.001 par value common stock.
CLASS B COMMON STOCK
In July 1995, upon the receipt by the Company of cumulative capital
contributions of $10,000,000 from the date of incorporation, the Class B common
stock outstanding at June 30, 1995 automatically converted into 231,304 shares
of common stock equal to 5% of the fully diluted capitalization of the Company
as such date.
45
<PAGE> 48
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
At June 30, 1997, the Company had outstanding warrants to purchase shares of
common stock as follows (see Note 7 for a description of warrants issued to
related parties):
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE EXPIRATION DATE
------ -------------- ---------------
<S> <C> <C>
115,482 $ 4.87 March 1998-November 1998
78,065 $ 5.36 June 2000-September 2005
14,548 $ 6.11 March 1999
193,750 $ 6.40 March 2001
19,375 $ 7.04 March 2001
4,513 $ 7.09 November 2005
45,272 $ 7.80 March 2001
250,000 $ 9.60 May 2001
------ ---------------- ------------------------
721,005 $ 4.87-9.60 March 1998-November 2005
====== ================ ========================
</TABLE>
The warrants to acquire 193,750 shares of common stock at an exercise price of
$6.40 were issued in connection with a bridge financing transaction ("the
bridge warrants"). The bridge warrants were assigned a value of $300,000 which
was reflected as a discount on the bridge notes and was accreted as additional
financing (interest) expense over the term of the bridge notes.
STOCK OPTION PLANS
In October 1993, the Company established a stock option plan (the "1993 Plan")
under which incentive and nonqualified stock options may be granted to key
employees, directors and consultants of the Company to purchase up to 338,600
shares of common stock. Under the 1993 Plan, options may be granted at a price
per share not less than the fair market value at the date of grant as
determined by the Board of Directors. In May 1996, the 1993 Plan was
superseded by the 1996 Stock Option Plan.
46
<PAGE> 49
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
In May 1996, the Company established a Stock Option Plan ("1996 Plan") which
provides for grants of options to employees, directors and consultants of the
Company to purchase up to 600,000 shares of common stock. Under the 1996 Plan,
options may be granted at a price per share not less than the fair market value
at the date of grant. Options granted generally have a maximum term of 10
years from the grant date and become exercisable over four years. Option
activity under the 1993 and 1996 Plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED
OPTIONS AVERAGE
EXERCISE PRICE EXERCISE PRICE
OPTIONS RANGE PER SHARE
------------------------------------------------
<S> <C> <C> <C>
Outstanding at June 30, 1994 63,204 $ .44 $ .44
Granted 115,237 .44 - .66 .44
Canceled (16,930) .44 .44
-------
Outstanding at June 30, 1995 161,511 .44 - .66 .44
Granted 193,476 .44 - .71 .53
Canceled (65,611) .44 - .66 .46
Exercised (6,178) .44 - .49 .46
-------
Outstanding at June 30, 1996 283,198 .44 - .71 .52
Granted 551,127 3.63 - 4.00 3.86
Canceled (4,066) .44 - 3.38 .94
Exercised (3,387) .44 - .71 .50
-------
Outstanding at June 30, 1997 826,872 .44 - 4.00 1.94
=======
</TABLE>
47
<PAGE> 50
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
In July 1995, the Company granted a board member an option to purchase 515,248
shares of common stock at $0.49 per share, exercisable for five years from the
date of grant. The shares vest in equal monthly installments over thirty-six
months. The shares issuable upon exercise of such option may be issued prior
to vesting but such shares are subject to repurchase at the original price per
share upon termination of services to the Company. Such grant was made outside
of the 1993 and 1996 Plans.
In March 1996, the Board of Directors adopted and in April 1996 the
stockholders approved the 1996 Equity Incentive Plan (the "Incentive Plan") and
reserved 600,000 shares of common stock for issuance thereunder. The Incentive
Plan provides for grants of incentive stock options to employees and
nonstatutory stock options, restricted stock purchase awards, stock bonuses and
stock appreciation rights to employees and consultants of the Company. No
options, restricted stock awards, stock bonuses or stock appreciation rights
have been granted under the Incentive Plan.
In March 1996, the Board of Directors adopted and in April 1996 the
stockholders approved the 1996 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") and reserved 200,000 shares of common stock for issuance
under the Directors' Plan. The Directors' Plan provides for automatic grants of
options to purchase shares of common stock to non-employee directors of the
Company. The Directors' Plan was effective upon the closing of the initial
public offering. As of June 30, 1997, options to purchase 35,000 shares of
common stock at $6.00 per share, exercisable for five years from the date of
grant have been granted under the Directors' Plan. At June 30, 1997 none of
these option grants are exercisable.
