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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-21215
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PROGENITOR, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 31-1344193
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4040 CAMPBELL AVE.
MENLO PARK, CA 94025
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (650) 617-0880
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the registrant's Common Stock, $.001
par value, held by non-affiliates of the registrant, based upon the closing sale
price of the Common Stock on December 12, 1997 as reported on the NASDAQ
National Market, was $16,180,194.
As of December 12, 1997 there were 13,414,695 shares of the registrant's Common
Stock, $.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on February 26, 1998 are incorporated by reference into
Part III of this Form 10-K Report.
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PROGENITOR, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I...................................................................................... 1
Item 1. BUSINESS.................................................................. 1
Item 2. PROPERTIES................................................................ 22
Item 3. LEGAL PROCEEDINGS......................................................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 22
EXECUTIVE OFFICERS.................................................................. 23
PART II..................................................................................... 24
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 24
Item 6. SELECTED FINANCIAL DATA................................................... 26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 45
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................ 61
PART III.................................................................................... 62
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY........................... 62
Item 11. EXECUTIVE COMPENSATION.................................................... 62
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 62
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 62
PART IV..................................................................................... 63
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........... 63
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PART I
ITEM 1. BUSINESS
The following Business Section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in Item 7 under the caption
"Factors That May Affect Future Financial Results" and elsewhere in, or
incorporated by reference into, this Form 10-K.
THE COMPANY
Progenitor, Inc. (the "Company" or "Progenitor") is engaged in the
discovery and functional characterization of genes to identify leads and targets
for the development of new pharmaceuticals. The Company's initial focus is on
the identification of genes important in blood and immune cell development
("hematopoiesis"), blood vessel development ("angiogenesis"), cancer and asthma.
Progenitor has identified several targets for the development of therapeutics
and diagnostics, and intends to accelerate its discovery of potential targets by
accessing complementary gene discovery and characterization technologies.
Consistent with this strategy, in August 1997 Progenitor completed the
acquisition (the "Acquisition") of Mercator Genetics, Inc. ("Mercator")
concurrently with the closing of Progenitor's initial public offering (the
"Offering") of Units ("Units") consisting of one share of the Company's Common
Stock, par value $.001 per share (the "Common Stock") and one warrant to
purchase one share of Common Stock ("Warrant"). Through the Acquisition,
Progenitor gained a complementary gene discovery approach, disease genetics,
established discovery programs and rights to two genes.
THE COMPANY'S GENOMICS SYSTEM
Genomics generally refers to technologies and methods directed toward
the identification of the location, structure and function of genes of a given
organism. Many genomics initiatives have focused largely on determining the
location and structure of genes. The Company focuses on elucidating gene
function using approaches that the Company believes may accelerate discovery of
genes with medical relevance. The Company's system combines developmental
biology and disease genetics approaches with genomics capabilities, including
sequencing, positional cloning, statistical analysis, model organisms and assay
development. In addition, the Company's bioinformatics system provides it with
the means to integrate and access data from these various approaches.
Developmental biology is the study of the genetic events that control
cell growth and differentiation in an organism from its beginning as a
fertilized egg through maturation, including the differentiation events that
lead to functional specialization. In the course of development, cells undergo
differentiation and specialization in discrete stages that are marked by changes
in the expression of a few critical genes. The timing and level of expression of
such genes distinguish particular cell types and functions. The Company uses
cells and tissues from animal models of development and from clinical samples,
for example tumor tissue, as sources for the discovery of genes that confer
critical cell functions and that may serve as a point for direct intervention in
disease processes. In particular, the Company believes that developing cells and
tissues provide a rich and largely unexploited source of genes with fundamental
biological roles. Such genes are expressed at higher levels during development,
and thus may be found more easily in developing cells and tissues than in mature
systems. Genes selected from differentiating cells in key developmental
processes may have significance in the treatment and management of diseases
characterized by abnormal cell growth and differentiation, such as cancer and
various acquired or inherited blood and immune system disorders. The Company is
applying technologies involved in manipulating and analyzing developing cells
and tissues towards the isolation and functional characterization of these
genes. The Company used its developmental biology approach to identify the B219
leptin receptor and the del-1 gene.
The Company combines its developmental biology expertise with expertise
in disease genetics. Disease genetics facilitates the discovery of multiple
genes associated with complex diseases, such as asthma, cancer and
cardiovascular disease. The Company's disease genetics approach incorporates
positional cloning techniques, selected patient populations, technologies for
discovery and analysis of multiple genetic markers, mutation analyses,
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and statistical methods to expedite discovery of genes potentially associated
with a given disease. The Company used its disease genetics approach in the
discovery of HFE, the gene responsible for hereditary hemochromatosis ("HH").
This approach also was used in the discovery of the EPM1 epilepsy gene by
Progenitor's licensor, Stanford University.
Bioinformatics serves as an interface between the Company's gene
discovery approaches. The Company's bioinformatics system aids in the
determination of the functional role of novel genes in several ways. The system
supports the correlation of functionally-related genetic variations discerned at
the cellular level through developmental biology with disease-associated
variations identified at the population level through human disease genetics
techniques. It also provides a means to assess gene discoveries in relation to
information in public databases, to correlate discoveries with known sequences,
to capture additional intellectual property based on discovered genes, and to
expedite evaluation and recognition of gene discoveries as therapeutic targets.
In addition, the system may be used as an interface between the Company and
potential pharmaceutical collaborators and licensees by providing a means for
such collaborators and licensees to access and utilize the Company's discovery
data on an ongoing basis.
The Company believes that its integrated genomics system provides it
with the capabilities necessary to discover and characterize new candidate genes
as therapeutic leads and targets for unmet medical needs. Developmental biology
provides the Company access to fundamental genes involved in cell growth
differentiation and functional specialization. Disease genetics provides the
Company with genes associated with a specific disease. Both approaches allow the
Company to select genes of potential interest from the background of genetic
activity. Moreover, the Company believes that its integration of developmental
biology and disease genetics approaches to gene discovery and characterization
provides technical synergies. The integrated system provides a mechanism for
confirming the relationship of the functional role of an identified gene in a
targeted disease. Patient-derived gene candidates may be evaluated in models of
functional specialization and disease for a direct role in a disease pathway,
while functionally-characterized candidate genes from developing cells may be
correlated with genes from patient samples. The Company believes that this
integrated system enables it to generate new candidate genes that are
potentially useful for the development of diagnostics and therapeutics.
DISCOVERY RESOURCES
STEM CELLS
The Company has developed proprietary lines of mouse ("murine") yolk sac
stem cells and murine embryonic stem ("ES") cells, and methods for using them.
These methods enable the Company to take multiple, progressive "molecular
snapshots" in order to identify, isolate and study the function of genes
associated with critical stages of development and the early specialization of
cells. Because these genes control fundamental changes in the cells that form
major tissues and organs, the Company believes that they may be useful in the
treatment and management of diseases characterized by abnormal changes in the
cells of such tissues and organs, such as cancer and degenerative diseases
associated with aging.
The Company uses proprietary techniques to isolate, grow, maintain and
differentiate in culture stem cells derived from the murine yolk sac (a tissue
that surrounds the organism during early development), and to use individual
cultured yolk sac stem cells as sources of novel hematopoietic and angiogenic
genes. Such genes may be expressed exclusively or at enhanced levels during
early development. The Company used cultured murine yolk sac stem cell lines to
identify its BFU-e red blood cell growth factor activity. In May 1995, the
Company entered into a collaboration with Novo Nordisk A/S ("Novo Nordisk")
relating to this growth factor. In November 1996, the Company's licensor, Ohio
University, received a notice of allowance from the United States Patent and
Trademark Office ("USPTO") for a patent application relating to cellular
compositions derived from the human and murine yolk sac and methods of obtaining
and using such compositions. See "Corporate Agreements--Novo Nordisk Agreement,"
"Factors That May Affect Future Financial Results--Dependence on Collaborators
and Licensees" and "Uncertainty of Patents and Proprietary Rights."
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In addition to yolk sac stem cells, the Company uses proprietary methods
to exploit murine ES cells for the discovery of novel genes. ES cells have the
capacity to develop into all the specialized cells and tissues of the adult
organism. This development occurs in discrete stages that are marked by changes
in the expression of a few fundamental genes. In developing tissues, the genetic
transition from one stage to the next is blurred because cells within a tissue
co-exist in a number of different stages. The Company has developed methods to
eliminate this blurring through the isolation, identification, and study of the
differentiation, function and gene expression of single, well-characterized
precursor cells representing discrete stages of development. Furthermore, the
Company uses its murine ES system as an in vitro differentiation model for
experimentally manipulating and studying the function of novel genes from
various sources in the context of organ formation. The Company believes that
these proprietary stem cell lines and related methods may yield potential
therapeutic targets for blood, immune, vascular and bone diseases as well as
other disorders.
DEVELOPING TISSUES
The Company also uses a variety of developing tissues, including tissues
from the murine liver, pancreas, brain and bone, as sources for the discovery of
novel genes from cells representing different stages of tissue development. For
example, the B219 leptin receptor was discovered in early hematopoietic cells
found in the developing murine liver, which is believed to be a source of genes
important in blood and immune system development. The Company also selectively
targets and isolates murine tissue-specific precursor cells. For example, early
endothelial precursor cells are purified and studied for changes in gene
expression as they develop into blood vessels. The Company believes that genes
responsible for blood vessel development may have therapeutic potential in
cancer, cardiovascular disorders and other diseases characterized by abnormal
blood vessel formation or degeneration.
PATIENT DNA COLLECTIONS
The Company uses multiple strategic populations to identify genes
associated with complex diseases. These populations include genetically isolated
populations that have intermarried for centuries, as well as large populations
that have been accessed through national databases. The Company believes that
the analysis of these types of populations provides it with the ability to
narrow the chromosomal regions that are selected for study, which may decrease
the time required to locate genes associated with complex diseases. Clinical
collaborations are in place to obtain DNA samples for the study of genes
associated with asthma, schizophrenia and HH. These collaborations typically
entail relationships with physicians caring for selected patient groups and
access to patient family histories and samples. Most of these agreements allow
the Company to re-study patients as the research program proceeds. Stringent
criteria are applied to select patients most likely to have a genetic
predisposition to a particular disease, thus reducing the complexity of gene
isolation. Once a patient population is selected, blood samples from patients,
their families and control groups within the population are used for DNA
extraction and the establishment of permanent cell lines. These cell lines
become continuing sources for DNA and RNA extraction and chromosomal analyses.
The Company uses DNA samples in linkage and disease association studies,
supplemented by analysis of information from detailed clinical databases, and
correlated with information on candidate genes derived from differentiating
cells in development and disease, to discover disease genes.
DISCOVERY TOOLS
GROWTH FACTOR RECEPTOR TECHNOLOGIES
The Company has developed proprietary gene cloning and screening
techniques, and related bioinformatics capabilities, to identify novel members
of a family of genes that encode receptors for growth factors involved in blood
cell formation as well as in the growth and development of neural and other
tissues. The Company used these technologies to facilitate the discovery of the
B219 leptin receptor. Receptors discovered by the Company may be used to
identify and clone novel growth factors, to screen for small molecules that
activate or inhibit receptor functions, and to identify and purify bone marrow
cell populations with potential therapeutic characteristics. In addition, the
Company may seek to identify the therapeutic activities of various forms of
these receptors.
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GENE EXPRESSION ANALYSIS
The Company uses a range of molecular biology technologies in
proprietary ways to reveal the expression of genes in single stem cells,
developing tissues and adult normal and diseased tissues. The Company believes
that the use of these technologies, including generation of stage-specific gene
libraries to compare the timing and levels of gene expression in such cells and
tissues, may yield important insights into the genetic basis of development and
disease. The Company applied gene expression analysis in its discovery of the
B219 leptin receptor and the del-1 gene. The Company continues to apply these
technologies to its various discovery resources, and has identified novel gene
sequences involved in hematopoiesis and angiogenesis, from which full-length
genes of the sequences of interest may be generated, and subjected to further
functional characterization. The Company is developing bioinformatics
applications and high-throughput systems to further exploit its capabilities in
the analysis of gene expression.
SINGLE CELL CDNA LIBRARIES
The Company uses its UniCell(TM) system to generate libraries of
complementary DNAs (cDNAs) from single cells. cDNAs are synthesized segments of
DNA that indicate the specific regions of DNA that are actively expressing the
proteins they encode at a given point in time. The UniCell(TM) system is
designed to enable the Company's researchers to discern differences in gene
expression during cell differentiation that indicate a gene's involvement in a
particular developmental or disease process. Through gene expression analysis
and subtractive techniques, the UniCell(TM) system enables the generation of
cDNA libraries from individual, well-characterized cells representing discrete
stages of development or disease. This system provides for cleaner sampling of
gene expression than can be accomplished in larger cultures of mixed or
non-synchronized cells and may facilitate the discovery of potentially medically
relevant genes and their functional characterization.
The Company compares genes identified from UniCell(TM) cDNA libraries
with known genes and genes from selected patient groups, to gain additional
information on function and association with a given disease. For example,
Progenitor has incorporated the UniCell(TM) system in its asthma genetics
program to isolate from cells lining the airway the genes that may be
responsible for the cellular and molecular changes that characterize asthma
pathology. Such genes may serve as targets for design and development of
candidate therapeutics to intervene in asthma and inflammatory processes. In
addition, the Company has entered into a collaboration to use the UniCell(TM)
system and related technologies to isolate and characterize novel hematopoietic
genes from single murine hematopoietic cells during multiple defined stages of
differentiation.
BIOINFORMATICS
The Company has implemented and has continued to upgrade an integrated
bioinformatics system to capture, manage and analyze the data from its discovery
programs and to serve as an interface between its developmental biology and
disease genetics approaches. The Company's bioinformatics system links the two
approaches, providing potentially important insights through the correlation of
functionally-related genetic variations discerned at the cellular level, with
disease-associated genetic variations identified in patient groups. The
Company's bioinformatics system also provides a means to correlate and analyze
data on its potential gene targets with data from public and proprietary
databases using a combination of standard and proprietary computational tools
and screening algorithms. This correlation and analysis may provide new insights
and guidance to discovery programs, contributing to the isolation of new genes,
elucidation of gene and protein function and determination of novelty. The
Company's bioinformatics capabilities and computational biology tools also allow
gene discovery through analysis of data from the Human Genome Project and other
genomic databases. In addition, the Company's bioinformatics system provides a
mechanism for potential collaborators and licensees to access and utilize the
Company's discovery data on an ongoing basis.
In order to enhance its bioinformatics capabilities, the Company has
entered into a purchase and license agreement with Pangea Systems, Inc.
("Pangea") under which it acquired a custom bioinformatics hardware and software
system, technical support, bioinformatics and data management consulting
services and access to system enhancements. This system is compatible with and
expands the Company's existing bioinformatics and general
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laboratory data management capabilities. The Company also serves as a beta test
site for, and has an option for discounted purchase of, new bioinformatics
products. In addition, the Company has entered into a separate collaboration
agreement with Pangea under which the Company will explore potential
collaborations that would combine the Company's developmental biology expertise
with Pangea software to produce new bioinformatics products. See "Technology
Agreements--Pangea Agreements."
HIGH-THROUGHPUT GENOMIC SEQUENCING
The Company has developed an automated, proprietary system for
sequencing large regions of genomic DNA, and has adapted this for sequencing
cDNAs. This system integrates directed sequencing and bioinformatics to
facilitate analysis and comparison of large regions of human chromosomes and
genes discovered in developing cells, tissues and organs. In September 1997, the
Company received one issued U.S. patent which relates to this method of
large-scale genomic sequencing.
CHROMOSOME ANALYSIS AND GENE MAPPING
The Company possesses a number of technologies that expedite positional
cloning of disease genes from human populations and evaluation of genes
discovered through developmental biology. These include physical mapping to
locate markers, chromosome separation to analyze separately each parental
chromosome for inheritance patterns, and clone coverage to obtain a proprietary
series of overlapping contiguous clones spanning the chromosomal region believed
to contain a disease gene. In addition to these technologies, the Company has
developed a high-throughput approach for identifying and assaying new markers in
any region of genomic DNA, which facilitates its disease association studies.
The Company is using its marker identification technology to evaluate patient
samples in its asthma gene discovery program to further refine its search for
genetic variations that may be implicated in this disease.
GENETIC ANALYSIS
The Company implements several analytical methods for the identification
of genes associated with complex diseases such as asthma. These methods include
linkage analysis, identity-by-descent and population-based disease association.
Linkage analysis involves determination of the likelihood that a specific
genetic marker is associated with an inherited disease trait.
Identity-by-descent analyzes whether affected individuals carry a particular
chromosomal region more often than would be expected by chance. Identification
of such a region that is identical-by-descent reduces the amount of chromosomal
material that must be searched to locate a specific gene. Population-based
disease association represents a statistically powerful comparison of affected
and unaffected individuals from a given population to determine whether a
particular chromosomal region is found at a higher frequency among affected
individuals than unaffected individuals. The disease association method of
genetic analysis may be applicable to a broad range of population types and
diseases, including complex diseases. To provide it with the flexibility
necessary to address complicated patterns of gene inheritance and expression,
the Company has developed the ability to apply alternative analytical methods to
a given disease gene discovery program. The Company used a combination of these
methods to discover the HFE gene, and also is applying these methods in its
asthma program.
FURTHER ELUCIDATION OF GENE FUNCTION
Many of the tools the Company uses for gene discovery and initial
functional characterization also are used in the further elucidation of gene
function. The Company has built and may continue to supplement a set of
developmental and adult models and systems for in-depth evaluation of the
biological roles of its discoveries. In combination, developmental biology and
disease genetics approaches to gene identification provide initial information
on gene function and medical relevance. A more thorough understanding of
biological functions and therapeutic implications is necessary to determine the
appropriateness of genes as therapeutic targets. The Company has assembled a
group of well-characterized cellular, developmental and adult models and methods
to study the role of genes in tissue and organ formation in order to determine
their therapeutic relevance. These
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include murine Xenopus (frog), Caenorhabditis elegans (roundworm) and Danio
rerio (zebrafish) assays, transgenic and gene knock-out technologies and methods
of gene delivery and protein expression.
The Company believes that genes discovered using developmental biology
and disease genetics are equally amenable to further functional characterization
using these biological models. For example, developing cells, tissues and model
systems allow direct evaluation of the role and potential utility of a gene by
over-expressing or inhibiting the expression of the gene during cell growth,
specialization, early organization of tissues and organ formation. In addition,
the Company uses animal and human models of disease, such as tumor implants in
animals or tissue samples from cancer patients, to study the expression and
potential therapeutic relevance of its discoveries. By using a range of models,
the Company has been able to predict and to elucidate further the role of the
B219 leptin receptor in adult hematopoiesis, and the role of del-1 in
angiogenesis and osteogenesis. The Company has access to the following models
and technologies to accelerate the further elucidation of gene function.
MURINE DEVELOPMENTAL ASSAYS
The Company's murine ES and yolk sac stem cell lines and related
proprietary methods serve as assay systems for the functional characterization
of genes. Murine stem cells can be manipulated in order to study the effects of
the addition or deletion of specific genes on normal cell function during
development and specialization, either in vitro or in vivo, and the effects of
candidate molecules on the genes in question. The Company currently is using
this technology to identify and characterize novel genes, receptors and related
proteins involved in the development of the blood and vascular systems. In
addition, the Company has licensed an ES cell-based assay system from the
National Jewish Center for Immunology and Respiratory Medicine ("National Jewish
Center") to support cloning of an identified murine BFU-e red blood cell growth
factor and its human equivalent. The Company also uses certain murine yolk sac
stem cell lines to evaluate the effects of discovered genes on endothelial cell
growth and blood vessel formation.
The Company also has entered into two collaborations to exploit murine
development to evaluate candidate genes from its discovery programs. The first
collaboration, with the University of Cambridge, allows the Company to
prioritize gene sequences for further functional characterization and to obtain
whole-body evaluation of gene expression during murine development using in situ
DNA hybridization. In situ DNA hybridization, which uses complementary binding
of DNA strands to indicate gene expression at specific sites throughout an
animal, was instrumental in the discovery by University of Cambridge researchers
of two genes involved in the early formation of mammalian tissues.
In the second collaboration, with Ohio University, transgenic mice are
used as tools to study the effects of over- and under-expression of genes during
early stages of development through adulthood, which the Company believes may
provide results relevant to human gene function and medical applications.
XENOPUS DEVELOPMENTAL ASSAYS
The Company has entered into a collaboration to identify and
functionally characterize novel hematopoietic genes using developing Xenopus
systems. The Xenopus system is useful for assessment of mammalian gene function,
particularly hematopoietic genes, because it can be manipulated easily and
produces a large volume of eggs for insertion and analysis of numerous
individual genes. Therefore, the biological effects of a broad range of
mammalian genes can be assessed in a rapid, high-throughput, reproducible
system.
C. ELEGANS DEVELOPMENTAL ASSAYS
The Company has entered into a collaboration to utilize C. elegans for
functional characterization of selected sequences from its cDNA libraries. C.
elegans is one of the most thoroughly-studied multi-cellular organisms in terms
of both its development and its genome. C. elegans has numerous genetic,
molecular and cellular similarities to higher organisms, including humans, which
may enable functional evaluation of genes from a variety of sources, and
elucidation of mechanisms of development and disease. The clear body of C.
elegans simplifies observation of changes that result from insertion or deletion
of genes. Moreover, because it is relatively
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easy to grow and to rapidly obtain numerous copies of genetically-identical
offspring, C. elegans may be useful for rapid, high-throughput screening of
genes and candidate molecules.
ZEBRAFISH DEVELOPMENTAL ASSAYS
As part of a research collaboration with Ohio University, the Company
has access to the zebrafish as an additional high-throughput developmental
biology assay system for gene characterization. Zebrafish have a number of
useful attributes for developmental biology assay systems, including a clear
body for organ visualization, ease of cell manipulation and transplantation,
rapid development, prolific egg-laying, and an established information base on
genes affecting development. Candidate genes from a variety of discovery sources
may be inserted into fertilized zebrafish eggs in order to assess the effects of
the genes during development. Such assays can be accomplished within 24 to 72
hours after transduction of the embryos with the genes of interest.
TRANSGENIC AND GENE KNOCK-OUT TECHNOLOGIES
Transgenic and gene knock-out animal models allow the Company to
distinguish the effects of the gain or loss of function of individual genes from
the background of genetic and cellular activity. Transgenic animals provide a
means to evaluate the functional effects of the selective over-expression of a
gene in living systems. The classical transgenic approach is to produce adult
animals that express a given gene at continuous, high levels. This approach is
time-consuming and unsuitable for high-throughput analyses. The Company's
transgenic technologies minimize these drawbacks through over-expression of
genes at selected stages in early development, and evaluation of the effects on
cell development and specialization, and tissue and organ formation. The Company
also produces developmental and adult gene knock-out models through genetic
manipulation of ES cells. These models allow the Company to evaluate the
biological effects of eliminating expression of a gene of interest. The Company
uses a range of techniques to evaluate the effects of gene over-expression, or
lack of expression, in major organs of mature animal models.
GENE DELIVERY AND EXPRESSION
Gene delivery and expression technologies permit the Company to study
the function of newly discovered genes in a range of cellular and animal models.
Among a variety of systems the Company uses is a proprietary gene delivery
system, T7T7, which the Company developed in collaboration with Ohio University.
T7T7 is a nonviral system that can induce expression of the gene it carries in a
cell's cytoplasm (the area surrounding the nucleus). The T7T7 system works in
both cell cultures and whole organisms, and in both dividing and nondividing
cells. The Company has an agreement with Chiron to explore potential
commercialization of the T7T7 system in clinical gene therapy applications. See
"Corporate Agreements--Chiron Agreement" and "Patents and Proprietary Rights."
DISCOVERY PROGRAMS
LEPTIN RECEPTORS
Abnormalities in the expression of leptin and the functioning of leptin
receptors have been implicated in obesity, diabetes and other metabolic
disorders. The Company used its proprietary receptor discovery technology and
murine developmental tissue resources to identify gene sequences that encode
various forms of the B219 leptin receptor. In September and December 1994, the
Company filed U.S. patent applications relating to the B219 leptin receptor. In
July 1997 the Company received one issued U.S. patent from the USPTO for claims
relating to genes encoding the leptin receptor. The Company also has received
one notice of allowance from the USPTO for claims relating to genes encoding the
leptin receptor, and one notice of allowance relating to a disease-associated
leptin receptor variant and a method for detecting this variant. In December
1996, the Company licensed certain aspects of its leptin receptor technology to
Amgen Inc. ("Amgen") for human therapeutic, diagnostic and prophylactic uses.
The Company has retained exclusive rights to the leptin receptor technology for
certain other uses, including small molecule screening and cell sorting. The
Company is seeking collaborators in these two areas. See "Corporate
Agreements--Amgen Agreements," "Patents and Proprietary Rights" and "Factors
That May Affect Future Financial Results--Dependence on Collaborators and
Licensees."
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The Company has published findings suggesting that leptin receptors may
play a broad and fundamental biological role. In particular, the Company has
demonstrated in vitro that leptin stimulates the growth and differentiation of
certain hematopoietic cells, including stem cell populations found in adult bone
marrow. In order to characterize further the function of leptin receptors, the
Company is investigating the role of leptin in the hematopoietic and immune
systems, for potential adjunct therapies for cancer and treatments for anemias
and other disorders of the blood and immune system.
HEREDITARY HEMOCHROMATOSIS
Hereditary hemochromatosis is an iron overload disease that can lead to
life-threatening conditions such as cirrhosis, liver cancer, diabetes, heart
failure and arthritis. HH is one of the most common genetic disorders, with an
estimated one million affected individuals in the U.S. If the disease is
detected early, the simple treatment of blood removal can prevent serious liver
disease and death. HH is under-diagnosed because it is difficult to correlate
early symptoms, such as general fatigue and abdominal pain, with the disease. In
addition, the confirmatory test for the disease is liver biopsy, an invasive
procedure. The Company targeted HH because it believes that an accurate,
non-invasive diagnosis of HH is an unmet medical need with significant
implications for patient care.
Using its disease genetics approach, the Company has discovered a gene,
HFE, and its specific mutations associated with HH. The Company has pending U.S.
and foreign patent applications relating to certain diagnostic markers for HH,
and has received two notices of allowance from the USPTO for two such
applications. The Company also has pending patent applications relating to
mutations in HFE, for which it has received a notice of allowance from the
USPTO, and pending patent applications relating to the gene itself. In addition,
the Company has two pending patent applications on the transcript map of all
genes in the region of HFE.
In September 1997 Progenitor licensed to SmithKline Beecham Clinical
Laboratories ("SBCL") certain exclusive rights to develop and perform clinical
laboratory diagnostic testing for HH under Progenitor's patent applications
covering the HFE gene and its specific mutations. Progenitor retains the right
to develop and market clinical laboratory testing outside of the certain
specified territories, and to form additional partnerships to develop and market
kit-based diagnostic products after a waiting period not to exceed six months.
Subject to its agreement with SBCL, the Company is seeking corporate
collaborations to commercialize a diagnostic kit for HH. See "Corporate
Agreements--SmithKline Beecham Agreement," "Patents and Proprietary Rights" and
"Factors That May Affect Future Financial Results--Dependence on Collaborators
and Licensees."
The Company believes that HFE also may have a role in the biology of
iron metabolism. The Company is developing functional data on HFE in this area
to determine whether it has therapeutic applications for certain anemias and
other diseases associated with iron metabolism. The Company is seeking
collaborations to develop and commercialize these therapeutic applications.
RED BLOOD CELL GROWTH FACTOR
The Company believes there is a large and growing market for agents that
stimulate new red blood cell development for patients with inherited anemias and
for patients who are undergoing kidney dialysis, cancer chemotherapy or bone
marrow transplantation. The Company has identified a growth factor activity that
stimulates the formation and development of red blood cells from burst-forming
units-erythroid ("BFU-e"), which are the earliest red blood cell precursors
found in adult bone marrow. The identified activity is distinct from that of
erythropoietin and other known growth factors. The Company is collaborating with
Novo Nordisk, through its subsidiary, ZymoGenetics, Inc. ("ZymoGenetics"), for
research, development and commercialization efforts relating to the BFU-e red
blood cell growth factor activity identified by the Company. The Company, along
with Novo Nordisk, is seeking to purify the murine BFU-e red blood cell growth
factor and clone its gene and its human equivalent. See "Corporate
Agreements--Novo Nordisk Agreement" and "Factors That May Affect Future
Financial Results--Dependence on Collaborators and Licensees."
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DEL-1 GENE IN ANGIOGENESIS AND OSTEOGENESIS
The Company believes that drugs designed to inhibit the growth of new
blood vessels may represent an important therapeutic approach to treating
cancer. The Company, in collaboration with Vanderbilt University ("Vanderbilt"),
has discovered del-1, a gene that encodes a novel cell-surface protein, Del-1,
involved in the early growth and development of blood vessels and bone. Since
del-1 is not expressed in most normal adult tissues, and Del-1 is accessible in
the lining of blood vessels, the Company believes that Del-1 may be a highly
specific, accessible and stable target for the development of cancer
therapeutics, diagnostics and imaging agents. The Company has shown that mice
implanted with human tumors express the murine del-1 gene in developing blood
vessels that feed the tumor. The Company also has demonstrated that a variety of
human tumor samples have a higher level of del-1 expression than normal,
noncancerous tissues. The Company has formed a collaboration to evaluate Del-1
for anti-angiogenic effects in model systems. In addition, the Company is
investigating del-1 expression in bone and cartilage formation for potential
therapeutic applications in bone growth and repair, and osteoporosis.
Progenitor and Vanderbilt have filed jointly two U.S. patent
applications relating to the del-1 nucleotide sequences, the proteins they
encode, methods of expressing functional gene products, methods of using del-1
and Del-1, and genetically engineered cells. A corresponding international
patent application was published in December 1996. The Company has an exclusive,
worldwide license to Vanderbilt's commercial rights under these patent
applications.
Interneuron owns an option to acquire an exclusive license to
manufacture, use and sell certain aspects of Del-1. Subject to such option, the
Company is seeking collaborations to pursue the research, development and
commercialization of del-1 and Del-1. See "Corporate Agreements--Interneuron
Agreement."
ASTHMA
Asthma is a respiratory disease that affects approximately 12 million
people in the U.S. Current medications address only symptoms, leaving an unmet
medical need for treatments of the causes of asthma. The Company is attempting
to identify and characterize novel genes as potential therapeutic targets for
such treatments. To this end, the Company has undertaken a gene discovery
program that combines its disease genetics and developmental biology approaches
to identify novel therapeutic targets through an understanding of both the
genetics and the biology of asthma. The disease genetics elements of the program
include clinical collaborations for DNA samples from patient populations showing
strong evidence of an inherited asthma component, whole-genome linkage scanning
to determine the locations of genes involved, positional cloning for gene
isolation, and high-throughput gene polymorphism detection for further analysis
of patient DNA and testing of candidate therapeutics. In the initial studies
performed by the Company using a portion of the patient DNA samples, linkages
have been established to specific chromosomal regions. The Company is applying
disease association methods and chromosome analysis technologies to some of
these regions to identify candidate disease genes for evaluation.
The developmental biology elements of the program may include cDNA and
gene expression methods to evaluate patients' cells involved in the asthma
inflammatory response in order to identify the genes responsible for the
functional changes occurring in these cells as they participate in asthma
pathophysiology. The program also may include cDNA and gene expression studies
using developmental and animal models, and application of Progenitor's
UniCell(TM) technology to generate unique cDNA libraries from single cells. In
addition, the Company may use developmental and disease models to conduct
functional analyses to elucidate the cellular and molecular biology of asthma,
and to validate gene discoveries as therapeutic leads and targets.
By combining its disease genetics and developmental biology gene
discovery approaches, the Company believes it may be able to confirm the
relationship of the functional role of an identified gene in the disease
manifestations of asthma. For example, the Company's developmental models may
permit the investigation of the functions of candidate genes identified through
disease association studies. Genes identified through developmental biology
models of functional specialization may be correlated with genes unique to its
asthma patient groups. The Company believes that this ability to combine two
gene discovery approaches, and to compare the results from the
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two, will enable it to identify genes with important functional roles in asthma
that will serve as novel targets for the development of new therapeutics for
this disease. The Company is seeking a corporate collaboration for this program.
GENES FROM DEVELOPING SYSTEMS
The Company has an ongoing program to identify and characterize novel
genes from individual cells undergoing critical stages of angiogenic and
hematopoietic specialization early in development. Using its UniCell(TM) system,
the Company is able to generate cDNA libraries from individual,
well-characterized cells from proprietary angiogenesis and hematopoiesis
differentiation systems. The Company believes that its program may allow it to
identify the genes that control key stages of differentiation, and that these
genes will have important and fundamental functions in hematopoiesis and
angiogenesis. Genes controlling hematopoiesis may provide a novel source for
blood cell growth factors and receptors, as therapeutic leads and targets for
diseases of the blood and immune system, and for support therapies for cancer
patients. Genes controlling angiogenesis may provide unique targets for
therapeutic and diagnostic approaches to cancer and to other diseases
characterized by abnormal blood vessel growth, such as diabetic retinopathy and
macular degeneration, diseases that are leading causes of blindness.
The Company has several ongoing collaborations to provide additional
sources of novel genes associated with early hematopoiesis and angiogenesis,
including programs to generate novel hematopoietic and angiogenic genes from
early developmental systems such as ES, yolk sac, developing liver and other
precursor cells. Through one collaboration, the Company has generated a number
of UniCell(TM) cDNA libraries from a proprietary hematopoiesis/angiogenesis
differentiation system. Through a second collaboration, the Company has
generated multiple libraries from human vascular endothelial cell precursors.
The Company's preliminary analyses have suggested that several novel sequences
from these libraries may have useful biological or pharmacological properties.
The Company may select sequences from these libraries for preparation of
full-length genes for further characterization and analysis in functional assays
and model systems. If these gene sequences are determined to be therapeutically
relevant, the Company will seek to exercise its rights under its collaborative
agreements and may enter into commercial collaborations for further development
of these gene sequences as therapeutic targets. See "del-1 Gene in Angiogenesis
and Osteogenesis" and "License Agreements--Vanderbilt University."
With respect to all of the above programs, there can be no assurance
that the Company will be successful in entering into additional collaborative
agreements or that any drugs or other products will be developed or
commercialized, that any additional patents will issue from any of the Company's
applications with respect to such programs or that, if issued, any resulting
patents will provide the Company with meaningful protection or rights. See
"Factors That May Affect Future Financial Results--Uncertainty of Product
Development," "--Dependence on Collaborators and Licensees," "--Uncertainty of
Patents and Proprietary Rights" and "--Dependence upon Research Collaborators
and Scientific Advisors."
CORPORATE AGREEMENTS
SMITHKLINE BEECHAM CLINICAL LABORATORIES AGREEMENT
In September 1997 the Company granted to SBCL, in certain designated
territories, an exclusive right and license (including the right to grant
sublicenses) under Progenitor's patent applications and know-how covering the
HFE gene and its specific mutations, to make, use, have made and import
materials or components for the sole purpose of developing certain diagnostic or
screening assays, and offering to sell, selling and performing such assays in
clinical laboratories. Under certain circumstances, at SBCL's election, the
exclusive right and license granted by the Company may be converted to a
nonexclusive, nontransferable right and license on a territory by territory
basis. Under the agreement, the Company also granted to SBCL a right of
negotiation to obtain a right and license, under the Company's patent
applications and know-how, to make, have made, use, offer to sell, sell and
import kits in the designated territory. In the event that the Company and SBCL
have not agreed upon the material commercial terms of such right and license
concerning kit-based diagnostic products prior to the expiration of the right,
the Company may enter into an agreement with any third party granting such right
and license.
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Under the terms of the agreement, SBCL is to bear all costs and expenses
associated with making, having made, using and importing the assay or its
components for the purpose of offering to sell, selling, and performing the
assays in the designated territories. Within certain specified provisions, SBCL
also will defend, indemnify and hold harmless Progenitor, its employees and
affiliates from any loss, damage or liability, including attorney's fees,
resulting from any claim, complaint, suit, proceeding or cause of action
alleging physical or other injury, including death, arising from the provision
of the assay or services using said assay. In partial consideration of the
exclusive rights and license, the Company is to receive guaranteed annual fees
through the end of the first five years of the agreement, such fees to be
creditable against royalties due and payable to the Company by SBCL in the given
one-year period. The Company also is to receive pre-determined royalty payments
on a per-test basis, for each test from which SBCL derives revenue. In the event
that SBCL's exclusive license is converted to a nonexclusive license, under the
terms of the agreement, SBCL shall pay the Company a reduced annual fee
following the conversion. Such payment shall be creditable against royalties due
and payable to the Company by SBCL within the one-year period. Under such
nonexclusive license, the Company is to receive royalty payments, at a reduced
pre-determined rate, on a per-test basis, for each test from which SBCL derives
revenue.
The Company retains the right to develop and market clinical laboratory
testing outside the designated territories, and subject to SBCL's right of
negotiation, to negotiate with third parties for the development and marketing
of kit-based diagnostic products. Subject to certain provisions under the
agreement, the Company is seeking corporate collaborations to commercialize a
kit-based diagnostic for HH. See "Patents and Proprietary Rights" and "Factors
That May Affect Future Financial Results--Dependence on Collaborators and
Licensees."
In connection with the Offering, SR One, a venture capital affiliate of
SmithKline Beecham p.l.c., purchased 214,000 Units.
AMGEN AGREEMENTS
In December 1996, the Company entered into a license agreement with
Amgen relating to certain aspects of the Company's leptin receptor technology.
The agreement grants Amgen an exclusive, worldwide license, with the right to
grant sublicenses, to use the Company's patent rights relating to the leptin
receptor and antibodies to the leptin receptor to develop products with human
therapeutic, diagnostic and prophylactic uses. In addition, Amgen received a
non-exclusive, worldwide license, with the right to grant sublicenses, to other
patent rights that are necessary or useful to Amgen in the development and
commercialization of the leptin receptor technology in Amgen's field of use. The
Company retained exclusive rights to its leptin receptor technology for the
following uses: (i) any ex vivo uses for ligand and small molecule drug
screening; (ii) any ex vivo uses for cell sorting; (iii) any anti-sense uses for
human therapeutic, diagnostic and/or prophylactic applications; and (iv) any in
vivo human therapeutic, diagnostic and/or prophylactic applications of
antibodies to the leptin receptor. The Company also retained a non-exclusive
right, with a right to grant licenses, to the leptin receptor technology for
human diagnostic uses to the extent necessary to develop and commercialize
products under the Company's exclusive retained rights, and a non-exclusive
right, without the right to grant licenses, to the licensed technology in
Amgen's field of use for research and development purposes only. Amgen has sole
discretion over the development and commercialization of licensed products.
The license agreement terminates upon the expiration of the last to
expire of any issued patent or patents that might issue relating to the licensed
technology. Amgen may terminate the agreement earlier by providing written
notice of its election to discontinue all development and commercialization
activities relating to the licensed technology, and also may terminate, in whole
or in part, any of the licenses granted to it under the agreement, by providing
60 days' written notice of termination. In addition, the Company may terminate
the agreement earlier in the event of a material breach by Amgen of its
obligations or any of its representations and warranties under the agreement.
Upon a termination, other than as a result of a material breach by the Company,
Amgen's license rights revert to the Company.
The Company received a $500,000 license fee upon execution of the
agreement. In addition, in the event that Amgen pursues the development of
products related to the licensed technology, the Company would be entitled to
receive up to an additional $22.0 million upon attainment of certain
development, regulatory and
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commercialization milestones, plus potential royalties on product sales.
Additional milestone payments of up to $12.0 million, plus royalty payments,
could be made to the Company for the development and commercialization of a
subsequent product. An additional $2.0 million in milestone payments, plus
royalties, could be paid to the Company for the regulatory approval and
commercialization of a diagnostic test. There can be no assurance that Amgen
will pursue the development of products related to the licensed technology, or,
if it decides to pursue such development, that it will be successful in
developing or commercializing any products using the Company's leptin receptor
technology or that the license agreement will not terminate prior to its
expiration. As such, there can be no assurance that any milestones will be
achieved or that any royalties or other payments contemplated by the license
agreement will ever be made. See "Factors That May Affect Future Financial
Results--Dependence on Collaborators and Licensees."