48
<PAGE> 51
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes information with regard to stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .44 - .71 791,462 8.03 $.51 508,500 $.51
3.38 - 3.88 386,658 9.24 3.62 56,773 3.62
4.00 - 6.00 199,000 9.39 4.35 20,499 4.00
--------- -------
1,377,120 585,772
========= =======
</TABLE>
At June 30, 1997, 49,342 options were available for future grant under the 1996
Plan.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Expected volatility .8448 .8448
Risk free interest rate 6.05% 6.44%
Life of options in years 5 5
Expected dividend yield -- --
</TABLE>
The weighted-average grant-date fair value of options granted during 1997 and
1996 was $2.72 and $.37, respectively.
49
<PAGE> 52
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123, net loss
per share would have been increased to the pro forma amounts indicated in the
table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1997 1996
----------------------------
<S> <C> <C>
Net loss - as reported $ (5,578) $ (4,097)
Net loss - pro forma (5,920) (4,187)
Net loss per share - as reported (.77) (1.13)
Net loss per share - pro forma (.81) (1.16)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, the resulting pro forma compensation cost may not be representative of
that expected in future years.
For certain options granted during 1996, the Company recognized as deferred
compensation the excess of the deemed value for financial reporting purposes of
the common stock issuable upon the exercise of such options over the aggregate
exercise price of such options. Total deferred compensation of $162,604 is
being amortized over the vesting period for such options.
6. BALANCE SHEET DETAIL
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1997 1996
-----------------------
<S> <C> <C>
Accrued consulting fees $ 74,836 $ 66,500
Accrued license fees 75,001 83,753
Other 6,189 108,012
-----------------------
$156,026 $258,265
=======================
</TABLE>
50
<PAGE> 53
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
6. BALANCE SHEET DETAIL (CONTINUED)
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1997 1996
--------------------------
<S> <C> <C>
Leasehold improvements $ 1,116,109 $ 1,116,109
Office equipment -- 79,654
Furniture and fixtures -- 33,120
Laboratory equipment -- 637,692
Leasehold improvements under capital lease 484,560 --
Office equipment under capital lease 126,772 --
Furniture under capital lease 143,061 32,881
Laboratory equipment under capital lease 1,378,616 193,400
--------------------------
Property and equipment 3,249,118 2,092,856
Accumulated depreciation and amortization (1,597,913) (1,039,418)
--------------------------
$ 1,651,205 $ 1,053,438
==========================
</TABLE>
Accumulated amortization of assets under capital leases was $745,222 and
$66,418 at June 30, 1997 and 1996, respectively.
7. RELATED PARTY TRANSACTIONS
As part of its continuous program of research an development, the Company
retains consultants to consult with and advise the Company. Certain of the
consultants are holders of the Company's common stock or options to purchase
common stock. Consulting expenses relating to these stockholders and option
holders were $174,000, $275,000, and $275,000, for the years ended June 30,
1997, 1996 and 1995, respectively. The amounts payable to these consultants at
June 30, 1997 and 1996 were $74,836, and $66,500 and respectively.
In fiscal year 1997, the Company paid a board member $67,000 for consulting
services and $150,000 for compensation related to services performed for the
Company.
51
<PAGE> 54
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
7._RELATED PARTY TRANSACTIONS (CONTINUED)
A stockholder and director of the Company (the "Director") is an officer and
sole stockholder of Paramount Capital (the "Placement Agent"). In connection
with various preferred stock offerings, the Placement Agent received
commissions and expense reimbursements of $814,885, and warrants to purchase up
to 91,415 shares of common stock at exercise prices ranging from $4.87 to $7.04
(see Note 5).
During fiscal year ended June 30, 1996, entities managed by the Director and
another member of the Board of Directors loaned the Company $200,000 which was
repaid in December 31, 1996. In connection with these agreements, the Company
issued warrants to purchase 4,513 shares of common stock with an exercise price
of $7.09 per share (see Note 5).
The Director has personally guaranteed the Company's lease on the office and
laboratory facilities (see Note 4).
The Company has entered into non-exclusive agreements with Maxzen Medical
Technologies ("Maxzen") for the purpose of identifying potential investors in
Japan. A director of the Company is affiliated with Maxzen. Under the terms of
the agreements, Maxzen receives commissions, payable in cash and warrants,
determined based on investments in the Company initiated by Maxzen. Through
June 30, 1997, Maxzen has earned commissions under the agreements amounting to
$298,840 and warrants for the purchase of 172,682 shares of common stock at
prices ranging from $4.87 to $7.80 (see Note 5).
52
<PAGE> 55
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
8. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30
1997 1996
--------------------------
<S> <C> <C>
Net operating loss carryforward $ 5,762,000 $ 4,001,000
Research and development credit carryforwards 621,000 455,000
Depreciation 231,000 272,000
Deferred rent expense 92,000 100,000
Capitalized research and development 674,000 281,000
Other 49,000 62,000
--------------------------
Gross deferred tax assets 7,429,000 5,171,000
Valuation allowance (7,429,000) (5,171,000)
--------------------------
Net deferred tax assets $ -- $ --
==========================
</TABLE>
Due to the Company's history of losses, a valuation allowance has been provided
against the full amount of deferred tax assets.
The valuation allowance increased by $2,258,000, $1,501,000, and $1,381,000 for
the fiscal years ended in 1997, 1996, and 1995, respectively.
At June 30, 1997, the Company has net operating loss carryforwards for federal
and state income tax purposes of approximately $16,238,000 and $4,015,000,
respectively, which expire in fiscal years ended June 30, 1999 through June 30,
2012. At June 30, 1997, the Company has research and development credit
carryforwards for federal tax purposes of approximately $459,000, which expire
in fiscal years ended June 30, 2009 through June 30, 2012.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the Company's tax net operating loss carryforward and tax credit
carryforwards may be subject to an annual limitation in future periods. As a
result of the annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax liabilities.
53
<PAGE> 56
Avigen, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
9. EMPLOYEE PROFIT SHARING/401(K) PLAN
In January 1996, the Company adopted a profit sharing/401(k) plan (the "Plan")
for the employees. Eligible employees can contribute amounts to the Plan via
payroll withholding subject to certain limitations. The Company's
contributions to the Plan are discretionary. In fiscal years 1997 and 1996, no
contributions were made by the Company.
54
<PAGE> 1
EXHIBIT 10.29
August 14, 1996
Thomas J. Paulson
76 Middlebeach Road West
Madison, CT 06443
Dear Tom:
Let me express how enthusiastic we are about the possibility of you joining the
Avigen team as Vice President, Finance and Chief Financial Officer, beginning
on August 16, 1996. This letter confirms the terms of our offer.
1. Your annual salary will be $160,000, payable twice monthly.
2. You will be enrolled in the Company's prepaid group health, dental and
disability plans.
3. You will have the option of enrolling in the Company's 401(k) program.
4. You will have three weeks of paid vacation per year.
5. Pending approval of Avigen's Board of Directors, we plan to offer you
options on 100,000 shares of common stock of Avigen at the price applicable
at the time of the option grant, as determined by the Board.
6. Avigen will pay your relocation expenses in moving from Connecticut to the
Bay Area.
7. You will sign Avigen's Proprietary Information and Invention Agreement for
Employees.
8. You will agree to follow Avigen's company policy that employees must not
disclose any information regarding salary, bonuses, or stock allocation to
other employees, either directly or indirectly.
Regarding item 6 above, please give me an estimate of your anticipated
relocation expenses.
There are two copies of this letter enclosed. If all of the foregoing is
satisfactory, please sign and date each copy, and return one copy to me in the
envelope marked Confidential, saving the other copy for yourself.
We look forward to the prospect of working with you in our exciting company.
Sincerely,
55
<PAGE> 2
/s/ John Monahan
John Monahan, Ph.D.
President and CEO
Enclosure
cc: Glenn Bauer
I have read, understand and hereby accept the foregoing terms and conditions of
employment.
NAME: /s/ Thomas J. Paulson DATE: 8/14/96
--------------------------- ---------------------------
56
<PAGE> 1
EXHIBIT 10.30
October 23,1996
Robert M. Maurer
11 West Sandpiper Lane
Lake Forest, Illinois 60045
RE: EMPLOYMENT TERMS
Dear Bob:
Avigen, Inc. is pleased to offer you the position of Vice President,
Business Development on the following terms:
You will be responsible for licensing, business development and
corporate partnering activities and will report to me. You will work at our
facility located at 1201 Harbor Bay Parkway, Alameda, California. Of course,
Avigen may change your position, duties and work location from time to time as
it deems necessary.