In connection with the license agreement, the Company and Amgen entered
into a Stock Purchase Agreement (the "Amgen Purchase Agreement"), which provided
for the purchase by Amgen of 1,023,256 shares (the "Amgen Shares") of Common
Stock in exchange for $4.5 million in cash and a $1 million promissory note
concurrently with the closing of the Offering. Pursuant to the Amgen Purchase
Agreement, Amgen has agreed for a period of time to limit its ownership interest
in the Company below a specified percentage. Pursuant to the Amgen Purchase
Agreement, Amgen also received certain registration rights with respect to the
Amgen Shares.
NOVO NORDISK AGREEMENT
In May 1995, the Company and Novo Nordisk, through its subsidiary
ZymoGenetics, entered into a research, development and commercialization
agreement under which Novo Nordisk received an exclusive, worldwide license to
any and all rights of the Company related to the BFU-e red blood cell growth
factor activity identified by the Company for any and all human therapeutic and
small molecule drug design uses. An amended and restated agreement was executed
between the parties in January 1997. Under the agreement, the development effort
is divided into two stages. During the first stage, Novo Nordisk and the Company
are attempting to purify, clone and sequence a BFU-e red blood cell growth
factor and other growth factors with similar hematopoietic functions. If this
stage is successfully completed, Novo Nordisk will have the right to decide
whether to proceed to the second stage, in which the Company may conduct
research to establish the biological function of the growth factor. During the
second stage, if commenced, Novo Nordisk has the option to engage the Company
for additional research, which may entitle the Company to receive up to $4.0
million in research fees from Novo Nordisk.
The agreement with Novo Nordisk terminates upon the expiration of the
last patent that might issue relating to the Company's growth factor
discoveries. Novo Nordisk also has a right to earlier termination of the
agreement upon 30 days' notice. If Novo Nordisk exercises this right prior to
paying a license fee, it would be obligated to grant to the Company an exclusive
worldwide license to all of Novo Nordisk's rights arising from the research
conducted pursuant to the agreement to make, use and sell related products. In
the event that Novo Nordisk and the Company have developed joint technology
under the agreement prior to such early termination, the Company would be
obligated to pay Novo Nordisk royalties for any sales of products made using the
licensed technology.
If Novo Nordisk decides to develop any licensed products, it will be
obligated to pay the Company a one-time license fee of $2.0 million and up to an
additional $22.0 million for each product if certain clinical testing,
regulatory and marketing approval milestones are met. In addition, the Company
has the right to receive royalties for sales of any resulting products. In the
event that all milestones are reached with respect to the BFU-e red blood cell
growth factor, the Company would receive an aggregate of $28.0 million under the
agreement, plus royalties on any net product sales. Novo Nordisk has the right
to manufacture and market any such products on an exclusive worldwide basis.
There can be no assurance that the Company or Novo Nordisk will successfully
clone the murine BFU-e red blood cell growth factor or its human equivalent, or,
if the factor is cloned, that Novo Nordisk will continue the program, that the
license agreement will not otherwise be terminated prior to its expiration, that
the Company will be able to clarify the biological function of the growth factor
or that Novo Nordisk will be successful in developing and commercializing any
drugs or other products utilizing the BFU-e red blood cell growth factor. As
such, there can be no assurance that any milestones will be achieved, or that
any royalties or other payments
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contemplated by the agreement will ever be made. See "Factors That May Affect
Future Financial Results--Dependence on Collaborators and Licensees."
CHIRON AGREEMENT
In March 1995, the Company entered into an agreement with Chiron for the
development and commercialization of the T7T7 gene delivery system for selected
applications. The agreement grants Chiron an exclusive, worldwide license to the
T7T7 gene delivery system for (i) all products carrying a single specified gene,
which has potential applications for tumor ablation; (ii) four infectious
disease vaccine constructs; (iii) products used for the prevention, therapy or
diagnosis of human restenosis; (iv) five additional constructs designated by
Chiron; and (v) additional constructs, with certain limitations, that may be
designated by Chiron upon payment of a fee for each such additional construct.
The Company also may grant licenses to third parties to constructs for fields of
use not licensed to and not in conflict with the exclusive licenses granted to
Chiron. Any such third-party licenses are subject to Chiron's right of first
refusal for any construct of the T7T7 gene delivery system not already covered
by the agreement for the development of a noninfectious disease vaccine.
Pursuant to the agreement, Chiron and the Company may develop jointly the T7T7
tumor ablation product for the treatment of cancer. The parties will own jointly
all preclinical and clinical data from the collaboration, which may be used by
either party for any purpose subject to the exclusive licenses granted to
Chiron. The Company has the right to collaborate and jointly invest in Chiron's
development efforts on the tumor ablation product, with the Company's level of
participation in any resulting product revenues based on its relative
contribution to development costs. Under the agreement, Chiron has committed to
use reasonable efforts to commercialize one or more licensed products and has
certain manufacturing rights and obligations for any resulting products. If
Chiron chooses to abandon development of a construct, its license rights
terminate with respect to that construct. Subject to the foregoing rights, the
agreement provides that each party will retain ownership of all inventions (and
any related patents) made solely by its employees and arising from the
activities performed under the agreement.
The agreement terminates upon the later of the expiration of the patents
upon which it is based or, within any given country, ten years after the first
commercial sale of a product developed under the agreement within such country.
In such events, Chiron's affected license rights become fully paid and
non-exclusive. Chiron also may terminate the agreement earlier with respect to
any particular construct upon 30 days' notice, and either party may terminate
the agreement in the event of a material breach by the other party of its
obligations under the agreement. In such events, Chiron's license rights would
revert to the Company, but Chiron would retain exclusive rights to inventions
and discoveries made solely by its employees, and joint rights to discoveries
made jointly with the Company. Chiron also would be required to pay the Company
all royalties accrued before termination.
The Company received a $2.5 million payment upon execution of the
agreement as a license fee and reimbursement of past research and development
expenses, and an additional $500,000 in January 1996 for continued funding of
the Company's research and development expenses. The Company has paid Chiron
$750,000 pursuant to the agreement, in full satisfaction of the Company's
obligation to reimburse Chiron for certain start-up manufacturing costs. Under
the agreement, the Company is entitled to receive up to an additional $4.3
million in various fees and milestone payments for each licensed product if all
specified research, clinical development, regulatory and marketing approval
milestones are achieved, plus additional fees for development of specific
constructs and for the first product developed. The agreement encompasses a
minimum of eleven potential products that Chiron may develop. In the event that
all such milestones are achieved and all contemplated products reach market, the
Company would receive an aggregate of $51.3 million (including payments already
received) plus royalties on net product sales. There can be no assurance that
the Company and Chiron will be successful in developing or commercializing any
drugs or products utilizing the T7T7 gene delivery system or that the agreement
will not terminate prior to its expiration. As such, there can be no assurance
that any milestones will be achieved or that any royalties or other payments
contemplated by the agreement will ever be made. See "Factors That May Affect
Future Financial Results--Dependence on Collaborators and Licensees."
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INTERNEURON AGREEMENT
In July 1997, the Company granted Interneuron an option to acquire an
exclusive, worldwide license to manufacture, use and sell certain aspects of
Del-1 for human therapeutic uses on terms to be negotiated. The Company retained
the right to negotiate with third parties to license Del-1, subject to a right
of first refusal held by Interneuron and provided that, in the event the Company
grants such rights to a third party, the Company must share fees, milestone
payments and royalties with Interneuron. Should the Company develop and sell
products using Del-1 independently, the Company will be required to pay
Interneuron royalties on net sales. The option and right of first refusal
agreement terminates upon the expiration of the last to expire of any patent
that might issue relating to the licensed technology, or upon the conclusion of
a license agreement with Interneuron.
In exchange for receiving the option and right of first refusal,
Interneuron paid the Company $1 and relinquished its right to certain minimum
return adjustments through the quarter ended April 7, 1997 to the conversion
ratio of the Company's Series A Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"). Interneuron and the Company agreed to determine the
value of the relinquishment of the minimum return adjustments and the extent to
which such value may be credited against payments, including royalties, that
would otherwise be payable to the Company under any license agreement with
Interneuron. The terms of the Series A Preferred Stock provided for Interneuron
to receive a 35% annual return, implemented through minimum return adjustments
to the conversion ratio of the Series A Preferred Stock, at the time the Series
A Preferred Stock converts to Common Stock. Such conversion occurred
automatically on the closing of the Offering and, accordingly, prior to the
relinquishment, Interneuron received an additional 1,439,016 shares of Common
Stock upon the closing of the Offering. See "Discovery Programs" and "Factors
That May Affect Future Financial Results--Control of Company by, and Potential
Conflicts of Interest with, Interneuron."
TECHNOLOGY AGREEMENTS
AFFYMETRIX AGREEMENT
The Company has entered into an agreement with Affymetrix, Inc.
("Affymetrix") with respect to a technology that has the potential to expedite
the discovery of candidate genes in disease association studies. Pursuant to
this agreement, Affymetrix and the Company have agreed to use a DNA-enrichment
method developed by the Company in combination with Affymetrix's GeneChip(TM)
technology to evaluate the utility of this combined technology for identifying
DNA variations in expressed genes. The Company believes that, once identified,
such variations may accelerate the identification of candidate genes and
chromosomal regions that are implicated in human disease.
PANGEA AGREEMENTS
The Company has entered into purchase and collaboration agreements with
Pangea relating to the licensing and further development of advanced
bioinformatics technology. Pursuant to the agreements, the Company purchased
bioinformatics products that combine hardware and software for use in
information management and high-throughput analysis. The Company serves as a
principal test site for new systems and technologies developed by Pangea, and is
eligible to purchase new products at a substantial discount. The Company and
Pangea also may explore potential collaborations that would combine the
Company's developmental biology expertise with Pangea software to produce new
bioinformatics products.
LICENSE AGREEMENTS
VANDERBILT UNIVERSITY
In July 1995, the Company entered into a license agreement with
Vanderbilt pursuant to which the Company obtained an exclusive worldwide license
to Vanderbilt's commercial rights under jointly owned patent applications to
develop and market products and processes utilizing technology relating to del-1
and Del-1. Under this agreement, the Company is obligated to pay royalties on
any resulting product sales. Vanderbilt may terminate
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the agreement after three years if the Company has not made adequate efforts to
commercialize products based on the gene.
STANFORD UNIVERSITY
In February 1997, the Company entered into a license agreement with
Stanford for an exclusive worldwide license to Stanford's commercial rights
under a patent application relating to the EPM1 epilepsy gene, which allows the
Company to develop and market diagnostic and therapeutic products relating to
the gene. Under this agreement, the Company is obligated to pay certain patent
expenses, royalty milestones on patents, and royalties on any resulting
products.
OHIO UNIVERSITY
The Company entered into licensing agreements with Ohio University as of
January 1992 relating to yolk sac stem cells and as of April 1993 relating to
the T7T7 gene delivery system. The licensing agreements, as amended, grant the
Company an exclusive worldwide license to the yolk sac stem cells and T7T7 gene
delivery system, respectively, and related technologies covered in Ohio
University's existing patents and patent applications, as well as any technology
developed from related sponsored research. In exchange, the Company is obligated
to pay Ohio University certain license and research fees as well as royalties
based on net sales of any resulting products. In addition, under the 1992
license agreement and the terms of a related stock purchase agreement, The Ohio
University Foundation received a 5% equity interest in the Company subject to
certain anti-dilution protection and was granted the right to purchase 25,000
shares of Common Stock in the event of an initial public offering, merger or
other similar corporate transaction, at a price equal to 50% of the anticipated
public offering price or merger or other consideration, as applicable. The Ohio
University Foundation exercised such right to purchase 25,000 shares immediately
prior to the closing of the Offering at a price equal to $2.69 per share. The
Ohio University Foundation's right to designate two representatives to the Board
of Directors of the Company terminated upon the consummation of the Offering.
ADVANCED TECHNOLOGY PROGRAM GRANT
In November 1994, the Company was awarded a $2.0 million, three-year
grant to study yolk sac-derived endothelial cells for therapeutic applications
under the ATP. The grant specifies the research and development of therapeutics
based on an understanding of the biology of development of endothelial cells.
The research agreements between the Company and its subcontractors under the ATP
grant (The University of Colorado, The University of Wisconsin, Ohio University,
Vanderbilt University and Bio Support, Inc.) require that all parties assign
rights to any inventions made by them under the grant to the Company. The ATP
grant provides that the Company retains full rights to any intellectual property
developed as part of the project.
The ATP grant is administered by the United States Department of
Commerce. As of September 30, 1997, the Company had received approximately
$1,651,000 under the ATP grant, and $129,699 in additional funds were payable to
the Company. The balance of the grants, approximately $349,000, is payable in
equal quarterly installments during the period from October 1, 1997 to May 31,
1998. The grant is subject to yearly appropriations by the United States
Congress for the ATP program, and legislation has been introduced to eliminate
the program. The National Institute of Standards and Technology has informed the
Company that, although it could not guarantee the availability of funds for the
Company's grant for the year ending May 31, 1998, it is likely that the Company
will receive such grant payments. There can be no assurance, however, that
funding for the ATP program will not be reduced or eliminated at any time.
PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to the Company's businesses. The
Company's policy is to file patent applications to protect technology,
inventions and improvements to inventions that are considered important to the
development of its business. The Company also relies on trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. To date, the Company has
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filed or exclusively licensed a number of pending patent applications in the
USPTO relating to its various technologies and discoveries, as well as foreign
counterparts of certain of these applications in Europe, Japan and certain other
countries. Also, through the acquisition of Mercator, the Company obtained
Mercator's patent and proprietary rights.
Progenitor owns one issued U.S. patent which relates to nucleic acid
molecules that encode the B219 leptin receptor. In addition, Progenitor owns, or
has exclusively licensed, a number of pending U.S. patent applications, and
certain corresponding foreign applications, relating to its various technologies
and discoveries. These pending patent applications include the following: seven
U.S. applications, owned by Progenitor, relating to certain leptin receptors
(including various isoforms of the leptin receptor), for which the USPTO has
issued two notices of allowance; two U.S. patent applications, co-owned with and
licensed from Vanderbilt, relating to del-1; one U.S. application, licensed from
Ohio University, relating to the T7T7 gene delivery system; and one allowed U.S.
application, licensed from Ohio University, relating to yolk sac stem cells.
Through the Acquisition, Progenitor owns one issued U.S. patent which relates to
a method for conducting large-scale genomic sequencing. Also through Mercator,
Progenitor presently has pending eleven U.S. patent applications, a provisional
U.S. patent application and certain corresponding foreign applications. These
patent applications relate to the following three basic inventions: (i) a method
for diagnosing HH utilizing genetic markers associated with the HFE gene region,
for which the Company has received two notices of allowance from the USPTO; (ii)
HH diagnostic markers which are genetic mutations within the HFE gene, for which
the Company has received a notice of allowance from the USPTO; and (iii) the HFE
gene, cloned versions of the gene, expression of the gene product in recombinant
form, and various uses of the gene in the development of research tools,
diagnostics and therapeutics. Also, among the eleven pending applications are
two patent applications relating to a transcript map of all genes in the region
of the HFE gene. In addition, the Company has an exclusive license from Stanford
for a U.S. patent application relating to the EPM1 epilepsy gene.
Additionally, Progenitor has an exclusive license from Ohio University
to one issued U.S. patent covering a method of providing tissue-specific
expression of exogenous genetic material in a mammal by genetically transformed
embryonic carrier cells such as yolk sac cells, and one issued U.S. patent
relating to the T7T7 gene delivery system. Progenitor also has licensed, on a
nonexclusive basis, from Associated Universities, Inc. and the Wisconsin Alumni
Research Foundation, respectively, two issued U.S. patents relating to the T7T7
gene delivery system.
Through the acquisition of Mercator, Progenitor also owns a number of
research methods and tools developed by Mercator that currently are held as
trade secrets. Examples of these technologies are an improved, integrated
approach to clone coverage and physical mapping, high-throughput genotyping
systems, proprietary screening probes that allow improved gene isolation across
a given genomic region, a large-scale method for evaluating DNA sequence
variation across many individuals, and computer software to speed the discovery
of sequence differences in genomic DNA.
The Company's success will depend to a significant extent on its ability
to obtain and enforce patents, maintain trade secret protection and operate
without infringing on the proprietary rights of third parties. Because the
patent positions of biotechnology and pharmaceutical companies can be highly
uncertain and frequently involve complex legal and factual questions, the
breadth of claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted with certainty. Commercialization of
pharmaceutical products can be subject to substantial delays as a result of the
time required for product development, testing and regulatory approval. The
value of any patents issued or licensed to the Company may depend upon the
remaining term of patent protection available at the time products that utilize
the patented technology are commercialized.
The Company believes that there may be significant litigation regarding
patent and other intellectual property rights relating to leptin and leptin
receptors. The Company is aware that Millennium Pharmaceuticals, Inc.
("Millennium") has filed a patent application relating to a receptor for leptin
and its use in obesity applications, and has licensed to Hoffmann-La Roche Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor. There can be no assurance that Millennium's patent
application, or any additional patent applications filed by Millennium or
others, will not result in issued patents covering a leptin receptor, the
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leptin protein or other ligands, or any of their respective uses, including
obesity. There can be no assurance that the invention by Millennium will be
accorded an invention date later than Progenitor's invention date, or that any
patent issued to Progenitor would be broad enough to cover leptin receptors of
Millennium or others. Progenitor's failure to obtain a patent that covers the
leptin receptors of Millennium or others, or the issuance of a patent to a third
party covering a leptin receptor, the leptin protein or other ligands, or any of
their respective uses, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is aware of a patent issued to Barry E. Rothenberg, related
to a method to identify hemochromatosis. The Company believes that the patent
may have been licensed to a private biotechnology company. The Rothenberg patent
does not include claims related to gene structure or the specific mutations that
give rise to hemochromatosis. However, there can be no assurance that Progenitor
and its licensee, SmithKline Clinical Labs, would be able to market an HH test
without obtaining a license to the Rothenberg patent. If such a license is
required, there can be no assurance that it may be obtained on commercially
reasonable terms.
A number of other groups are attempting to identify partial gene
sequences and full-length genes, the functions of which have not been
characterized. The public availability of partial gene sequence information
before the Company applies for patent protection on a corresponding full-length
gene could adversely affect the Company's ability to obtain patent protection
with respect to such a gene. To the extent any patents issue to other parties on
such partial or full-length genes, and as other patents issue with the expansion
of the biotechnology industry, the risk increases that the potential products
and processes of the Company or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved,
particularly in regard to human therapeutic uses. Substantial periods of time
pass before the USPTO responds to applications. In addition, the coverage
claimed in a patent application can be significantly reduced before a patent is
issued. Consequently, the Company does not know whether any of its pending or
future patent applications will result in the issuance of patents or, if any
patents are issued, whether the patents will be subjected to further proceedings
limiting their scope, and whether they will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and patent applications in certain other countries generally are
not published until more than 18 months after they are filed, and since
publication of discoveries in scientific or patent literature often lags behind
actual discoveries, the Company cannot be certain that it or any licensor was
the first creator of inventions covered by pending patent applications or that
it or such licensor was the first to file patent applications on such
inventions.
There can be no assurance that any patents issued to the Company would
not be held invalid or unenforceable by a court or that such patents would cover
products or technologies of the Company's competitors. Competitors or potential
competitors may have filed patent applications or received patents, and may
obtain additional patents and proprietary rights relating to compounds or
processes competitive with those of the Company. To protect its proprietary
rights, the Company may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to the Company. Moreover, even if the Company's patents issue,
there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
Accordingly, there can be no assurance that the Company will develop proprietary
technologies that are patentable, that the Company's patent applications will
result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology or products, nor can
there be any assurance that the Company's patents will not be held invalid by a
court of competent jurisdiction.
In addition to patent protection, the Company also relies to a
significant extent upon trade secret protection for its unpatented confidential
and proprietary information, including many of the Company's key discovery
technologies. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology. To protect its trade secrets, the Company requires its employees,
consultants, scientific advisors and parties to collaboration and licensing
agreements to execute confidentiality agreements upon the commencement of
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employment, the consulting relationship or the collaboration or licensing
arrangement with the Company. In the case of employees, the agreements also
provide that all inventions resulting from work performed by them while employed
by the Company will be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection of
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information, that the Company can meaningfully protect
its rights in such unpatented proprietary technology through other means, that
any obligation to maintain the confidentiality of such proprietary technology
will not be breached by employees, consultants, advisors, collaborators or
licensees or others, or that others will not independently develop substantially
equivalent technology. The loss of trade secret protection of any of the
Company's key discovery technologies would materially and adversely affect the
Company's competitive position and could have a material adverse effect on the
Company's business, financial condition and results of operations. Finally,
disputes may arise as to the ownership of proprietary rights to the extent that
outside collaborators, licensees or consultants apply technological information
developed independently by them or others to Company projects or apply Company
technology to other projects and, if adversely determined, such disputes could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company may incur substantial costs if it is required to defend
itself in patent suits brought by third parties or if the Company initiates such
a suit to enforce the Company's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
the Company or its collaborators or licensees claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its collaborators or licensees to obtain a license or
licenses in order to continue to manufacture or market the affected products and
processes or require the Company or its collaborators or licensees to cease
doing so. There can be no assurance that the Company or its collaborators or
licensees would prevail in any such action or that any license required under
any such patents would be made available on commercially acceptable terms, if at
all. Any adverse outcome of such litigation could have a material adverse effect
on the Company's business, financial position and results of operations. In
addition, if the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources. The
Company is unable to predict how courts will resolve any future issues relating
to the validity, scope or enforceability of its patents should they be
challenged.
It is uncertain whether any third-party patents will require the Company
to alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Factors That May
Affect Future Financial Results--Uncertainty of Patents and Proprietary Rights."
COMPETITION
Research in the field of genomics is highly competitive. Competitors of
the Company in the genomics area include, among others, public companies such as
Gene Logic, Inc., Genome Therapeutics Corp., Human Genome Sciences, Inc., Incyte
Pharmaceuticals, Inc., Microcide Pharmaceuticals, Inc., Millennium, Myriad
Genetics, Inc., and Sequana Therapeutics, Inc., as well as private companies and
major pharmaceutical companies and universities and other research institutions,
including those receiving funding from the federally funded Human Genome
Project. The Company's competitors may discover, characterize or develop
important genes in advance of the Company, which could have a material adverse
effect on any related Company discovery program. The Company expects competition
to intensify in genomics research as technical advances in the field are made
and become more widely known.
In addition, the Company faces, and will continue to face, intense
competition from pharmaceutical and biotechnology companies, as well as academic
and research institutions and governmental agencies. The Company is subject to
significant competition from organizations that are pursuing technologies that
are the same as or similar
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to those which constitute the Company's discovery approaches, and from
organizations that are pursuing pharmaceutical or diagnostic products that are
competitive with the Company's or its collaborators' potential products. Many of
the organizations competing with the Company have greater capital resources,
larger research and development staffs and facilities, greater experience in
drug discovery and development, the regulatory approval process and
pharmaceutical product manufacturing, and greater marketing capabilities than
the Company. See "Factors That May Affect Future Financial Results--Intense
Competition; Rapid Technological Change."
The Company is and will continue to be reliant on its collaborators and
licensees for support of its programs, including preclinical and clinical
development, manufacturing and marketing of its initial products. The Company's
present and future collaborators and licensees are now conducting or are
expected to conduct, multiple product development efforts within disease or
technology areas that are the subject of their respective alliances with the
Company. Any product candidate or technology of the Company may therefore be
subject to internal competition with a potential product under development or a
technology platform under evaluation by a collaborator or licensee. See "Factors
That May Affect Future Financial Results--Dependence on Collaborators and
Licensees."
GOVERNMENT REGULATION
Prior to marketing, new drugs, diagnostic kit products or other products
developed by the Company or its collaborators or licensees must undergo an
extensive regulatory approval process in the U.S. and other countries. This
regulatory process, which includes preclinical studies and clinical trials, and
also may include post-marketing studies of each product candidate to establish
its safety and efficacy, usually takes many years and requires the use of
substantial resources. Preclinical studies of new drugs include laboratory
evaluations and will require animal tests conducted in accordance with the FDA's
cGLP regulations to assess the product's potential safety and efficacy. Data
obtained from preclinical studies and clinical trials are susceptible of varying
interpretations that could delay, limit or prevent regulatory approval. Delays
or rejections also may be encountered based upon changes in the FDA's policies
for drug or biologic approval during the period of product development and FDA
regulatory review of each NDA submitted in the case of new pharmaceutical
agents, or PLA in the case of biologics. Product development of new
pharmaceuticals is highly uncertain, and unanticipated developments, clinical or
regulatory delays, unexpected adverse side effects or inadequate therapeutic
efficacy could slow or prevent the product development efforts of the Company
and its collaborators or licensees, and have a materially adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that regulatory approval will be obtained for any drugs or other
products developed by the Company or its collaborators or licensees.
Furthermore, regulatory approval may entail limitations on the indicated use of
a drug or other product. Because certain of the products likely to result from
the Company's discovery programs involve the application of new technologies and
may be based upon a new therapeutic approach, such products may be subject to
substantial additional review by various government regulatory authorities other
than the FDA and, as a result, regulatory approvals may be obtained more slowly
than for products using conventional technologies. Under current guidelines,
proposals to conduct clinical research involving gene therapy at institutions
supported by the NIH must be submitted to the FDA and the NIH, and may be
subject to approval by the RAC and the NIH. Furthermore, gene therapies are
relatively new technologies that have not been tested extensively in humans. The
regulatory requirements governing these products and related clinical procedures
for their use are uncertain and subject to change.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of the Company or its collaborators or licensees
conform to the FDA's cGMP regulations, which must be followed at all times. In
complying with cGMP requirements, manufacturers must expend time, money and
effort on a continuing basis in production, record keeping and quality control.
Manufacturing establishments, both domestic and foreign, are subject to
inspection by or under the authority of the FDA and by other federal, state and
local agencies. Failure to pass such inspections may subject the manufacturer to
possible FDA actions such as the suspension of manufacturing, seizure of the
product, withdrawal of approval or other regulatory sanctions. The FDA also may
require the manufacturer to recall a product from the market.
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Discovery of previously unknown problems with a product may have adverse
effects on the Company's business, including withdrawal of the product from the
market. Violations of regulatory requirements at any stage, including during
preclinical studies and clinical trials, the approval process or post-approval,
may result in various adverse consequences to the Company, including the FDA's
delay in approval of or refusal to approve a product, withdrawal of an approved
product from the market or the imposition of criminal penalties against the
manufacturer and NDA or PLA holder. The Company has not submitted an IND for any
product candidate, and no product candidate has been approved for
commercialization in the U.S. or elsewhere. The Company intends to rely
primarily on its collaborators or licensees to file INDs and generally direct
the regulatory approval process. No assurance can be given that the Company or
any of its collaborators or licensees will be able to conduct clinical trials or
obtain the necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's collaborators or licensees from marketing drugs or other
products developed by the Company or will limit the commercial use of such
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the current standards prescribed by
state and federal laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an
accident, the Company could be held liable for any resulting damages, and any
such liability could exceed the Company's resources. See "Factors That May
Affect Future Financial Results--Government Regulation; No Assurance of
Regulatory Approval" and "--Hazardous and Radioactive Materials; Environmental
Matters."
PRODUCT LIABILITY INSURANCE
The testing, manufacture, marketing and sale of pharmaceutical and other
products entail the inherent risk of liability claims or product recalls and
associated adverse publicity. Clinical trials and sales by the Company or its
collaborators or licensees of potential products incorporating the Company's
discoveries may expose the Company to potential liability resulting from the use
of such products. Such liability might result from claims made directly by
consumers or by regulatory agencies, pharmaceutical companies or others selling
such products. The Company currently has a limited amount of clinical trial and
product liability insurance coverage through inclusion on Interneuron's
insurance policies. The Company will seek to obtain its own coverage as needed
and will maintain and appropriately increase such coverage as clinical
development of any product candidates progresses and if and when its products
are ready to be commercialized. There can be no assurance that the Company will
be able to obtain such insurance or, if obtained, that such insurance can be
acquired at a reasonable cost or in sufficient amounts to protect the Company
against such liability. Certain of the Company's license agreements require the
Company to indemnify licensors against product liability claims arising from
products developed using the licensed technology. Also, certain of these
agreements and other collaborative and license agreements require the Company to
maintain minimum levels of insurance coverage. The failure to maintain product
liability coverage, or the occurrence of any product liability claim, or a
recall of any products of the Company or its collaborators or licensees, could
inhibit or prevent commercialization of products being developed by the Company
and could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, to the extent any product
liability claim exceeds the amount of any insurance coverage, the Company's
business, financial condition and results of operations could be materially and
adversely affected. See "Factors That May Affect Future Financial Results--Risk
of Product Liability."
ACQUISITION OF MERCATOR GENETICS, INC.
On February 14, 1997, Progenitor entered into an acquisition agreement
("Acquisition Agreement") to acquire Mercator concurrently with the closing of
the Offering. Pursuant to the Acquisition Agreement, a subsidiary of Progenitor
was merged with and into Mercator, with Mercator as the surviving corporation.
The Acquisition and Offering closed on August 12, 1997. In addition to obtaining
a disease genetics approach to gene
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discovery, Progenitor obtained technologies that help to enhance and extend its
genomics capabilities. Progenitor also obtained worldwide rights to the HFE
gene, associated with hereditary hemochromatosis ("HH"), an iron overload
disease, and the EPM1 epilepsy gene, both discovered using this disease genetics
approach. At the date of the Acquisition Agreement, Mercator had eleven pending
U.S. patent applications, a provisional U.S. patent application and certain
corresponding foreign applications relating to its genomics technologies and
discoveries, and had received notices of allowance from the USPTO for patent
applications relating to the diagnosis of HH using specific gene markers and
genetic mutations, and for an application relating to its automated genomic
sequencing technology. A patent application relating to the EPM1 epilepsy gene
is pending in the USPTO.
Under the terms of the Acquisition Agreement, the Company issued
3,442,814 shares of Common Stock to the Mercator stockholders, options to
acquire 592,914 shares of Common Stock and warrants to purchase 56,737 shares of
Common Stock with a weighted average exercise price of $2.94 per share to the
Mercator warrant holders. In addition to the issuance of Common Stock and
options, the Company also assumed liabilities of Mercator totaling approximately
$2.6 million and funded a bridge financing prior to the Acquisition totaling
approximately $3.8 million which included accrued interest of approximately
$105,000.
EMPLOYEES
As of September 30, 1997, the Company had 47 full-time employees, of
whom 15 hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 37 are
engaged in research and development activities, and 10 are engaged in business
development, finance and administration. None of the Company's employees is
covered by a collective bargaining agreement, and the Company has never
experienced any strike or work stoppage. The Company believes its relations with
its employees to be good.
In order to support its operations, the Company must hire and retain
additional research, management, administrative and financial personnel. In
addition, in connection with the Acquisition and the relocation of the Company's
facilities, the Company may be required to expend substantial additional
resources to create a combined personnel base. The Company's success will depend
in large part on its ability to attract and retain key employees and scientific
advisors. Competition among biotechnology and pharmaceutical and other companies
for highly skilled scientific and management personnel is intense. There can be
no assurance that the Company will be successful in retaining its existing
personnel or advisors, or in attracting additional qualified employees.
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ITEM 2. PROPERTIES
In connection with the Acquisition, the Company relocated its facilities
to the San Francisco Bay area, where the Company occupies approximately 35,000
square feet of laboratory and office space in Menlo Park at a rent of $30,100
per month. The lease expires on September 30, 1999 and contains provisions for a
one-year renewal option. The Company expects that its current facilities will be
adequate to serve its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 6, 1997, Interneuron, the then-majority shareholder of the
Company's outstanding voting stock, approved an increase in the number of shares
available for grants from the Company's 1997 Stock Option Plan, from 550,000 to
625,000 effective upon the closing of the Acquisition.
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EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Douglass B. Given, M.D., Ph.D. 45 President, Chief Executive Officer and Director
Lawrence K. Cohen, Ph.D. 44 Chief Operating Officer
Mark N.K. Bagnall 40 Vice President, Finance and Chief Financial Officer
H. Ralph Snodgrass, Ph.D. 47 Vice President, Research and Chief Scientific Officer
</TABLE>
- ----------------------
Douglass B. Given, M.D., Ph.D. has served as President, Chief Executive
Officer and a Director of the Company since June 1994 and served as Executive
Vice President and Chief Operating Officer from January 1993 to June 1994. Prior
to joining the Company, Dr. Given was Vice President at the Schering Plough
Research Institute, a pharmaceutical research facility, from March 1989 to
December 1992. Dr. Given also serves as a Director of the Edison Biotechnology
Center, is on the Dean's Advisory Council of the University of Chicago and is on
the Dean's Advisory Council of The Ohio State University. Dr. Given received an
M.D. and Ph.D. in Biological Sciences from the University of Chicago, performed
his postdoctoral training in Internal Medicine and Infectious Diseases at
Harvard Medical School and Massachusetts General Hospital, and received an
M.B.A. from the Wharton School of Business at the University of Pennsylvania.
Lawrence K. Cohen, Ph.D. has served as Chief Operating Officer of the
Company since November 1997. Prior to joining the Company, Dr. Cohen was Vice
President, Research and Development at Somatix Therapy Corporation ("Somatix"),
from April 1993 to June 1997. From January 1992 to April 1993, he served as
Director, Molecular Biology at Somatix. Previously, Dr. Cohen held R&D
management positions at Somatix and at Applied bioTechnology, Inc. Dr. Cohen
holds a B.A. in Chemistry from Grinnell College, and received M.S. and Ph.D.
degrees in Microbiology from the University of Illinois. He performed
postdoctoral training at the Dana-Farber Cancer Institute and Harvard Medical
School.
Mark N.K. Bagnall has served as Vice President, Finance and Chief
Financial Officer of the Company since August 1996. Prior to joining the
Company, Mr. Bagnall served as Vice President of Finance, Chief Financial
Officer and Secretary of Somatix, from July 1992. Previously, he served as
Treasurer and Secretary of Somatix from January 1991 to July 1992, and of its
predecessor, Hana Biologics, Inc., from January 1990 to January 1991.
Mr. Bagnall is a Certified Public Accountant.
H. Ralph Snodgrass, Ph.D. has served as Chief Scientific Officer of the
Company since May 1996 and has served as Vice President, Research since he
joined the Company in July 1993. Prior to joining the Company, Dr. Snodgrass was
Assistant Professor of Microbiology and Immunology at the University of North
Carolina, Chapel Hill from January 1988 to June 1993. Previously, Dr. Snodgrass
headed a research laboratory for the study of T cell development and stem cell
biology at the Basel Institute for Immunology in Switzerland. Dr. Snodgrass has
held appointments at The Ohio State University as Clinical Associate Professor,
Division of Bone Marrow Transplantation, Department of Internal Medicine since
July 1994, and as Adjunct Associate Professor, Department of Medical
Microbiology and Immunology since July 1995. Dr. Snodgrass received his Ph.D. in
Immunology from the University of Pennsylvania and performed his postdoctoral
training at The Fox Chase Cancer Center, Philadelphia.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock and Warrants are traded on the Nasdaq
National Market under the symbols "PGEN" and "PGENW", respectively. The Common
Stock and Warrants were offered as a Unit that separated immediately upon
issuance at a price of $7 per Unit. The Common Stock and Warrants commenced
trading on August 7, 1997, at $5.375 and $1.625, respectively. Prior to that
date there was no market for the Common Stock or warrants. The high and low
closing prices of the Company's Common Stock as reported on Nasdaq for the
period August 7, 1997 through September 30, 1997 were $5.13 and $4.00,
respectively. The high and low prices of the Company's Warrants as reported on
Nasdaq during that period were $1.50 and $0.75, respectively.
The Company has not paid cash dividends and does not anticipate paying
such dividends in the foreseeable future. There were 46 stockholders of record
on December 15, 1997.
(b) Use of Proceeds
As described above in "Business," the Company has completed the
Offering. The following information relates to the use of proceeds of the
Offering:
(1) Effective Date of Registration Statement and Commission File
Number. The Company's Registration Statement on Form S-1, File No. 333-05369
(the "Registration Statement"), relating to the Offering, became effective on
August 6, 1997.
(2) Offering Date. The initial closing date of the Offering was
August 12, 1997. A subsequent closing in connection with the partial exercise by
the Underwriters of the Offering of their over-allotment option occurred on
September 10, 1997.
(3) Managing Underwriters. Lehman Brothers Inc.
(4) Securities Registered and Proposed Aggregate Offering Price.
The Company registered a total of 3,162,500 Units, each Unit consisting of one
share of Common Stock ("Unit Share") and one Warrant, and 3,162,500 shares of
Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"). The
proposed maximum aggregate offering price was $37,950,000 for the Units and
$56,925,000 for the Warrant Shares.
(5) Securities Sold. A total of 2,875,000 Units were sold
pursuant to the Offering. This consisted of 2,750,000 Units sold on August 12,
1997 upon the initial closing of the Offering, and 125,000 Units sold on
September 10, 1997 pursuant to the partial exercise, at the request of Lehman
Brothers Inc. as managing underwriter, of the over-allotment option granted to
the Underwriters. None of the Warrants had been exercised as of December 15,
1997, and consequently no Warrant Shares had been sold. The Company intends to
maintain the effectiveness of the Registration Statement to the extent required
by the terms of the Warrants with respect to the 2,875,000 Warrant Shares
issuable upon exercise of the Warrants actually sold.
(6) Aggregate Gross Proceeds, Expenses and Aggregate Net
Proceeds. The sale of the 2,875,000 Units generated aggregate gross proceeds of
$20,125,000, consisting of $15,453,125 from the sale of the Unit Shares (at a
price of $5.375 per share) and $4,671,875 from the sale of the Warrants (at a
price of $1.625 per Warrant). The aggregate net proceeds to the Company from the
sale of the 2,875,000 Units were approximately $17,200,000, after deducting
underwriting discounts and commissions of approximately $1,200,000 and estimated
expenses of the Offering of approximately $1,700,000 payable by the Company. The
Company also received $4,500,000 in cash and a $1,000,000 promissory note from
the sale of the Amgen Shares, and approximately
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$67,000 in cash from the sale of 25,000 shares of Common Stock to The Ohio
University Foundation, pursuant to a stock purchase right.
(7) Use of Proceeds. Through September 30, 1997, the Company used
$1,618,000 of the net proceeds of the Offering, together with the cash proceeds
received from the sale of the Amgen Shares and the sale of 25,000 shares of
Common Stock to The Ohio University Foundation, for research and development and
$483,000 of such proceeds for administration. In addition, the Company used a
portion of such net proceeds as follows: (i) approximately $179,000 of such net
proceeds to pay expenses relating to employee benefit and retention plans
relating to the Acquisition; (ii) approximately $430,000 relating to legal,
accounting and other costs incurred in the Acquisition and related S-4
registration statement; (iii) approximately $252,000 of such net proceeds to
facilitate employee relocation, to Mercator's facility in California; and (iv)
approximately $285,000 of such net proceeds for other costs such as benefit
costs, the consolidation of operations, the elimination of duplicate systems and
facilities, and other integration costs. The Company anticipates using the
balance of such net proceeds primarily for research and development, and also
for the expansion or upgrade of facilities for the acquisition of equipment and
for working capital and other general corporate purposes. The Company also may
use such proceeds for other purposes, including the acquisition of technology
rights, products, equipment, businesses or assets of other companies. At
September 30, 1997, the Company had approximately $19,673,000 of such proceeds
remaining, held in cash and cash equivalents.