Your compensation will be $160,000 per year, less all required
withholding for taxes and social security. You will be paid semi-monthly and you
will be eligible for the following standard Avigen benefits: medical insurance,
vacation, sick leave and holidays. Details about these benefits are available
for your review. Avigen may modify compensation and benefits from time to time
as it deems necessary.
Subject to approval by Avigen's Board of Directors, and to the terms
of the Avigen stock option plan and your stock option agreement, you will
receive an option to purchase 100,000 shares of Avigen's common stock at a price
and vesting schedule to be determined by the Board.
Avigen will also help towards the relocation of you and your family to
the bay area. Towards this end the company will pay direct costs for your
relocation that are not directly tax deductible up to a maximum of $50,000. It
is to be understood this whole process will be completed within a year.
As an Avigen employee, you will be expected to abide by the company's
rules and regulations, acknowledging in writing that you have read the company's
Employee Handbook, and sign and comply with a Proprietary Information and
Inventions Agreement which prohibits unauthorized use or disclosure of Avigen's
proprietary information.
Normal working hours are from 8:30 a.m. to 5:30 p.m. Monday through
Friday. As an exempt salaried employee, you will be expected to work additional
hours as required by the nature of your work assignments.
You may terminate your employment with Avigen at any time and for any reason
whatsoever simply by notifying Avigen. Likewise, Avigen may tenninate your
employment at any time for any reason whatsoever, with or without cause or
advance notice. This at-wil1 employment cannot be changed except in writing and
signed by an Avigen officer.
57
<PAGE> 2
The employment terms in this letter supersede any other agreements or
promises made to you by anyone, whether oral or written.
Please sign and date this letter, and return it to me by October 30,
1996, if you wish to accept employment at Avigen under the terms described
above. If you accept our offer, we would like you to start on November 4, 1996.
We look forward to your favorable reply and to a productive and
enjoyable work relationship.
Sincerely,
/s/ John Monahan
John Monahan, Ph.D.
President & CEO
Accepted by:
/s/ Robert M. Maurer
- -------------------------------
(Robert M. Maurer)
/s/
- -------------------------------
Date
58
<PAGE> 1
EXHIBIT 10.31
October 19, 1993
Gary J. Kurtzman, M.D.
24 Campbell Lane
Menlo Park, CA 94025
Dear Gary:
I am pleased to offer you the position of Senior Director of Research, reporting
directly to me. Your starting salary will be $120,000 per year, payable twice
monthly. The effective starting date of this position will be December 13, 1993.
Our employee benefits include a prepaid employee and family dental plan and a
prepaid employee and family medical plan. You will be eligible for three weeks
paid vacation.
You will receive a stock option for 80,000 shares of Avigen common stock priced
on the date of the next meeting of Avigen's Compensation Committee. These
options will have 16 quarterly vesting periods over the next four years.
If you accept the above described offer, please sign and return one copy of this
letter to me. You may keep the second copy for your records.
Gary, I hope that this letter accurately describes our conversations. On behalf
of all of us at Avigen, let me again tell you how much we look forward to having
you join this exciting company.
Sincerely,
/s/ John Monahan
John Monahan, Ph.D.
President and CEO
JM:jd
P.S. Enclosed please find phone numbers of all our Scientific Advisory Board
members. I will contact them this week.
I have read, understand and hereby accept the foregoing terms and conditions of
employment.
NAME: /s/ Gary J. Kurtzman DATE: 11/15/93
--------------------------- ---------------------------
59
<PAGE> 1
EXHIBIT 10.32
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- -------------------------------------------------------------------------------
$2,000,000.00
Oakland, California
August 14, 1996
FOR VALUE RECEIVED, the undersigned AVIGEN, INC. ("Borrower~) promises to pay
to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office
at East Bay RCBO, One Kaiser Plaza Suite 850, Oakland, CA 94612, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in Immediately available funds, the principal sum of
$2,000,000.00, or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at a
rats per annum equal to the Prime Rate in effect from time to time~ The "Prime
Rate" is a bass rate that Bank from time to time establishes and which serves
as the basis upon which effective rates of interest are calculated for those
loans making reference thereto. Each change in the rate of interest hereunder
shall become effective on the date each Prime Rate change Is announced within
Bank.
(b) Payment of Interest. Interest accrued on this Note shall be payable on
the last day of each month, commencing September 30, 1996.