The amounts actually expended for each purpose, including the allocation
of funding among the Company's research programs, will depend on numerous
factors, including any expansion or acceleration and the breadth of the
Company's research and development programs; the results of research and
development, preclinical studies and clinical trials conducted by the Company or
its collaborative partners or licensees, if any; the acquisition and licensing
of products and technologies or businesses, if any; the Company's ability to
establish and maintain corporate relationships and academic collaborations; the
Company's ability to integrate the operations of Mercator; the Company's ability
to manage growth; competing technological and market developments; the time and
costs involved in filing, prosecuting, defending and enforcing patent and
intellectual property claims; the receipt of licensing or milestone fees from
any current or future collaborative and license arrangements, if established;
the continued funding of governmental research grants; the timing of regulatory
approvals; and other factors.
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
The selected financial data presented below summarizes certain financial
data which has been derived from and should be read in conjunction with the more
detailed financial statements of the Company and the notes thereto which have
been audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon is included elsewhere in the Annual Report on Form 10-K along with said
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Business."
<TABLE>
<CAPTION>
MAY 8,
1992
(DATE OF
INCEPTION)
YEAR ENDED SEPTEMBER 30, TO
----------------------------------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 1,142 $ 1,332 $ 2,821 $ -- $ -- $ 5,295
Operating expenses:
Research and development 5,463 3,873 4,228 4,113 3,116 21,567
Purchased in-process
research and development 21,092 -- -- -- -- 21,092
General and administrative 2,880 1,791 1,116 1,275 1,339 8,667
Nonrecurring expenses 1,507(1) -- -- -- -- 1,507
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 30,942 5,664 5,344 5,388 4,455 52,833
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations (29,800) (4,332) (2,523) (5,388) (4,455) (47,538)
Nonrecurring expense -- (974)(2) -- -- -- (974)
Interest income 255 -- -- -- -- 255
Interest expense (738) (178) (352) (648) (246) (2,183)
----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (30,283) $ (5,484) $ (2,875) $ (6,036) $ (4,701) $ (50,440)
Preferred stock dividend (12,283) (12,283)
----------- ----------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders $ (42,566) $ (5,484) $ (2,875) $ (6,036) $ (4,701) $ (62,723)
=========== =========== =========== =========== =========== ===========
Net loss per share $ (9.82) $ (1.92) $ (1.02) $ (2.12)
=========== =========== =========== ===========
Shares used in computing
net loss per share 4,333,383 2,863,210 2,810,853 2,851,433
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 19,673 $ 22 $ 1,174 $ 10 $ 11
Working capital 13,521 (1,755) (269) (988) (562)
Total assets 23,585 920 2,395 977 979
Long-term obligations 942 4,010 705 11,767 6,150
Deficit accumulated during
development stage (62,724) (20,158) (14,674) (11,799) (5,763)
Total stockholders' equity
(deficit) 15,940 (5,164) (101) (11,791) (5,755)
</TABLE>
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<PAGE> 29
Includes the accounts of Mercator Genetics, Inc. subsequent to the Acquisition
date.
Net loss per share amounts have been computed on the basis described in Note 1
in the Notes to Consolidated Financial Statements.
All shares and per share amounts have been restated to reflect the 1-for-2
reverse stock split which occurred prior to the Offering in August 1997.
The Company has declared no cash dividends.
(1) Charges related to the Acquisition of Mercator Genetics, Inc. and the
relocation of the Company to California.
(2) Charges related to an attempted initial public offering in June 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to the results of
operations and financial condition of Progenitor. This discussion and analysis
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included herein.
In addition to historical information, the following management's
discussion and analysis includes certain forward-looking statements regarding
events and financial trends which may affect the Company's future operating
results and financial position. These forward-looking statements include but are
not limited to statements regarding: future sources of revenue; uncertainty of
product development; uncertainty of additional funding; and liquidity and
capital resources. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The forward-looking statements included herein are also subject to a
number of other risks and uncertainties that could cause the Company's actual
results and financial position to differ materially from those anticipated in
the forward-looking statements. Such risks and uncertainties include, but are
not limited to: uncertainties relating to the technological approaches of the
Company; history of operating losses and anticipation of future losses;
uncertainty of product development; need for additional capital and uncertainty
of additional funding; dependence on collaborators and licensees; intense
competition and rapid technological change; uncertainty of patents and
proprietary rights; management of growth, and risks of acquiring new
technologies; uncertainties related to clinical trials; government regulation
and no assurance of obtaining regulatory approval; dependence on key personnel;
dependence on research collaborators and scientific advisors; control of Company
by, and potential conflicts of interest with, Interneuron; uncertainty of health
care reform measures and third-party reimbursement; risk of product liability;
no assurance of an active trading market and potential volatility of trading
prices; possible delisting from the Nasdaq National Market and market
illiquidity; redemption of Warrants; current prospectus required to exercise the
Warrants; anti-takeover considerations; hazardous and radioactive materials and
environmental matters; and the absence of dividends. Due to the foregoing
factors, it is possible that in some future period the Company's results of
operations may be below the expectations of public market analysts and
investors. These and other risks and uncertainties related to the Company's
business are described in detail below under the caption "Factors That May
Affect Future Financial Results" and elsewhere in this report.
OVERVIEW
A development stage company, Progenitor was incorporated in February
1992 and commenced operations in May 1992. Progenitor has devoted substantially
all of its resources since inception to research and development programs. To
date, all of Progenitor's revenues have resulted from payments from
collaborators and licensees and a grant from the U.S. Department of Commerce's
National Institute of Standards and Technology Advanced Technology Program
("ATP") that was awarded to Progenitor in November 1994. Royalties, payments
from collaborators, license fees, payments under governmental grants and
investment income, in each case, if any, are expected to be the only sources of
revenue for the foreseeable future. Certain payments under collaborative and
license arrangements are contingent upon the Company meeting certain milestones.
Payments under collaborative or licensing arrangements, if any, will be subject
to significant fluctuation in both timing and amount, and therefore the
Company's results of operations for any period may not be comparable to the
results of operations for any other period. The Company has not yet received any
royalties or other revenues from the sale of products or services and does not
expect to receive significant revenues from sales of products for the next
several years, if at all. As of September 30, 1997, Progenitor had total
stockholders' equity of $15.9 million, including an accumulated deficit of $62.7
million.
Significant discovery, research and development efforts will be required
prior to the time when any of the Company's gene discoveries may lead to
therapeutic product candidates or result in products that may be brought to
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<PAGE> 31
the market, if at all. Products, if any, resulting from the Company's research
and development programs are not expected to be commercially available for a
number of years, if at all, even if any are successfully developed and proven
safe and effective. Significant additional research and development efforts and
extensive preclinical studies and clinical trials will be required prior to
submission of any regulatory application for commercial use. See "Factors That
May Affect Future Financial Results--Uncertainty of Product Development."
Interneuron provided the initial funding to Progenitor and had invested
equity and debt financing to Progenitor totaling $26.6 million (which included
the Mercator bridge financing of $3.8 million) prior to the Offering.
Interneuron has no obligation to invest any additional funds in the Company, and
the Company does not expect Interneuron to do so. Progenitor raised an
additional $1.6 million in net proceeds through a private placement of Series B
Preferred Stock in fiscal 1995. In August 1997, the Company completed the
Offering of 2,750,000 units (the "Units"). Each Unit consisted of one share of
the Company's Common Stock, par value $0.001 per share ("Common Stock"), and one
Warrant to purchase one share of Common Stock ("Warrant"). The Units separated
immediately upon issuance. Simultaneously with the closing of the Offering, the
Company sold 1,023,256 shares of Common Stock to Amgen Inc. (the "Amgen Shares")
for $5.375 per share pursuant to a stock purchase agreement, in exchange for
$4.5 million in cash and a $1.0 million promissory note, and 25,000 shares of
Common Stock to The Ohio University Foundation for $2.69 per share for $67,250
in cash pursuant to a stock purchase right. In addition, the Underwriters also
exercised a portion of the over-allotment option, resulting in additional
proceeds of $813,750. See "The Offering." The Company intends to seek additional
funding through public or private equity or debt financing and collaborative and
license arrangements. There can be no assurance, however, that additional
financing will be available when needed, or that, if available, such financing
will be available on terms acceptable to the Company. See "Factors That May
Affect Future Financial Results--Need For Additional Capital; Uncertainty of
Additional Funding."
THE ACQUISITION
On February 14, 1997, Progenitor entered into the Acquisition Agreement
with Mercator. The Acquisition was completed in August 1997, simultaneously with
the closing of the Offering. Pursuant to the Acquisition, Progenitor issued
3,442,814 shares of Common Stock, options to acquire 592,914 shares of Common
Stock, and warrants to purchase 56,737 shares of Common Stock with a weighted
average exercise price of $2.94. In addition to the issuance of Common Stock,
options, and warrants, the Company also assumed liabilities of Mercator totaling
$2,567,549 and funded a bridge financing prior to the Acquisition totaling
$3,769,519 including accrued interest.
THE OFFERING
In August 1997, the Company completed the Offering. The initial net
proceeds to the Company of the Offering were approximately $16.4 million. In
addition, in September 1997, the Underwriters of the Offering exercised a
portion of the over-allotment option granted to them in connection with the
Offering and purchased an additional 125,000 Units, resulting in net proceeds to
the Company of $813,750. The Company intends to use the net proceeds of the
Offering, together with the $4.5 million in cash proceeds received from sale of
the Amgen Shares and the proceeds of $67,250 from the sale of 25,000 shares of
Common Stock to The Ohio University Foundation, primarily for research and
development. The Company anticipates using the balance of such net proceeds for
the expansion or upgrade of facilities, acquisition of equipment and for working
capital and other general corporate purposes. The Company also may use such
proceeds for other purposes, including the acquisition of technology rights,
products, equipment, businesses or assets of other companies. As of September
30, 1997, the Company used approximately $2.1 million of such net proceeds for
research and development, and $646,000 for administration. In addition, the
Company used a portion of such net proceeds as follows: (i) approximately
$179,000 to pay expenses relating to employee benefit and retention plans
relating to the Acquisition; (ii) approximately $131,000 of such net proceeds to
facilitate employee relocation to Mercator's facility in California; and (iii)
approximately $285,000 for other costs such as benefit costs, the consolidation
of operations, the elimination of duplicate systems and facilities, and other
integration costs.
The Company's Series A and Series B Preferred Stock was automatically
converted into Common Stock upon the closing of the Offering into a total of
3,074,767 shares of Common Stock. The terms of the Series A and
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<PAGE> 32
Series B Preferred Stock provided that, upon such an offering, the conversion
ratio would be adjusted so that the holders would receive a minimum return of
35% annually, commencing July 7, 1995.
Interneuron relinquished its right to seven minimum return adjustments
on its shares of Series A Preferred Stock, of which it was the sole holder, in
exchange for an option agreement dated as of July 2, 1997 related to the
Company's Del-1 protein discovery ("Del-1"). As a result of the option
agreement, Interneuron relinquished its right to receive minimum return
adjustments on its Series A Preferred Stock through April 7, 1997.
See "Interneuron Option Agreement."
Interneuron also agreed to recapitalize a portion of its investment in
the Company such that (i) Interneuron relinquished the remaining minimum return
adjustments to the conversion ratio of the Company's Series A Preferred Stock
totaling $9.9 million; and (ii) Interneuron contributed to the Company's capital
all outstanding balances of intercompany loans from Interneuron to Progenitor
totaling $13.9 million.
In addition to these agreements, Interneuron purchased 500,000 Units in
the Offering. As a result, Interneuron beneficially owns approximately 37% of
the Company's Common Stock. Accordingly, Interneuron is and may continue to be
the Company's largest stockholder. See "Factors That May Affect Future Financial
Results--Control of Company by, and Potential Conflicts of Interest with,
Interneuron."
Upon the closing of the Offering, the minimum return adjustments on the
Series A and Series B Preferred Stock were treated for accounting purposes as a
dividend to the preferred holders in the form of 435,121 additional shares of
Common Stock to be issued, and 1,850,163 shares of Common Stock the issuance of
which was relinquished or contributed to the capital of the Company by
Interneuron. In accordance with generally accepted accounting principles, this
dividend increased the net loss attributable to holders of Common Stock by
approximately $12.3 million for the year ended September 30, 1997.
EFFECTS OF ACQUISITION AND OFFERING
In connection with the Acquisition, the Company incurred nonrecurring
charges in the quarter ended September 30, 1997, which totaled $22.6 million,
including the write-off of $21.1 million in costs related to the purchase of
in-process research and development, and $1.5 million for employee relocation,
severance and bonus payments, and other payments related to the consolidation of
Progenitor and Mercator. The $21.1 million write-off of in-process research and
development represents the allocation of the Mercator purchase price to
technology acquired, and was expensed in the period acquired pursuant to
accounting pronouncements for research and development expenditures.
INTERNEURON OPTION AGREEMENT
Interneuron relinquished its right to seven minimum return adjustments
on its shares of Series A preferred stock, of which it was the sole holder, in
exchange for an option agreement dated as of July 2, 1997 related to Del-1.
Pursuant to this option agreement, Interneuron received a right of first refusal
to acquire an exclusive, worldwide license to manufacture, use and sell certain
technology related to Del-1 on terms to be negotiated. In the event that
Progenitor grants such rights to a third party, the Company must share fees,
milestone payments and royalties with Interneuron. Should the Company develop
and sell the technology independently, the Company will pay Interneuron
royalties on net sales. Thus, should the Company license or sell the technology
to a third party, a portion of any related royalty payments will be paid to
Interneuron. Because the amount of revenue to be shared or royalties to be paid
depends upon the future development and success of the technology and the
structure of any future sale or license agreement, it is not currently possible
to estimate the future effect of the option on the Company. The Company is not
required to pursue the development of Del-1 and does not expect the payments to
be made to Interneuron if Del-1 is successfully developed to be material to its
total cost of developing Del-1. In addition, Del-1 is only one of a number of
discoveries generated by the Company's genomics system.
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RESULTS OF OPERATIONS
REVENUES
Revenues totaling $1.1 million in fiscal 1997 included $500,000
resulting from a license agreement with Amgen, and $641,000 related to the ATP
grant. Revenues in fiscal 1996 totaled $1.3 million as a result of a $500,000
milestone payment received from Chiron in January 1996 and revenues recognized
under the ATP grant totaling $751,000. Revenues of $2.8 million in fiscal 1995
were primarily attributable to an initial cash payment of $2.5 million under
Progenitor's collaboration agreement with Chiron and recognition of $260,000 of
revenues related to a payment under Progenitor's ATP grant.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses, excluding the write-off of
acquired in-process R&D, increased in fiscal 1997 to $5.5 million from $3.9
million in fiscal 1996. The increase was primarily due to additional expenses
resulting from increased staffing and research activity acquired from Mercator
in the fourth quarter, and $386,000 recorded as R&D expense for the issuance of
common stock to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the Offering. R&D expenses decreased from $4.2
million in fiscal 1995 to $3.9 million in fiscal 1996, largely attributable to a
$750,000 reimbursement in fiscal 1995 to Chiron for certain start-up
manufacturing costs related to the Chiron collaboration. Other research and
development expenses consisted primarily of salaries and consulting fees, legal
fees, sponsored research projects, license fees, occupancy fees and expenditures
for laboratory supplies and animal facilities. The Company expects R&D expenses
to increase in fiscal 1998 due to higher expenses related to the Acquisition,
which will be realized for a full fiscal year. The Company expects research and
development expenses to increase in the future, depending on the availability of
capital.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses increased to $2.9 million in
fiscal 1997 from $1.8 million in fiscal 1996 primarily due to increased
headcount and payments made in connection with the achievement of certain
long-term performance milestones. Additionally, in the fourth quarter of fiscal
1997, the Company incurred additional G&A expenses as a result of the
Acquisition. In fiscal 1996, G&A expenses increased from $1.1 million in fiscal
1995 due to higher headcount and a generally higher level of operating
activities. The Company expects general and administrative expenses to increase
in the future, depending on the availability of capital.
NONRECURRING EXPENSES, OPERATING
In connection with the Acquisition, Progenitor consolidated its
operations in California in fiscal 1997 and incurred $1.5 million in costs,
including costs of $839,000 to facilitate employee relocation and to pay
expenses relating to employee benefit and retention plans, costs of $350,000
associated with the consolidation of operations and the elimination of duplicate
systems, and costs of $318,000 facilities and other integration costs.
INTEREST INCOME
Interest income of $255,000 in fiscal 1997 is primarily attributable to
interest on the Mercator bridge financing, and also to interest earned on the
funds received as a result of the Offering.
INTEREST EXPENSE
Interest expense increased to $738,000 in fiscal 1997 attributable to
the resumption of debt funding provided by Interneuron in March 1996 due to the
depletion of cash received from Chiron in fiscal 1995. The increase is also
attributable to interest expense on the bridge loan provided by Interneuron
which the Company used to fund Mercator's interim working capital needs.
Immediately prior to the closing of the Offering, Interneuron recapitalized a
portion of its investment in the Company by making a contribution to the
Company's capital of the
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<PAGE> 34
entire balance of the Interneuron bridge loan and the debt funding. Interest
expense decreased from fiscal 1995 to fiscal 1996 due to a lower average debt
balance resulting from the fiscal 1995 conversion into equity of $11.5 million
of Progenitor's debt payable to Interneuron. The Company expects to continue
financing equipment purchases through sale-leaseback arrangements, if favorable
terms are available, which could result in an increase in interest expense.
NET LOSS
The net loss increased to $30.3 million in fiscal 1997 due to the
write-off of purchased R&D in connection with the Acquisition, higher R&D and
G&A expenses as discussed above, and nonrecurring operating expenses associated
with the Acquisition and the Company's relocation to California. The net loss
increased from $2.9 million in fiscal 1995 to $5.5 million in fiscal 1996 due to
lower revenues and increased costs associated with the nonrecurring,
non-operating expenses related to the initial filing of the Registration
Statement.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997 Financial Accounting Standards No. 128 (FAS 128), "Earnings per
Share," was issued and is effective for financial statements issued for periods
ending after December 15, 1997. The Company will comply with the requirements of
FAS 128 for the quarter ended December 31, 1997. The future adoption of FAS 128
is not expected to have a material effect on the Company's reported earnings per
share.
In 1997 Financial Accounting Standards No. 130 (FAS 130), "Reporting
Comprehensive Income," was issued and is effective for fiscal years commencing
after December 15, 1997. The Company will comply with the requirements of FAS
130 in fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash balances of $19.7
million. The Company expects negative cash flow from operations to continue for
the foreseeable future. The Company will require substantial additional funds to
continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in collaborative or license agreements, if any, and expand
administrative capabilities. The Company estimates that, at its planned rate of
spending, its existing cash and cash equivalents will be sufficient to meet its
funding requirements for at least the next fourteen months. In order to achieve
this result, however, the Company will need to closely manage the rate of
expenditures for all of its research programs. Although the Company anticipates
that its existing cash balances will be sufficient to meet its funding
requirements for its primary research programs for at least the next fourteen
months, the Company may be required to curtail the expansion of, or to reduce
the level of expenditures for, certain of its other research programs, in the
future or to seek corporate collaborations with respect to such programs at an
earlier stage than would be required if the Company had greater financial
resources or to obtain other funding. There can be no assurance that any such
corporate collaboration will be obtained on terms favorable to the Company or at
all or that any such funding will be available on terms favorable to the Company
or at all. In addition, there can be no assurance that the Company's assumptions
regarding its future levels of expenditures and operating losses will prove
accurate. The Company's future funding requirements will depend on many factors,
including any expansion or acceleration of the Company's research and
development programs; the results of research and development, preclinical
studies and clinical trials conducted by the Company or its collaborative
partners or licensees, if any; the acquisition and licensing of products and
technologies or businesses, if any; the Company's ability to establish and
maintain corporate relationships and academic collaborations; the Company's
ability to manage growth; competing technological and market developments; the
time and costs involved in filing, prosecuting, defending and enforcing patent
and intellectual property claims; the receipt of licensing or milestone fees
from any current or future collaborative and licensing arrangements, if
established; the continued funding of governmental research grants; the timing
of regulatory approvals, if any; and other factors. To the extent undertaken by
the Company, the time and costs involved in conducting preclinical studies and
clinical trials, seeking regulatory approvals, and scaling-up manufacturing and
commercialization activities also would increase the Company's funding
requirements.
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The Company will need to raise substantial additional capital to fund
operations. Prior to the Offering, Interneuron funded substantially all of
Progenitor's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and collaborative
arrangements. There can be no assurance that additional financing will be
available when needed, or that, if available, such financing will be available
on terms acceptable to the Company. If additional funds are raised by issuing
equity securities, dilution to existing stockholders will result. In addition,
in the event that additional funds are obtained through collaborative or license
arrangements, such arrangements may require the Company to relinquish rights to
certain of its technologies or potential products that it would otherwise seek
to develop or commercialize itself. See "Factors That May Affect Future
Financial Results--Need for Additional Capital; Uncertainty of Additional
Funding."
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
Uncertainties Relating to the Technological Approaches of the Company.
To date, the Company has not developed or commercialized any products.
There can be no assurance that the Company's genomics approaches will enable it
to discover genes with functions relevant to the diagnosis or treatment of
diseases. There is limited scientific understanding relating to the role of
genes in diseases, and relatively few products based on genetic discoveries have
been developed and commercialized to date. Accordingly, even if the Company is
successful in identifying genes associated with specific diseases, there can be
no assurance that the Company will continue to be successful in marketing its
discoveries to biopharmaceutical firms for use in the development of therapeutic
and diagnostic products or that any such resulting products will be
commercialized successfully.
The development of products based on the Company's discoveries also will
be subject to the risks of failure inherent in the development of products based
on new technologies. These risks include the possibility that any such products
will be found to be ineffective or toxic, or otherwise fail to receive necessary
regulatory approvals; that any such products will be difficult to manufacture on
a commercial scale or will be uneconomical to market; that proprietary rights of
third parties will preclude the Company or its licensees and collaborators from
marketing any such products; or that third parties will market superior or
equivalent products. As a result, there can be no assurance that the Company's
research and development activities or those of its licensees and collaborators
will result in any commercially viable products. See "--Uncertainty of Patents
and Proprietary Rights."
Genomics, biotechnology, developmental biology, disease genetics and
pharmaceutical technologies have undergone and are expected to continue to
undergo rapid and significant change. The Company's future success will depend
in large part on its ability to maintain a competitive position with respect to
these technologies. Rapid technological developments by the Company or others
may result in the Company's technologies becoming obsolete before the Company
recovers any expenses it incurs in connection with its related development
programs. See "-Intense Competition; Rapid Technological Change."
History of Operating Losses; Anticipation of Future Losses.
Progenitor is a development stage company that commenced operations in
May 1992. As of September 30, 1997, Progenitor had an accumulated deficit of
approximately $62.7 million and is continuing to incur losses. In connection
with the Acquisition, the Company incurred several nonrecurring charges in the
quarter and fiscal year ending September 30, 1997 which totaled $22.6 million,
including the write-off of costs related to the purchase of in-process research
and development, severance, employee retention and relocation, other employee
benefit costs, the consolidation of operations, the elimination of duplicate
systems and facilities, and other integration costs. There can be no assurance
that the Company will not incur additional charges in subsequent periods to
reflect other costs associated with the Acquisition or from the integration of
operations after the Acquisition. Neither the Company nor any of its
collaborative partners or licensees has yet developed products that have
generated any revenues to the Company or entered clinical trials that would lead
to revenues to the Company if successful. To date, all of the Company's revenues
have resulted from payments from collaborative and license agreements and a
development grant from a governmental agency. The Company expects to incur
substantial additional losses over the next several years as it expands its
research and development activities. Payments from collaborators and licensees,
payments under governmental grants and investment income are expected to be the
only sources of revenue for the foreseeable future. The Company has not
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yet generated any revenues from the achievement of milestones under its
corporate agreements. Substantial levels of royalties or other revenues from
commercial sales of products are not expected for a number of years. To achieve
profitable operations, the Company, alone or with others, must successfully
discover and functionally characterize medically relevant genes and thereafter
use these discoveries to develop products, conduct preclinical studies and
clinical trials, obtain required regulatory approvals and successfully
manufacture, introduce and market such products. There can be no assurance that
any of these requirements will be met. The time required to reach or sustain
profitability is highly uncertain, and there can be no assurance that the
Company will be able to achieve profitability on a sustained basis, if at all.
Moreover, if profitability is achieved, the level of profitability cannot be
predicted and may vary significantly from quarter to quarter.
Uncertainty of Product Development.
Significant discovery, research and development efforts will be required
prior to the time when any additional gene discoveries may lead to product
candidates or result in products that may be brought to the market. Therapeutics
products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for a number of years. Significant
additional research and development efforts and extensive preclinical studies
and clinical trials will be required prior to submission of any regulatory
application for commercial use. There can be no assurance that the Company or
any collaborator or licensee will be permitted to undertake clinical trials of
any potential products, if developed, that sufficient numbers of patients can be
enrolled for such trials, or that such clinical trials will demonstrate that the
products tested are safe and efficacious. Even if clinical trials are
successful, there can be no assurance that the Company or any collaborator or
licensee will obtain regulatory approval for any product, that an approved
product can be produced and distributed in commercial quantities at reasonable
cost or gain acceptance for use by physicians and other health care providers,
or that any potential products will be marketed successfully at prices that
would permit the Company to operate profitably. The failure of any of these
events to occur could have a material adverse effect on the Company's business,
financial condition and results of operations.
Need for Additional Capital; Uncertainty of Additional Funding.
The Company expects negative cash flow from operations to continue for
the foreseeable future. The Company will require substantial additional funds to
continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in corporate agreements, if any, and expand administrative
capabilities. The Company estimates that at its planned rate of spending,
existing cash and cash equivalents will be sufficient to fund operations for at
least the next fourteen months. In order to achieve this result, however, the
Company will need to closely manage the rate of expenditures for all of its
research programs. Although the Company anticipates that its existing cash
balances will be sufficient to meet its funding requirements for its primary
research programs for at least the next fourteen months, the Company will be
required to curtail the expansion of, or to reduce the level of expenditures
for, certain of its other research programs, or to seek corporate collaborations
with respect to such programs at an earlier stage than would be required if the
Company had greater financial resources or to obtain other funding. There can be
no assurance that any such corporate collaborations will be obtained on terms
favorable to the Company or at all or that any such funding will be available on
terms favorable to the Company or at all.
There can be no assurance that the Company's assumptions regarding its
future levels of expenditures and operating losses will prove accurate. The
Company's future funding requirements will depend on many factors, including any
expansion or acceleration and the breadth of the Company's research and
development programs; the results of research and development, preclinical
studies and clinical trials conducted by the Company or its collaborative
partners or licensees, if any; the acquisition and licensing of products and
technologies or businesses, if any; the Company's ability to establish and
maintain corporate relationships and academic collaborations; the Company's
ability to manage growth; competing technological and market developments; the
time and costs involved in filing, prosecuting, defending and enforcing patent
and intellectual property claims; the receipt of licensing or milestone fees
from any current or future collaborative and license arrangements, if
established; the continued funding of governmental research grants; the timing
of regulatory approvals; and other factors. To the extent undertaken by the
Company, the time and costs involved in conducting preclinical studies and
clinical trials, seeking regulatory approvals, and scaling-up manufacturing and
commercialization activities also would increase the Company's funding
requirements.
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The Company will need to raise substantial additional capital to fund
future operations. Prior to the Offering, Interneuron funded substantially all
of the Company's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and from collaborators and
licensees. There can be no assurance that additional financing will be available
when needed, or that, if available, such financing will be available on terms
acceptable to the Company. If additional funds are raised by issuing equity
securities, dilution to existing stockholders will result. In addition, in the
event that additional funds are obtained through arrangements with collaborators
or licensees, such arrangements may require the Company to relinquish rights to
certain of its technologies or potential products that it would otherwise seek
to develop or commercialize itself. If funding is insufficient at any time in
the future, the Company may be required to delay, scale back or eliminate some
or all of its research and development programs or cease operations.
Dependence on Collaborators and Licensees.
The Company's strategy for development and commercialization of drugs
and other products from its discoveries depends upon the establishment of
corporate relationships. The Company expects to rely on these relationships in
order to research and develop potential products, conduct preclinical studies
and clinical trials, obtain regulatory approvals, and manufacture and market any
resulting products. The Company has entered into agreements with SmithKline
Beecham Clinical Laboratory, Amgen, Chiron and Novo Nordisk. The Company's
revenues will be dependent on the success of the products developed through
these and future corporate relationships. The failure of the Company's
collaborators and licensees to develop, obtain regulatory approval for, and
market products incorporating the Company's discoveries would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that any collaborators and licensees will
commit sufficient development resources, technology, regulatory expertise,
manufacturing, marketing and other resources towards developing, promoting and
commercializing products incorporating the Company's discoveries. Further,
competitive conflicts may arise among these third parties that could prevent
them from working cooperatively with the Company. The amount and timing of
resources devoted to these activities by such parties could depend on the
achievement of milestones by the Company and generally will be controlled by
such parties. In addition, the Company's corporate agreements generally provide
the Company's collaborators and licensees with the right to terminate the
agreement in part or in full under certain circumstances. Any such termination
would substantially reduce the likelihood that the applicable product candidate
or candidates would be developed, would obtain regulatory approvals and would be
manufactured and successfully commercialized, and any such termination could,
therefore, have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's milestone payments or
royalties from sales of products by collaborators or licensees, if any, may be
less than the revenues the Company could have generated had it commercialized,
and marketed products itself. There can be no assurance that the Company will be
successful in establishing additional or maintaining existing collaborative or
licensing arrangements, that any collaborators or licensees will be successful
in developing and commercializing products or that the Company will receive
milestone payments or generate revenues from royalties sufficient to offset the
Company's significant investment in research and development and other costs. If
the Company chooses in the future to engage directly in the development,
manufacturing and marketing of certain products, it will require substantial
additional funds, personnel and production and other facilities. There can be no
assurance that any of these resources will be available to the Company on
acceptable terms, if at all. See "--Need for Additional Capital; Uncertainty of
Additional Funding."
Intense Competition; Rapid Technological Change.
Research in the field of genomics is highly competitive. Competitors of
the Company in the genomics area include, among others, public companies such as
Gene Logic, Inc., Genome Therapeutics Corp., Human Genome Sciences, Inc., Incyte
Pharmaceuticals, Inc., Microcide Pharmaceuticals, Inc., Millennium
Pharmaceuticals, Inc. ("Millennium"), Myriad Genetics, Inc., and Sequana
Therapeutics, Inc., as well as private companies and major pharmaceutical
companies and universities and other research institutions, including those
receiving funding from the federally funded Human Genome Project. A number of
entities are attempting to rapidly identify and patent randomly-sequenced genes
and gene fragments. In addition, certain other entities are pursuing a gene
identification, characterization and product development strategy based on gene
mapping. The Company's competitors may discover, characterize or develop
important genes in advance of the Company, which could have a material adverse
effect on any related Company discovery program.
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The Company expects competition to intensify in genomics research as technical
advances in the field are made and become more widely known.
The Company is subject to significant competition from organizations
that are pursuing the same or similar technologies as those which constitute the
Company's discovery platforms, and from organizations that are pursuing
pharmaceutical or other products that are or may be competitive with the
Company's or its collaborators' or licensees' potential products. Many of the
organizations competing with the Company have greater capital resources, larger
research and development staffs and facilities, greater experience in drug
discovery and development, the regulatory approval process and pharmaceutical
product manufacturing, and greater marketing capabilities than the Company.
The Company is and will continue to be reliant on its collaborators and
licensees for support of its programs, including support for any preclinical and
clinical development, manufacturing and marketing to be undertaken now or in the
future. The Company's present and future collaborators and licensees are now
conducting, or are expected to conduct, multiple product development efforts
within each disease or technology area that is the subject of the relationship
with the Company. Any product candidate or technology of the Company may
therefore be subject to internal competition with a potential product under
development or a technology platform under evaluation by a collaborator or
licensee. See "--Dependence on Collaborators and Licensees."
Uncertainty of Patents and Proprietary Rights.
The Company's success will depend to a significant extent on its ability
to obtain and enforce patents, maintain trade secret protection and operate
without infringing on the proprietary rights of third parties. Because the
patent positions of biotechnology and pharmaceutical companies can be highly
uncertain and frequently involve complex legal and factual questions, the
breadth of claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted with certainty. Commercialization of
pharmaceutical products can be subject to substantial delays as a result of the
time required for product development, testing and regulatory approval. The
value of any patents issued or licensed to the Company may depend upon the
remaining term of patent protection available at the time any products covered
by such patents are commercialized.
The Company actively pursues a policy of seeking patent protection for a
number of its proprietary products and technologies. Progenitor has licensed
from Ohio University two issued U.S. patents and pending U.S. patent
applications relating to stem cell technology and to gene delivery technology,
along with certain corresponding foreign patent applications and one issued
foreign patent. Progenitor has received one issued U.S. patent relating to
nucleic acid molecules encoding the B219 leptin receptor. In addition,
Progenitor presently has seven pending U.S. patent applications which disclose
certain leptin receptors (including various isoforms of the leptin receptor),
nucleic acid molecules encoding the receptors, genetically-engineered cells and
antibodies to the receptors for which the USPTO has issued two notices of
allowance. The Company believes that there may be significant litigation
regarding patent and other intellectual property rights relating to leptin and
leptin receptors. The Company is aware that Millennium has filed at least one
patent application relating to a receptor for leptin and its use in obesity
applications, and has licensed to Hoffmann-La Roche Inc. rights to develop
certain therapeutics for obesity using Millennium's discovery of a leptin
receptor.
In June 1996, Millennium filed a "Protest" in the USPTO in connection
with the Progenitor applications relating to leptin receptors. A Protest is a
procedure available for use by a third party to provide the patent examiner who
is reviewing the involved application or applications with what the third party
believes to be relevant information. The Protest procedure does not afford any
right to the third party to participate in the patent prosecution process beyond
the filing of its written protest. Millennium's Protest primarily argued that
any claims allowed to Progenitor should not be so broad as to cover Millennium's
own leptin receptor. Notwithstanding the Protest, the USPTO recently issued to
the Company one U.S. patent and two notices of allowance for claims relating to
nucleic acid molecules encoding certain leptin receptors.
There can be no assurance that Millennium's patent application, or any
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses, including obesity. There can be no assurance
that the invention by
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Millennium will be accorded an invention date later than the Company's invention
date, or that any patent issued to the Company would be broad enough to cover
leptin receptors of Millennium or others. The Company's failure to obtain a
patent that covers the leptin receptors of Millennium or others, or the issuance
of a patent to a third party covering a leptin receptor, the leptin protein or
other ligands, or any of their respective uses, including obesity, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that there may be significant litigation regarding
patent and other intellectual property rights relating to leptin and leptin
receptors. The Company is aware that Millennium has filed a patent application
relating to a receptor for leptin and its use in obesity applications, and has
licensed to Hoffmann-La Roche Inc. rights to develop certain therapeutics for
obesity using Millennium's discovery of a leptin receptor. There can be no
assurance that Millennium's patent application, or any additional patent
applications filed by Millennium or others, will not result in issued patents
covering a leptin receptor, the leptin protein or other ligands, or any of their
respective, uses, including obesity. There can be no assurance that the
invention by Millennium will be accorded an invention date later than
Progenitor's invention date, or that any patent issued to Progenitor would be
broad enough to cover leptin receptors of Millennium or others. Progenitor's
failure to obtain a patent that covers the leptin receptors of Millennium or
others, or the issuance of a patent to a third party covering a leptin receptor,
the leptin protein or other ligands, or any of their respective uses, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company is aware of a patent issued to Barry E. Rothenberg, related
to a method to identify hemochromatosis. The Company believes that the patent
may have been licensed to a private biotechnology company. The Rothenberg patent
does not include claims related to gene structure or the specific mutations that
give rise to hemochromatosis. However, there can be no assurance that Progenitor
and its licensee, SmithKline Clinical Labs, would be able to market an HH test
without obtaining a license to the Rothenberg patent. If such a license is
required, there can be no assurance that it may be obtained on commercially
reasonable terms.
A number of other groups are attempting to identify partial gene
sequences and full-length genes, the functions of which have not been
characterized. The public availability of partial gene sequence information
before the Company applies for patent protection on a corresponding full-length
gene could adversely affect the Company's ability to obtain patent protection
with respect to such a gene. To the extent any patents issue to other parties on
such partial or full-length genes, and as other patents issue with the expansion
of the biotechnology industry, the risk increases that the potential products
and processes of the Company or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved,
particularly in regard to human therapeutic uses. Substantial periods of time
pass before the USPTO responds to patent applications. In addition, the coverage
claimed in a patent application can be significantly reduced before a patent is
issued. Consequently, the Company does not know whether any of its pending or
future patent applications will result in the issuance of patents or, if any
patents are issued, whether the patents will be subjected to further proceedings
limiting their scope, and whether they will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Because patent applications in the U.S. are maintained in secrecy until patents
issue and patent applications in certain other countries generally are not
published until more than 18 months after they are filed, and since publication
of discoveries in scientific or patent literature often lags behind actual
discoveries, the Company cannot be certain that it or any licenser was the first
creator of inventions covered by pending patent applications or that it or such
licenser was the first to file patent applications on such inventions.
There can be no assurance that any patents issued to the Company would
not be found invalid or unenforceable by a court or that such patents would
cover products or technologies of the Company's competitors. Competitors or
potential competitors may have filed patent applications or received patents,
and may obtain additional patents and proprietary rights relating to compounds
or processes competitive with those of the Company. To protect its proprietary
rights, the Company may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to the Company. Moreover, even if the Company's patents issue,
there can be no assurance that they will provide sufficient proprietary
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protection or will not be later limited, circumvented or invalidated.
Accordingly, there can be no assurance that the Company will develop proprietary
technologies that are patentable, that the Company's patent applications will
result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology or products, nor can
there be any assurance that the Company's patents will not be held invalid by a
court of competent jurisdiction.
In addition to patent protection, the Company also relies to a
significant extent upon trade secret protection for its confidential and
proprietary information, including many of the Company's key discovery
technologies. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology. To protect its trade secrets, Progenitor has required its employees,
consultants, scientific advisors and parties to collaboration and licensing
agreements to execute confidentiality agreements upon the commencement of
employment, the consulting relationship or the collaboration or licensing
arrangement, as the case may be, with Progenitor. In the case of employees, the
agreements also provide that all inventions resulting from work performed by
them while employed by Progenitor will be the exclusive property of Progenitor.
Mercator did not enter into such agreements with all of its former employees and
consultants. The Company will continue to require its employees, consultants,
scientific advisors and collaborators and licensees to execute confidentiality
agreements and invention assignment agreements (in the case of its employees)
upon the commencement of employment, the consulting relationship or the
collaboration or license with the Company. There can be no assurance, however,
that these agreements will provide meaningful protection of the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information, that the Company can meaningfully protect its rights in such
unpatented proprietary technology through other means, that any obligation to
maintain the confidentiality of such proprietary technology will not be breached
by employees, consultants, advisors, collaborators, licensees or others, that
former Mercator employees or consultants will not disclose proprietary
information of Mercator without being in breach of any confidentiality
restriction, or that others will not independently develop the same or
substantially equivalent technology. The loss of trade secret protection of any
of the Company's key discovery technologies would materially and adversely
affect the Company's competitive position and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Finally, disputes may arise as to the ownership of proprietary rights to the
extent that outside collaborators, licensees or consultants apply technological
information developed independently by them or others to Company projects or
apply Company technology to other projects and, if adversely determined, such
disputes could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company may incur substantial costs if it is required to defend
itself in patent suits brought by third parties or if the Company initiates such
a suit to enforce the Company's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
the Company or its collaborators or licensees, claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its collaborators or licensees to obtain a license or
licenses in order to continue to manufacture or market the affected products and
processes or require the Company or its collaborators or licensees to cease
doing so. There can be no assurance that the Company or its collaborators or
licensees would prevail in any such action or that any license required under
any such patents would be made available on commercially acceptable terms, if at
all. Any adverse outcome of such litigation could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, if the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources. The
Company is unable to predict how courts will resolve any future issues relating
to the validity, scope or enforceability of its patents should they be
challenged.
It is uncertain whether any third-party patents will require the Company
to alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations.
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Management of Growth; Risk of Acquiring New Technologies.