(C) Default Interest. From and after the maturity date of this Note, or such
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear Interest until paid in full at an increased rate per annum (computed on
the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of
interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the term
of this Note borrow, partially or wholly repay its outstanding borrowings, and
reborrow, subject to all of the limitations, terms and conditions of this Note
and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made
hereon by or for any Borrower, which balance may be endorsed hereon from time
to time by the holder. The outstanding principal balance of this Note shall be
due and payable in full on September 30, 1997.
(b) Advances. Advances hereunder, to the total amount of the principal sum
available hereunder, may be made by the holder at the oral or written request
of (i) GLENN BAUER, any one acting alone, who are authorized to request
advances and direct the disposition of any advances until written notice of the
revocation of such authority is received by the holder at the office designated
above, or (ii) any person, with respect to advances deposited to the credit of
any account of any Borrower with the holder, which advances, when so deposited,
shall be conclusively presumed to have been made to or for the benefit of each
Borrower regardless of the fact that persons other than those authorized to
request advances may have authority to draw against such account. The holder
shall have no obligation to determine whether any person requesting an advance
is or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
60
<PAGE> 2
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of Default"
under this Note:
(a) The failure to pay any principal, interest, fees or other charges when
due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor of
this Note or any general partner or
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other lability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party Obligor
to Bank proves to be incorrect, false or misleading in any material respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(9) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be Immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel),
expended or Incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first
written above.
AVIGEN, INC.
By: /s/ Glenn Bauer
61
<PAGE> 3
Title: Controller
By: /s/ Thomas J. Paulson
Title: VP Finance
62
<PAGE> 4
WELLS FARGO BANK CORPORATE RESOLUTION: BORROWING
- -------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
RESOLVED: That this corporation, AVIGEN, INC., proposes to obtain credit from
time to time, or has obtained credit from Wells Fargo Bank, National
Association ('Bank").
BE IT FURTHER RESOLVED, that any one of the following officers:
together with any one of the following officers:
of this corporation be and they are hereby authorized and empowered for and on
behalf of and in the name of this corporation and as its corporate act and
deed:
(a) To borrow money from Bank and to assume any liabilities of any other
person or entity to Bank, in such form and on such terms and conditions as
shall be agreed upon by those authorized above and Bank, and to sign and
deliver such promissory notes and other evidences of indebtedness for money
borrowed or advanced and/or for indebtedness assumed as Bank shall require;
such promissory notes or other evidences of indebtedness may provide that
advances be requested by telephone communication and by any officer, employee
or agent of this corporation so long as the advances are deposited into any
deposit account of this corporation with Bank, this corporation shall be bound
to Bank by, and Bank may rely upon, any communication or act, including
telephone communications, purporting to be done by any officer, employee or
agent of this corporation provided that Bank believes, in good faith, that the
same is done by such person.
(b) To contract for the issuance by Bank of letters of credit, to discount
with Bank notes, acceptances and evidences of indebtedness payable to or due
this corporation, to endorse the same and execute such contracts and
instruments for repayment thereof to Bank as Bank shall require, and to enter
into foreign exchange transactions with or through Bank.
(c) To mortgage, encumber, pledge, convey, grant, assign or otherwise
transfer all or any part of this corporation's real or personal property for
the purpose of securing the payment of any of the promissory notes, contracts,
instruments and other evidences of indebtedness authorized hereby, and to
execute and deliver to Bank such deeds of trust, mortgages, pledge agreements
and/or other security agreements as Bank shall require.
(d) To perform all acts and to execute and deliver all documents described
above and all other contracts and instruments which Bank deems necessary or
convenient to accomplish the purposes of this resolution and/or to perfect or
continue the rights, remedies and security interests to be given to Bank
hereunder, including without limitation, any modifications, renewals and/or
extensions of any of this corporation's obligations to Bank, however evidenced;
provided that the aggregate principal amount of all sums borrowed and credits
established pursuant to this resolution shall not at any time exceed the sum of
$2,000.000.00 outstanding and unpaid.
Loans made pursuant to a special resolution and loans made by offices of Bank
other than the office to which this resolution is delivered shall be in
addition to foregoing limitation.