One of the Company's strategies is to maintain its technological
competitiveness by accessing new equipment and advanced technologies. The
expansion of the Company's scientific infrastructure may involve the retention
of additional personnel, the establishment of new or expanded facilities and the
acquisition of technology rights, products, equipment, businesses or assets of
other companies. There can be no assurance that the Company's management
personnel, systems, procedures and controls will be adequate to support the
expansion of the Company's operations. The acquisition of additional personnel,
technology rights, products, equipment, businesses or assets of other companies,
as well as the entry into new areas of scientific research, will require the
dedication of management resources in order to achieve the strategic objectives
associated with such growth and expansion. There can be no assurance that the
Company will be able to manage successfully the growth and expansion of its
operations. Failure of the Company to manage its growth, or any specific
acquisition of additional capabilities, could have a material adverse effect on
the Company's business, financial condition and results of operations.
Uncertainties Related to Clinical Trials.
Before seeking regulatory approval for the commercial sale of
therapeutic products that may be developed incorporating the Company's
discoveries, the Company or its collaborators or licensees will be required to
demonstrate through preclinical studies and clinical trials that such products
are safe and effective for use in the target indications. To date, no product
candidates incorporating the Company's discoveries have entered clinical trials.
The results from preclinical studies and early clinical trials may not be
indicative of results that will be obtained in large-scale testing, and there
can be no assurance that any clinical trials, if undertaken, will demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals or
will result in marketable products. Clinical trials also are often conducted
with patients having advanced stages of disease. During the course of treatment,
these patients can die or suffer other adverse medical effects for reasons that
may not be related to the product candidate being tested but which can
nevertheless affect clinical trial results. A number of companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after achieving promising results in earlier trials. If products
developed by the Company or its collaborators or licensees are not shown to be
safe and effective in clinical trials, the resulting delays in developing other
product candidates and conducting related preclinical studies and clinical
trials, as well as the need for additional financing, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Government Regulation; No Assurance of Regulatory Approval.
Prior to marketing, new drugs developed by the Company or its
collaborators or licensees must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process, which
includes preclinical studies and clinical trials and also may include
post-marketing studies of each product candidate to establish its safety and
efficacy, usually takes many years and requires the use of substantial
resources. Preclinical studies include laboratory evaluations and will require
animal tests conducted in accordance with the United States Food and Drug
Administration's ("FDA") current Good Laboratory Practices ("cGLP") regulations
to assess the product's potential safety and efficacy. Data obtained from
preclinical studies and clinical trials are susceptible of varying
interpretations that could delay, limit or prevent regulatory approval. Delays
or rejections also may be encountered based upon changes in FDA policies for
drug or biologic approval during the period of product development and FDA
regulatory review of each new drug application ("NDA") submitted in the case of
new pharmaceutical agents, or product license application ("PLA") in the case of
biologics. Product development of new pharmaceuticals is highly uncertain, and
unanticipated developments, clinical or regulatory delays, unexpected adverse
side effects or inadequate therapeutic efficacy could slow or prevent the
product development efforts of the Company and its collaborators or licensees,
and have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that regulatory
approval will be obtained for any drugs or other products developed by the
Company or its collaborators or licensees. Furthermore, regulatory approval may
entail limitations on the indicated use of a drug or other product. Because
certain of the products likely to result from the Company's discovery programs
involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities other than the FDA and, as a
result, regulatory approvals may be obtained more slowly than for products using
conventional technologies. Under current guidelines, proposals to conduct
clinical research involving gene therapy at institutions supported by the
National Institutes of Health ("NIH") must be submitted to the FDA and the NIH,
and may be subject to approval by the Recombinant DNA Advisory Committee ("RAC")
and the NIH. Furthermore, gene therapies are relatively new technologies that
have not been tested extensively in humans. The regulatory
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requirements governing these products and related clinical procedures for their
use are uncertain and subject to change.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of the Company or its collaborators or licensees
conform to the FDA's current good manufacturing practice ("cGMP") regulations,
which must be followed at all times. In complying with cGMP requirements,
manufacturers must expend time, money and effort on a continuing basis in
production, record keeping and quality control. Manufacturing establishments,
both domestic and foreign, are subject to inspection by or under the authority
of the FDA and by other federal, state and local agencies. Failure to pass such
inspections may subject the manufacturer to possible FDA actions such as the
suspension of manufacturing, seizure of the product, withdrawal of approval or
other regulatory sanctions. The FDA also may require the manufacturer to recall
a product from the market.
Discovery of previously unknown problems with a product may have adverse
effects on the Company's business, including withdrawal of the product from the
market. Violations of regulatory requirements at any stage, including during
preclinical studies and clinical trials, the approval process or post-approval,
may result in various adverse consequences to the Company, including the FDA's
delay in approval of or refusal to approve a product, withdrawal of an approved
product from the market or the imposition of criminal penalties against the
manufacturer and NDA or PLA holder. The Company has not submitted an
investigational new drug ("IND") application for any product candidate, and no
product candidate has been approved for commercialization in the U.S. or
elsewhere. The Company intends to rely primarily on its collaborators or
licensees to file INDs and generally direct the regulatory approval process. No
assurance can be given that the Company or any of its collaborators or licensees
will be able to conduct clinical trials or obtain the necessary approvals from
the FDA or other regulatory authorities for any products. Failure to obtain
required governmental approvals will delay or preclude the Company's
collaborators or licensees from marketing drugs or other products developed by
the Company or will limit the commercial use of such products and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel.
The Company is highly dependent upon the principal members of its
scientific and management staff and the services of Dr. Douglass B. Given,
President and Chief Executive Officer, in particular. The loss of any of these
persons could have a material adverse effect on the Company's business,
financial condition and results of operations. In order to support the Company's
existing operations, the Company will be required to hire and retain additional
management, administrative and financial personnel. Recruiting and retaining
qualified scientific personnel and advisors to perform research and development
work in the future also will be critical to the Company's success. There can be
no assurance that the Company will be able to attract and retain such personnel
and advisors on acceptable terms given the competition among numerous
pharmaceutical, biotechnology and other companies, universities and other
research institutions for experienced personnel and advisors. In addition, the
Acquisition and the Company's anticipated growth and expansion are expected to
place increased demands on the Company's resources and management skills. The
failure of the Company's existing personnel to handle such increased demands or
the Company's failure to attract and to retain additional personnel with such
capabilities could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Research Collaborators and Scientific Advisors.
The Company has relationships with collaborators at academic and other
institutions, who conduct research in cooperation with the Company. Such
collaborators are not employees of the Company. All of the Company's consultants
are employed by employers other than the Company and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to the Company. As a result, the Company has limited control over
their activities and, except as otherwise required by its collaboration and
consulting agreements, can expect only limited amounts of their time to be
dedicated to the Company's activities. The potential success of the Company's
discovery programs depends in part on continued collaborations with researchers
at academic and other institutions. There can be no assurance that the Company
will be able to negotiate additional acceptable collaborations at academic and
other institutions or that its existing collaborations will be maintained or be
successful.
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The Company's research collaborators and scientific advisors sign
agreements which provide for confidentiality of the Company's proprietary
information and results of studies, but not all of Mercator's former employees
and consultants have signed such agreements. There can be no assurance that the
Company will be able to maintain the confidentiality of its technology and other
confidential information in connection with every collaboration, and any
unauthorized dissemination of the Company's confidential information could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "--Uncertainty of Patents and Proprietary Rights."
Control of Company By, and Potential Conflicts of Interest with, Interneuron.
Interneuron beneficially owns approximately 37% of the Company's Common
Stock, and is and may continue to be the Company's largest stockholder.
Accordingly, Interneuron will continue to have substantial influence over the
election of directors of the Company and other matters submitted to a
stockholder vote, including extraordinary corporate transactions such as a
merger or sale of substantially all of the Company's assets. In addition, the
Company and Interneuron have entered into an intercompany services agreement
that provides among other things that in the event of any future equity offering
by the Company, Interneuron has the right to purchase (at the same price and on
the same terms as such equity offering) a portion of the shares being offered so
as to maintain its fully-diluted interest in the Company immediately prior to
such equity offering, subject to certain limitations.
Interneuron may elect to increase its ownership percentage in the
Company through other means, including additional equity investments or the
purchase of Common Stock in the open market. Interneuron, however, has not made
any commitment to purchase additional securities, and there can be no assurance
that it will do so. Interneuron's ownership of a substantial block of the
Company's voting stock could have the effect of delaying or preventing sales of
additional securities of the Company or a sale of the Company or other change of
control supported by the other stockholders of the Company.
In addition, the Company may be subject to various risks arising from
Interneuron's influence over the Company, including conflicts of interest
relating to new business opportunities that could be pursued by the Company or
by Interneuron and its other affiliates, and significant corporate transactions
for which stockholder approval is required. The Company granted Interneuron an
option and right of first refusal to acquire an exclusive, worldwide license to
manufacture, use and sell Del-l for human therapeutic uses in exchange for a
royalty to the Company based on sales. While the option agreement specifies the
payments to be made to Interneuron if the Company or a third party develops such
a therapeutic, the terms of any license agreement should Interneuron exercise
its option, including the amount of the royalty to the Company, will be
determined through negotiations between Interneuron and the Company and, given
the relationship between Interneuron and the Company, the terms of any such
license agreement may not be as favorable to the Company as those that may be
obtainable from a third party. In addition, such option and right of first
refusal may have an adverse effect on the Company's ability to enter into
license or other agreements relating to Del-1 with third parties. In connection
with the grant of the option, Interneuron relinquished its right to certain
minimum return adjustments to the conversion ratio of the Company's Series A
preferred stock. Interneuron and the Company agreed to determine the value of
the relinquishment of the minimum return adjustments and the extent to which
such value may be credited against payments, including royalties, that would
otherwise be payable by Interneuron to the Company under any such license. Such
relinquishment may be deemed taxable income to the Company. There can be no
assurance that all of such income would be offset by current expenses or
operating loss carryforwards.
Uncertainty of Health Care Reform Measures and Third-Party Reimbursement.
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of third-party payers,
such as government health administration authorities, private health insurers
and other organizations, to contain or reduce the cost of health care. In the
U.S. and in certain foreign jurisdictions there have been, and the Company
expects that there will continue to be, a number of legislative and regulatory
proposals aimed at changing the health care system. While the Company cannot
predict whether any such legislative or regulatory proposals will be adopted or
predict the effect that such proposals may have on its business, the
consideration or approval of such proposals could have a material adverse effect
on the trading and market price of the Common Stock or on the Company's ability
to raise capital or to complete additional corporate agreements, and the
adoption of such
Page 41
<PAGE> 44
proposals could have a material adverse effect on the Company's business,
financial condition and results of operations.
In both domestic and foreign markets, successful commercial sales of the
Company's or its collaborators' or licensees' potential products will depend in
part on the availability of reimbursement from government and health
administrative authorities, private health insurers or other third-party payers.
Third-party payers are increasingly challenging the price and cost-effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Future legislation
and regulations affecting the pricing of pharmaceuticals could further limit
reimbursement for medical products and services. There can be no assurance that
any of the Company's potential products will be considered cost-effective or
that adequate third-party reimbursement will be available to enable the Company,
its collaborators or licensees to maintain price levels sufficient to realize an
appropriate return on their investment. In addition, the trend toward managed
health care in the U.S. and the concurrent growth of managed care organizations,
such as health maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reduce government insurance programs, could result in
pricing pressure for any products that might be developed by the Company. If
adequate reimbursement is not provided by government and other third-party
payers for the Company's or its collaborators' or licensees' potential products,
there would be a material adverse effect on the Company's business, financial
condition and results of operations.
Risk of Product Liability.
The testing, manufacture, marketing and sale of pharmaceutical and other
products entail the inherent risk of liability claims or product recalls and
associated adverse publicity. Clinical trials and sales by the Company or its
collaborators or licensees of potential products incorporating the Company's
discoveries may expose the Company to potential liability resulting from the use
of such products. Such liability might result from claims made directly by
consumers or by regulatory agencies, pharmaceutical companies or others selling
such products. The Company currently has a limited amount of clinical trial and
product liability insurance coverage through Interneuron. When required, the
Company will seek to obtain its own coverage and to maintain and appropriately
increase such coverage as clinical development of any product candidates
progresses and if and when its products are ready to be commercialized. There
can be no assurance that the Company will be able to obtain such insurance or,
if obtained, that such insurance can be acquired at a reasonable cost or in
sufficient amounts to protect the Company against such liability. Certain of the
Company's license agreements require it to indemnify licensers against product
liability claims arising from products developed using the licensed technology.
Also, certain of these agreements and other collaborative and license agreements
require the Company to maintain minimum levels of insurance coverage. The
failure to maintain product liability coverage, the occurrence of any product
liability claim or a recall of products of the Company or its collaborators or
licensees could inhibit or prevent commercialization of products being developed
by the Company and could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, to the
extent any product liability claim exceeds the amount of any insurance coverage,
the Company's business, financial condition and results of operations could be
materially and adversely affected.
No Assurance of Active Trading Market; Potential Volatility of Trading Prices.
There can be no assurance that an active public market for the Company's
Common Stock or Warrants will be sustained. The stock market has experienced
significant price and volume fluctuations that are often unrelated to the
operating performance of particular companies. In addition, the market prices of
securities of other biotechnology companies in the past have been highly
volatile, and the market price of the Company's Common Stock and Warrants has
also experienced such volatility. Factors such as the results of preclinical
studies and clinical trials by the Company or its collaborative partners,
licensees or competitors, evidence of the safety or efficacy of products of the
Company or its competitors, announcements of technological innovations or new
discoveries, product opportunities or products by the Company or its
competitors, changes in governmental regulations or third-party reimbursement
policies, developments in patent or other proprietary rights of the Company or
its competitors, fluctuations in the Company's operating results and changes in
general market conditions for biotechnology stocks could have an adverse impact
on the future price of the Common Stock and the Warrants.
Possible Delisting from the Nasdaq National Market; Market Illiquidity.
The Common Stock and Warrants (collectively, the "Listed Securities")
are listed separately on the Nasdaq National Market. In order to
Page 42
<PAGE> 45
maintain such listing, the Company will be required to comply with certain
Nasdaq National Market listing maintenance standards, including minimum tangible
asset value amounts, public float requirements and minimum stock price amounts.
There can be no assurance that the Company will be able to comply with such
listing maintenance standards as in effect from time to time. If the Company is
unable to comply with the standards for continued listing, the Listed Securities
could be subject to delisting from the Nasdaq National Market. Trading, if any,
in the Listed Securities would thereafter be conducted on the Nasdaq Small Cap
Market or on an electronic bulletin board established for securities that do not
meet the Nasdaq Small Cap Market listing requirements or in what is commonly
referred to as the "pink sheets." As a result of any such delisting from the
Nasdaq National Market, an investor would find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's securities.
Redemption of Warrants.
The outstanding Warrants are subject to redemption at $0.01 per Warrant
upon at least 30 days' (but not more than 60 days') written notice, provided
that the market price of the Common Stock during the 30 consecutive trading days
ending within three days of the date of the notice of redemption equals or
exceeds 200% of the then-current Warrant exercise price. If the Company
exercises the right to redeem the outstanding Warrants, a holder would be forced
to (i) exercise the Warrant; (ii) sell the Warrant at the then-current market
price; or (iii) accept the redemption price which, at the time the Warrants are
called for redemption, is likely to be substantially less than the then-current
market price of the Warrants.
Current Prospectus Required To Exercise The Warrants.
Holders will be able to exercise the Warrants only if a current
prospectus relating to the shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") is then in effect. Although the Company has a
contractual obligation to maintain the effectiveness of a current prospectus
covering the Warrant Shares under certain circumstances, there can be no
assurance that the Company will be able to do so when required. The value of the
Warrants may be impaired if a current prospectus covering the Common Stock
issuable upon exercise of the Warrants is not kept effective.
Anti-Takeover Considerations.
The Company has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative rights thereof without any further vote or action by
the Company's stockholders. The Company has no current plans to issue shares of
preferred stock. However, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock would dilute the voting power of holders of Common Stock and could have
the effect of delaying, deferring or preventing a change in control of the
Company. In addition, all outstanding options under the Company's 1992 Stock
Option Plan and 1996 Stock Incentive Plan become exercisable, and purchase dates
under the 1996 Employee Stock Purchase Plan could be accelerated, upon certain
changes in control of the Company. The Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law, which could delay or make
more difficult a merger, tender offer or proxy contest involving the Company and
may have the effect of discouraging takeovers which could be in the best
interest of certain stockholders. In general, the statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. There can be no
assurance that this provision, the rights of option holders and the Company's
ability to issue preferred stock will not have an adverse effect on the market
value of the Company's stock or Warrants in the future.
Hazardous and Radioactive Materials; Environmental Matters.
Research and development conducted by the Company involves the
controlled use of hazardous materials, chemicals, biological materials and
radioactive compounds. The Company, and its collaborators and licensees, as
applicable, are subject to international, federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such substances and certain waste products. The Company believes that the safety
procedures relating to its in-house research and development and production
efforts are in material compliance with the standards currently prescribed by
such laws and regulations. However, 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 resulting damages, and any
such liability could exceed the Company's resources. Moreover, there can be no
assurance that the Company's collaborators and licensees are and will continue
to be in compliance with such standards or that the
Page 43
<PAGE> 46
Company will not be required to incur significant costs in the future to comply
with new or modified standards. In such events, there would be a material
adverse effect on the Company's business, financial condition and results of
operations.
Absence of Dividends.
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
Page 44
<PAGE> 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants............................................... 46
Consolidated Balance Sheets as of September 30, 1997 and 1996................... 47
Consolidated Statements of Operations for the years ended September 30, 1997,
1996, and 1995, and for the period from May 8, 1992 (Date of Inception) to 48
September 30, 1997..............................................................
Consolidated Statements of Cash Flows for the years ended September 30, 1997, 49
1996, and 1995, and for the period from May 8, 1992 (Date of Inception) to
September 30, 1997..............................................................
Consolidated Statement of Stockholders' Equity (Deficit) for the period from 50
May 8, 1992 (Date of Inception) through September 30, 1997......................