BE IT FURTHER RESOLVED, that the authority hereby conferred is in addition to
that conferred by any other resolution heretofore or hereafter delivered to
Bank and shall continue in full force and effect until Bank shall have received
notice in writing, certified by the Secretary of this corporation, of the
revocation hereof by a resolution duly adopted by the Board of Directors of
this corporation. Any such revocation shall be effective only as to credit
which is extended or committed by Bank, or actions which are taken by this
corporation pursuant to the resolutions contained herein, subsequent to Bank's
receipt of such notice. The authority hereby conferred shall be deemed
retroactive, and any and all acts-authorized herein which were performed prior
to the passage of this resolution are hereby approved and ratified.
63
<PAGE> 5
CERTIFICATION
1, /s/ Thomas J. Paulson, Secretary of AVIGEN, INC., a corporation created
and existing under the laws of the state of CALIFORNIA, do hereby certify and
declare that the foregoing is a full, true and correct copy of the resolutions
duly passed and adopted by the Board of Directors of said corporation, by
written consent of all Directors of said corporation or at a meeting of said
Board duly and regularly called, noticed and held on November 22, 1996, at
which meeting a quorum of the Board of Directors was present and voted in favor
of said resolutions; that said resolutions are now in full force and effect;
that there is no provision in the Articles of Incorporation or Bylaws of said
corporation, or any shareholder agreement, limiting the power of the Board of
Directors of said corporation to pass the foregoing resolutions and that such
resolutions are in conformity with the provisions of such Articles of
Incorporation and Bylaws; and that no approval by the shareholders of, or of
the outstanding shares of, said corporation is required with respect to the
matters which are the subject of the foregoing resolutions.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the corporate
seal of said corporation as of November 22, 1996.
/s/ Thomas J. Paulson
Secretary of Avigen Inc., a corporation
(Seal)
64
<PAGE> 1
EXHIBIT 10.33
Transamerica Business Credit
Technology Finance Division
76 Batterson Park Road
Farmington, CT 06032
(860) 677 6466
(860) 677-6766 Fax
January 2, 1997
Mr. John Monahan
Chief Executive Officer
Avigen, Inc.
1201 Harbor Bay Parkway, # 1000
Alameda, California 94502
Dear John:
Transamerica Business Credit Corporation - Technology Finance Division
("Lessor") is pleased to offer to lease the Equipment described below to
Avigen, Inc. ("Lessee"). This Commitment supersedes all prior correspondence,
proposals, and oral or other communications relating to leasing arrangements
between Lessee and Lessor. The outline of this offer is as follows:
Lessee:
Avigen, Inc.
Lessor:
Transamerica Business Credit Corporation - Technology Finance Division and/or
its affiliates, successors and assigns.
Guarantors:
Not Applicable.
Equipment:
A. Equipment (all equipment subject to approval of Lessor). B. Tenant
Improvements
Equipment Cost:
Type A Equipment $1,500,000
Type B Tenant Improvements $ 500,000
Equipment Location:
Alameda, California 94502.
Anticipated Delivery:
September 1, 1996 - December 31, 1997
<PAGE> 2
Lease Term Commencement:
Upon delivery and acceptance of the Equipment or upon each completion of
deliveries and acceptance of items of Equipment with aggregate cost of not less
than $50,000, but in no event, shall any Equipment be delivered later than
December 31, 1997.
Term for Types A and B Equipment:
From each Lease Term Commencement until 36 months from the first day of the
month next following or on the same date as the Lease Term Commencement if that
date is the first date of the month.
Lease Repayment Terms for Types A and B Equipment:
Monthly Rent equal to 3.1436% of Equipment Cost shall be payable monthly in
advance. The first month's rent shall be payable upon signing the Lease and the
last month's rent shall be due upon the Lease Term Commencement. As of the date
of each Lease Term Commencement, the Monthly Rent Payments shall be fixed for
the term.
The Lessor reserves the right to increase the Monthly Rent Payments as of the
date of each Lease Term Commencement commensurate to the change in the weekly
average of the interest rates of five-year U.S. Treasury Securities from the
week ending November 11, 1996 to the week preceding the date of each Lease Term
Commencement, as published in the Wall Street Journal.
Interim Rent Payments:
In the event that the Lease Term Commencement is not on the first day of the
month, Interim Rent Payments shall accrue from each Lease Term Commencement
until the next following first day of a month and shall be payable at the end
of that month. Interim Rent Payments shall be at the daily equivalent of the
currently adjusted Monthly Rent Payment.
Purchase Option:
The Lessee shall have the option to purchase all (but not less than all) the
Equipment at the expiration of the term of the lease for the then current Fair
Market Value of the Equipment and Tenant Improvements, plus applicable sales
and other taxes.
It shall be agreed that the Fair Market Value will be equal to 10% of Equipment
and Tenant Improvements Cost.
Automatic Renewal:
In the event the Lessee does not exercise the Purchase Option described above,
the lease shall automatically renew for a term of one year with Monthly Rentals
equal to 1.5% of the original Equipment Cost and Tenant Improvement payable
monthly in advance. At the expiration of the renewal period, the Lessee shall
have the option to purchase ail (but not less than all) the Equipment and
Tenant Improvements for $1.00 plus applicable sale and other taxes.
Documentation:
The documentation relating to this transaction shall implement the transaction
contemplated by this commitment letter to the satisfaction of Lessor and Lessee
and its counsels, shall be fully acceptable
65
<PAGE> 3
to Lessor and Lessee and its counsels, and shall contain conditions precedent,
representations, warranties and covenants by Lessee and shall provide for
events of defaults and remedies, all as required by Lessor and acceptable to
Lessee for transactions of this type. The documentation shall include, but not
be limited to, the terms and conditions described in this commitment letter. A
Uniform Commercial Code Fixture Filing shall be required.
Insurance:
Prior to any delivery of Equipment, the Lessee shall furnish confirmation of
insurance acceptable to the Lessor covering the Equipment and Tenant
Improvements including primary, all risk, physical damage, property damage and
bodily injury with appropriate loss payee and additional insured endorsements
in favor of the Lessor, its Parent and Subsidiaries.
Taxes:
Sales or use taxes would be added to the Equipment Cost or collected on the
gross rentals, as appropriate.
Additional Covenants:
There shall be no actual or threatened conflict with, or violation of, any
regulatory statute, standard or rule relating to the Lessee, its present or
future operations, or the Equipment.
All information supplied by the Lessee shall be correct and shall not omit any
material statement necessary to make the information supplied not be
misleading. There shall be no material breach of the representations and
warranties of the Lessee in the Lease. The representations shall include that
the Equipment Cost of each item of the Equipment does not exceed the fair and
usual price for like quantity purchased of such item and reflects all
discounts, rebates and allowances for the Equipment given to Lessee by the
manufacturer, supplier or any other person including, without limitation,
discounts for advertising, prompt payment, testing or other services.
Conditions Precedent to
Each Lease Term
Commencement:
1. No material adverse change in the financial condition, operation or
prospects of the Lessee prior to funding.
2. Completion of the documentation and final terms of the proposed financing
satisfactory to Lessor and Lessee and Lessor's and Lessee's counsel.
3. Results of all due diligence, including lien, judgment and tax searches and
other matters Lessor may request shall be satisfactory to Lessor and
Lessor's counsel.
4. Receipt by Lessor of duly executed Lease documentation in form and
substance satisfactory to Lessor and Lessee and its counsels.
5. Lessor shall receive title and a valid and perfected first priority lien
and security interest in all Equipment acquired through the use of this
Commitment and Lessor shall have received satisfactory evidence that there
are no liens on any Equipment except as expressly permitted herein.
6. Lessor shall be satisfied with the amount, type, and terms of all insurance
maintained by the Lessee on Lessor's Equipment. Lessee shall deliver copies
of all such insurance policies together with an endorsement naming Lessor
as loss payee and additional insured.
7. Copies of invoices and proof of payment on the sale and leaseback portion.
8. Lessee on an on-going basis throughout the Lease shall provide to Lessor
its quarterly financial statements and press releases, if any.
66
<PAGE> 4
Fees and Expenses:
The Lessee shall be responsible for the Lessor's reasonable expenses (including
legal expenses) in connection with the transaction. Such expenses will not
exceed $5,000 without the expressed written consent of Lessee.
Law:
This letter and the proposed Lease are intended to be governed by and construed
in accordance with Illinois law without regard to its conflict of law
provisions.
Indemnity:
Lessee agrees to indemnify and to hold harmless Lessor, and its officers,
directors and employees against all claims, damages, liabilities and expenses
which may be incurred by or asserted against any such person in connection with
or arising out of this letter and the transactions contemplated hereby, other
than claims, damages, liability, and expense resulting from Lessor or such
person's gross negligence or willful misconduct.
Confidentiality:
This letter is delivered to you with the understanding that neither it nor its
substance shall be disclosed publicly or privately to any third person except
those who are in a confidential relationship to you (such as your legal counsel
and accountants), or where the same is required by law and then only on the
basis that it not be further disclosed, which conditions the Lessee and its
agents agree to be bound by upon acceptance of this letter.
Without limiting the generality of the foregoing, none of such persons shall
use or refer to Lessor or to any affiliate name in any disclosures made in
connection with any of the transactions without Lessor's prior written consent.
Conditions of Acceptance:
This Commitment Letter is intended to be a summary of the most important
elements of the agreement to enter into a leasing transaction with Lessee, and
it is subject to all requirements and conditions contained in Lease
documentation proposed by Lessor or its counsel and acceptable to Lessee and/or
its counsel in the course of closing the lease described herein. Not every
provision that imposes duties, obligations, burdens, or limitations on Lessee
is contained herein, but shall be contained in the final Lease documentation
satisfactory to Lessor and Lessee and its counsel.
EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATED TO THIS LETTER OR THE TRANSACTION DESCRIBED IN THIS LETTER.
Commitment Fee:
The $20,000 Application Fee previously paid shall be applied to the Commitment
Fee. The Commitment Fee will then first be applied to Lessor's reasonable
expenses not to exceed $5,000 without Lessee's written consent and the
remainder will be applied on a prorate basis towards the
67
<PAGE> 5
second month's rent for each Lease Term Commencement as Equipment is accepted
under this Lease Commitment. Commitment Fee will be refunded if the Lessee and
Lessor do not execute lease documentation acceptable to both parties.
Commitment Expiration:
This Commitment shall expire on January 29, 1997, unless prior thereto either
extended in writing by the Lessor or accepted as provided below by the Lessee.
Should you have any questions, please call me. If you wish to accept this
Commitment, please so indicate by signing and returning the enclosed duplicate
copy of this letter to me by January 29, 1997.
Yours truly,
TRANSAMERICA BUSINESS CREDIT
CORPORATION-TECHNOLOGY FINANCE
DIVISION
By /s/ Gerald A. Michaud
Gerald A. Michaud
Senior Vice President - Marketing
Accepted this 22 day of May, 1997
By /s/ John Monahan
John Monahan
Chief Executive Officer
68
<PAGE> 1
Exhibit 11.1
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1995 1996 1997
-----------------------------------------
<S> <C> <C> <C>
Net Loss $(3,264,991) $(4,097,235) $(5,578,206)
-----------------------------------------
Weighted average common shares
Outstanding 2,032,946 2,459,315 7,286,146
Shares related to Staff Accounting
Bulletin Topic 4D:
Common Stock 158,641 118,981 0
Common Stock Options 663,135 497,351 0
Preferred Stock 502,493 376,870 0
Common & Preferred Stock Warrants 211,552 158,664 0
-----------------------------------------
Total shares outstanding for primary
and fully diluted net loss per share 3,568,767 3,611,181 7,286,146
=========================================
Net loss per share $ (0.91) $ (1.13) $ (0.77)
-----------------------------------------
Calculation of shares outstanding for
computing pro forma net loss per share:
Shares used in computing net loss per share 3,568,767 3,611,181 7,286,146
Adjustment to reflect the effect of the assumed
conversion of convertible preferred stock from
the date of issuance 1,726,297 1,530,770 0
-----------------------------------------
Total shares outstanding for pro forma
net loss per share 5,295,064 5,141,951 7,286,146
=========================================
Pro forma net loss per share $ (0.62) $ (0.80) $ (0.77)
=========================================
</TABLE>
69
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the 1993 Stock Option Plan, 1996 Stock Option Plan,
Nonstatutory Stock Option, 1996 Equity Incentive Plan, and the 1996
Non-Employee Directors' Stock Option Plan of Avigen, Inc. of our report dated
August 15, 1997, with respect to the financial statements of Avigen, Inc.
included in the Annual Report on Form 10-K for the year ended June 30, 1997.
Walnut Creek, California
September 25, 1997
70
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,407,057
<SECURITIES> 9,631,979
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,039,036
<PP&E> 3,249,118
<DEPRECIATION> 1,597,913
<TOTAL-ASSETS> 14,760,353
<CURRENT-LIABILITIES> 1,103,157
<BONDS> 0
0
0
<COMMON> 7,288
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,760,353
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> (6,384,628)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,978
<INCOME-PRETAX> (5,576,552)
<INCOME-TAX> 1,654
<INCOME-CONTINUING> (5,578,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,578,206)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.77)
</TABLE>