Notes to Consolidated Financial Statements...................................... 52
</TABLE>
Page 45
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Progenitor, Inc.:
We have audited the accompanying consolidated balance sheets of Progenitor, Inc.
and Subsidiary (a Development Stage Company) as of September 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended September 30, 1997, 1996 and 1995,
and for the period from May 8, 1992 (date of inception) to September 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Progenitor, Inc. and Subsidiary (a Development Stage Company) as of September
30, 1997 and 1996, and the consolidated results of operations and cash flows for
the years ended September 30, 1997, 1996 and 1995, and for the period from May
8, 1992 (date of inception) to September 30, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 4, 1997
Page 46
<PAGE> 49
PROGENITOR, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,673,252 $ 22,315
Accounts receivable 129,699 175,498
Prepaid expenses and other current assets 421,411 120,827
------------ ------------
Total current assets 20,224,362 318,640
------------ ------------
Property and equipment, at cost:
Equipment 3,095,469 1,216,219
Leasehold improvements 72,387 --
------------ ------------
3,167,856 1,216,219
Less accumulated depreciation (1,248,895) (674,847)
------------ ------------
1,918,961 541,372
Notes receivable-employees, net 480,208 59,645
Intangible assets, net of accumulated amortization of $38,477 961,390 --
------------ ------------
Total assets $ 23,584,921 $ 919,657
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,792,827 $ 446,915
Accrued expenses 4,148,372 1,361,615
Capital lease obligations - current 761,929 265,155
------------ ------------
Total current liabilities 6,703,128 2,073,685
------------ ------------
Note payable - related party -- 3,443,050
Convertible debenture - related party -- 475,677
Capital lease obligations 941,696 91,706
------------ ------------
Total liabilities 7,644,824 6,084,118
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, authorized 5,000,000 and 3,000,000 shares
at September 30, 1997 and 1996, respectively:
Series A, 2,020,496 issued and outstanding as of -- 20,205
September 30, 1996
Series B, 349,000 issued and outstanding as of September -- 3,490
30, 1996
Common stock, Class A, $.001 par value: 39,000,000 shares 13,405 2,886
authorized; 13,405,333 and 2,885,904 shares issued and
outstanding as of September 30, 1997 and 1996, respectively
Stock subscription promissory note receivable (1,000,000) --
Additional paid-in capital 79,650,550 14,966,792
Deficit accumulated during development stage (62,723,858) (20,157,834)
------------ ------------
Total stockholders' equity (deficit) 15,940,097 (5,164,461)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 23,584,921 $ 919,657
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 47
<PAGE> 50
PROGENITOR, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEAR ENDED SEPTEMBER 30, INCEPTION)
-------------------------------------------- TO SEPTEMBER 30,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 1,141,649 $ 1,332,366 $ 2,821,386 $ 5,295,401
Operating expenses:
Research and development 5,462,755 3,872,891 4,227,959 21,567,545
Write-off of acquired in-process 21,092,000 -- -- 21,092,000
research and development
General and administrative 2,880,458 1,791,050 1,116,652 8,666,941
Nonrecurring expenses 1,506,563 -- -- 1,506,563
------------ ------------ ------------ ------------
Total operating expenses 30,941,776 5,663,941 5,344,611 52,833,049
------------ ------------ ------------ ------------
Loss from operations (29,800,127) (4,331,575) (2,523,225) (47,537,648)
Nonrecurring expense -- (973,525) -- (973,525)
Interest and other income 255,292 -- -- 255,292
Interest expense - related party (659,531) (119,617) (289,297) (1,940,030)
Interest expense - other (78,177) (59,087) (62,945) (244,466)
------------ ------------ ------------ ------------
Net loss $(30,282,543) $ (5,483,804) $ (2,875,467) $(50,440,377)
============
Preferred stock dividend (12,283,481) -- --
------------ ------------ ------------
Net loss applicable to common stock $(42,566,024) $ (5,483,804) $ (2,875,467)
============ ============ ============
Net loss per common share $ ($9.82) $ (1.92) $ (1.02)
============ ============ ============
Shares used in computing net loss per common
share 4,333,383 2,863,210 2,810,853
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 48
<PAGE> 51
PROGENITOR, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEAR ENDED SEPTEMBER 30, INCEPTION) TO
-------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(30,282,543) $ (5,483,804) $ (2,875,467) $(50,440,377)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 828,541 292,086 262,263 1,870,295
Gain on sale of equipment -- (23,247) -- (23,247)
Noncash expense for anti-dilution stock
issuances 386,463 -- 376,680 763,143
Write-off of acquired in-process 21,092,000 -- -- 21,092,000
research and development
Changes in operating assets and liabilities:
Accounts receivable 45,799 18,400 (193,898) (129,699)
Accounts receivable - related party -- 131,600 (131,600) --
Notes receivable - employees, net (351,813) 159,089 (16,638) (411,458)
Prepaid expenses and other current (50,759) (98,209) (19,618) (171,586)
assets
Accounts payable (1,142,759) 87,998 59,490 (822,105)
Accrued expenses 1,076,061 17,897 664,324 2,437,676
Accrued interest - related party 659,589 119,617 261,350 1,912,141
------------ ------------ ------------ ------------
Cash used in operating activities (7,739,421) (4,778,573) (1,613,114) (23,923,217)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (923,288) (83,467) (154,814) (2,410,905)
Proceeds from sale of equipment -- 54,000 -- 54,000
Advances under convertible bridge promissory
note (3,769,519) -- -- (3,769,519)
Cash paid in purchase of Mercator (762,937) -- -- (762,937)
------------ ------------ ------------ ------------
Cash used in investing activities (5,455,744) (29,467) (154,814) (6,889,361)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - related party 5,697,469 3,362,369 1,041,972 20,555,003
Proceeds from convertible debenture -
related party -- -- 436,740 436,740
Proceeds from bridge loan - related party 3,665,029 -- -- 3,665,029
Proceeds from issuance of stock, net 23,006,585 420,250 1,560,431 24,995,179
Proceeds from capital lease financings 826,673 117,325 87,771 1,694,371
Principal payments on capital lease
financings (349,654) (243,332) (194,787) (860,492)
------------ ------------ ------------ ------------
Cash provided by financing activities 32,846,102 3,656,612 2,932,127 50,485,830
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 19,650,937 (1,151,428) 1,164,199 19,673,252
Cash and cash equivalents, beginning of
period 22,315 1,173,743 9,544 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 19,673,252 $ 22,315 $ 1,173,743 $ 19,673,252
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 49
<PAGE> 52
PROGENITOR, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
From May 8, 1992 (Date of Inception) To September 30, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------------------
SERIES A SERIES B
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Balance, May 8, 1992 (date of inception)
Issued in May 1992 at $.002 per share -- -- -- --
Issued in May 1992 at $.001 per share -- -- -- --
Issued in December 1992 and
January 1993 at $.000 per
share under anti-dilution
provisions -- -- -- --
Issued in December 1992 and
January 1993 at $.02 per share -- -- -- --
Repurchased at $.02 per share -- -- -- --
Cumulative net loss (May 8,
1992 through September 30, 1994) -- -- -- --
-------------------------------------------------------
Balance, September 30, 1994 -- -- -- --
-------------------------------------------------------
Issued preferred stock at $6.25
for conversion of debt to
equity 2,020,496 $ 20,205 -- --
Conversion of Class B common to
Class A common under
anti-dilution provisions -- -- -- --
Issued in December 1994 at
$.000 per share under
anti-dilution provisions -- -- -- --
Stock options exercised at $.20
per share -- -- -- --
Issued preferred stock in
December-April at $4.47 per
share, net of offering costs -- -- 349,000 $ 3,490
Net loss
-------------------------------------------------------
Balance, September 30, 1995 2,020,496 20,205 349,000 3,490
-------------------------------------------------------
Stock options exercised at
$.20-$6.00 per share -- -- -- --
Issued common stock in February
1996 at $6.00 per share -- -- -- --
Net loss -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------- SHAREHOLDER
CLASS A CLASS B PROMISSORY
------------------------- -------------------- NOTE
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
--------- ------------ -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 8, 1992 (date of inception)
Issued in May 1992 at $.002 per share 2,412,950 $ 2,413 -- -- --
Issued in May 1992 at $.001 per share -- -- 250,000 $ 250 --
Issued in December 1992 and
January 1993 at $.000 per
share under anti-dilution
provisions 13,397 13 -- -- --
Issued in December 1992 and
January 1993 at $.02 per share 216,588 217 -- -- --
Repurchased at $.02 per share (74,267) (74) -- -- --
Cumulative net loss (May 8,
1992 through September 30, 1994) -- -- -- -- --
-------------------------------------------------------------------
Balance, September 30, 1994 2,568,668 2,569 250,000 250 --
-------------------------------------------------------------------
Issued preferred stock at $6.25
for conversion of debt to
equity -- -- -- -- --
Conversion of Class B common to
Class A common under
anti-dilution provisions 178,750 179 250,000 (250) --
Issued in December 1994 at
$.000 per share under
anti-dilution provisions 40,353 40 -- -- --
Stock options exercised at $.20
per share 1,500 1 -- -- --
Issued preferred stock in
December-April at $4.47 per
share, net of offering costs -- -- -- -- --
Net loss
-------------------------------------------------------------------
Balance, September 30, 1995 2,789,271 2,789 -- -- --
-------------------------------------------------------------------
Stock options exercised at
$.20-$6.00 per share 38,300 39 -- -- --
Issued common stock in February
1996 at $6.00 per share 58,333 58 -- -- --
Net loss -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
PAID-IN DEVELOPMENT
CAPITAL STAGE TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance, May 8, 1992 (date of inception)
Issued in May 1992 at $.002 per share $ 2,413 -- $ 4,826
Issued in May 1992 at $.001 per share -- -- 250
Issued in December 1992 and
January 1993 at $.000 per
share under anti-dilution
provisions (13) -- --
Issued in December 1992 and
January 1993 at $.02 per share 4,105 -- 4,322
Repurchased at $.02 per share (1,411) -- (1,485)
Cumulative net loss (May 8,
1992 through September 30, 1994) -- $(11,798,563) (11,798,563)
-------------------------------------------
Balance, September 30, 1994 5,094 (11,798,563) (11,790,650)
-------------------------------------------
Issued preferred stock at $6.25
for conversion of debt to
equity 12,607,895 -- 12,628,100
Conversion of Class B common to
Class A common under
anti-dilution provisions 161,751 -- 161,680
Issued in December 1994 at
$.000 per share under
anti-dilution provisions 214,960 -- 215,000
Stock options exercised at $.20
per share 299 -- 300
Issued preferred stock in
December-April at $4.47 per
share, net of offering costs 1,556,641 -- 1,560,131
Net loss -- (2,875,467) (2,875,467)
-------------------------------------------
Balance, September 30, 1995 14,546,640 (14,674,030) (100,906)
-------------------------------------------
Stock options exercised at
$.20-$6.00 per share 70,212 -- 70,251
Issued common stock in February
1996 at $6.00 per share 349,940 -- 349,998
Net loss -- (5,483,804) (5,483,804)
</TABLE>
Page 50
<PAGE> 53
PROGENITOR, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
From May 8, 1992 (Date of Inception) To September 30, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------
SERIES A SERIES B
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------ ------- ------
<S> <C> <C> <C> <C>
-----------------------------------------------------------
Balance, September 30, 1996 2,020,496 20,205 349,000 3,490
-----------------------------------------------------------
Issuance of stock in February
1997 at $4.00-$5.50 per share -- -- -- --
Issuance of Units in Offering -- -- -- --
Issuance to underwriters to
cover overallotment -- -- -- --
Issuance of common stock in
Mercator Acquisition -- -- -- --
Forgiveness of debt by
Interneuron -- -- -- --
Conversion of preferred stock
series A to common stock (2,020,496) (20,205) -- --
Conversion of preferred stock
series B to common stock -- -- (349,000) (3,490)
Issuance of stock upon exercise
of warrants-Ohio University -- -- -- --
Issuance of stock to Ohio
University under
anti-dilution provisions -- -- -- --
Issuance of common stock to
Amgen -- -- -- --
Issuance of common stock in
August - September at
$.20-$.68 per share upon
exercise of options -- -- -- --
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
Balance, September 30, 1997 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER
COMMON STOCK PROMISSORY
-------------------------------------------------------
CLASS A CLASS B NOTE
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
Balance, September 30, 1996 2,885,904 2,886 -- -- --
-----------------------------------------------------------------------
Issuance of stock in February
1997 at $4.00-$5.50 per share 1,313 2 -- -- --
Issuance of Units in Offering 2,750,000 2,750 -- -- --
Issuance to underwriters to
cover overallotment 125,000 125 -- -- --
Issuance of common stock in
Mercator Acquisition 3,442,814 3,443 -- -- --
Forgiveness of debt by
Interneuron -- -- -- -- --
Conversion of preferred stock
series A to common stock 2,349,414 2,349 -- -- --
Conversion of preferred stock
series B to common stock 725,393 725 -- -- --
Issuance of stock upon exercise
of warrants-Ohio University 25,000 25 -- -- --
Issuance of stock to Ohio
University under
anti-dilution provisions 71,900 72 -- -- --
Issuance of common stock to
Amgen 1,023,256 1,023 -- -- (1,000,000)
Issuance of common stock in
August - September at
$.20-$.68 per share upon
exercise of options 5,339 5 -- -- --
Preferred stock dividend -- -- -- -- --
Net loss -- -- -- -- --
-----------------------------------------------------------------------
Balance, September 30, 1997 13,405,333 $ 13,405 -- -- $ (1,000,000)
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
PAID-IN DEVELOPMENT
CAPITAL STAGE TOTAL
------------ ----------- ----------
<S> <C> <C> <C>
-------------------------------------------
Balance, September 30, 1996 14,966,792 (20,157,834) (5,164,461)
-------------------------------------------
Issuance of stock in February
1997 at $4.00-$5.50 per share 5,529 -- 5,531
Issuance of Units in Offering 16,355,740 -- 16,358,490
Issuance to underwriters to
cover overallotment 813,625 -- 813,750
Issuance of common stock in
Mercator Acquisition 15,396,557 -- 15,400,000
Forgiveness of debt by
Interneuron 13,940,814 13,940,814
Conversion of preferred stock
series A to common stock 17,856 -- --
Conversion of preferred stock
series B to common stock 2,765 -- --
Issuance of stock upon exercise
of warrants-Ohio University 67,225 -- 67,250
Issuance of stock to Ohio
University under
anti-dilution provisions 386,391 -- 386,463
Issuance of common stock to
Amgen 5,411,991 -- 4,413,014
Issuance of common stock in
August - September at
$.20-$.68 per share upon
exercise of options 1,784 -- 1,789
12,283,481 (12,283,481)
Net loss -- (30,282,543) (30,282,543)
-------------------------------------------
Balance, September 30, 1997 $ 79,650,550 $(62,723,858) $ 15,940,097
===========================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
Page 51
<PAGE> 54
PROGENITOR, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies:
a. Organization: Progenitor, Inc. (together with Subsidiary, the
"Company"), a Delaware Corporation, is engaged in the discovery and functional
characterization of genes to identify therapeutic leads and targets for the
development of new pharmaceuticals. Significant additional research and
development activities, clinical testing, and regulatory approvals must be
completed before commercial sales, if any, of the Company's product will
commence. The Company is actively pursuing research and development grants and
negotiating equity and corporate partnership arrangements to fund its research
and development activities. Expenses incurred have been primarily for research
and development activities and administration, resulting in an accumulated
deficit of $62,723,858. The Company is dependent on the proceeds of its
securities offerings and other financing vehicles to continue clinical research
and to fund working capital requirements. If additional funding is unavailable
to the Company when needed, the Company will be required to significantly
curtail one or more of its research and development programs, and the Company's
business and financial condition will be adversely affected.
Prior to August 12, 1997, the Company was a majority owned subsidiary of
Interneuron Pharmaceuticals, Inc. (Interneuron). Interneuron provided the
initial funding of the Company and had invested $26.6 million in the Company
through debt and equity financing through August 12, 1997.
b. Basis of Presentation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Mercator Genetics, Inc. ("Mercator"), since August 12, 1997, the date of
acquisition (see Note 2). All intercompany transactions and balances have been
eliminated in consolidation.
c. Revenue Recognition: The Company recognizes revenue under
strategic alliances as certain agreed upon milestones are achieved or license
fees are earned.
d. Research and Development Costs: All costs related to research
and development are expensed as incurred.
e. Reclassification: Certain reclassifications have been made to
the 1996 and 1995 consolidated financial statements to conform to the 1997
presentation.
f. Cash and Cash Equivalents: Cash and cash equivalents consist
of cash in banks, highly liquid debt instruments and money market funds with
original maturities of three months or less. At September 30, 1997,
approximately $19.7 million of cash and cash equivalents were held in three
financial institutions.
g. Property and Equipment: Property and equipment is stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets. Equipment leased under capital leases is
amortized using the straight-line method over the lease term. Maintenance and
repairs are charged to expense as incurred, while renewals and improvements are
capitalized. The asset cost and accumulated depreciation is removed for assets
sold or retired, and any resulting gain or loss is reflected in the statement of
operations. Equipment includes $2,349,886 and $865,540 of equipment under
capital leases and accumulated depreciation of $1,008,556 and $516,551 as of
September 30, 1997 and 1996, respectively.
h. Intangible Assets: Intangible assets at September 30, 1997
include amounts related to goodwill and assembled workforce of approximately
$481,000 and $735,000, respectively. Goodwill represents the excess of the
purchase price over the fair value of the net assets of Mercator and is
amortized on a straight-line basis over ten years. Assembled workforce
represents the estimated cost to recruit and train 37 Mercator employees
retained by the Company and is being amortized on a straight-line basis over two
years. Approximately $216,000 of
Page 52
<PAGE> 55
the amount related to assembled workforce was written off as a permanent
impairment loss in September 1997 as a result of employee turnover subsequent to
the date of acquisition. This amount was calculated based on the value allocated
to the individual employees who left immediately following the acquisition.
i. Stock Split: Effective in August 1997, the Board of Directors
authorized a 1-for-2 reverse stock split on Class A common shares. All
references to Class A common shares, underlying stock options, warrants and per
share data have been restated to reflect the reverse stock split.
j. Net Loss per Share:
Historical
Net loss per common share is computed based on the
weighted average number of common shares outstanding during the year. Common
equivalent shares from stock options and warrants are excluded from the
computation as their effect is anti-dilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin, common and common
equivalent shares issued at prices below the initial public offering (the
"Offering") price during the 12 months immediately preceding the filing date of
an Offering have been included in the calculation as if they were outstanding
through the interim period that includes the Offering prospectus, March 31,
1997, (using the treasury stock method and the Offering price of $5.375 per
share).
Supplementary
Supplementary net loss per common share is computed based
on the historical net loss per share adjusted for the conversion of all
outstanding shares of preferred stock into common stock as if the conversion had
occurred on October 1, 1996. Based on this supplementary net loss per common
share would have been $(6.09) for the year ended September 1997, with a weighted
average number of shares outstanding of 6,986,949.
k. 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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
l. Future Disclosure Requirements: The Company will adopt SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128"), in the fiscal quarter ending
December 31, 1997. SFAS No. 128 requires the Company to change its method of
computing, presenting and disclosing earnings per share information. Upon
adoption, all prior period data presented will be restated to conform to the
provisions of SFAS No. 128. Management has not determined the effect of adopting
SFAS No. 128.
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.
2. Acquisition: Effective August 12, 1997, the Company acquired Mercator
for an aggregate purchase price of approximately $23.6 million (the
"Acquisition"). The Acquisition has been accounted for using the purchase
method. The purchase price consideration was comprised of 3,442,814 shares of
common stock, 592,914 options and 56,737 warrants to purchase common stock with
a combined fair value of $15.4 million, $3.8 million of loan forgiveness, $2.6
million of assumed liabilities and $1.9 million of estimated transaction costs.
Prior to the Acquisition, the Company provided bridge loan financing of $3.8
million, including accrued interest of approximately $105,000, to Mercator in
the form of a Convertible Bridge Promissory Note which became part of the
purchase price consideration.
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<PAGE> 56
In connection with the Acquisition the Company wrote off approximately
$21.1 million of acquired in-process research and development which was charged
to operations, because in management's opinion, technological feasibility for
the acquired research and development had not been established and the
technology had no alternative future use. The Company also incurred several
nonrecurring expenses of approximately $1.5 million, including $839,000 for
severance, retention and bonus programs, $350,000 to facilitate employee
relocation and $318,000 for other integration costs.
The following unaudited pro forma consolidated results of operations
have been prepared as if the Acquisition of Mercator had occurred on October 1,
1995:
<TABLE>
<CAPTION>
Year ended Year ended
September 30, 1997 September 30, 1996
------------ ------------
<S> <C> <C>
Revenue $ 1,266,649 $ 1,832,377
Net Loss $(15,898,101) $(34,246,991)
Net loss applicable to
common stock $(28,181,582) $(34,246,991)
Net loss per common share $ (3.86) $ (5.43)
</TABLE>
The pro forma net loss applicable to common stock and net loss per share amounts
for fiscal 1996 include the write off of purchased research and development of
$21.1 million, the recognition of an impairment loss on assembled workforce of
$216,000, and amortization expense of approximately $307,000 related to goodwill
and assembled workforce. The pro forma net loss applicable to common stock and
net loss per common share amounts for fiscal 1997 include amortization expense
of approximately $307,000 related to goodwill and assembled workforce. The pro
forma consolidated results do not purport to be indicative of results that would
have occurred had the acquisition been in effect for the periods presented, nor
do they purport to be indicative of the results that will be obtained in the
future.
3. Accrued expenses: Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Initial public offering expenses $ 955,430 $ 249,363
Acquisition expenses 672,825
Sponsored research - Ohio University 311,489 342,506
Sponsored research - other 646,846 199,853
Nonrecurring expenses 654,579
Other 907,203 569,893
---------- ----------
$4,148,372 $1,361,615
========== ==========
</TABLE>
4. Income taxes:
No income tax provision or benefit has been provided for federal income
tax purposes as the Company has incurred losses since inception. As of September
30, 1997, net deferred tax assets totaled approximately $20,283,000 on total net
operating loss carryforwards of approximately $31,500,000, tax credits of
approximately $720,000 and capitalized research and development costs of
$6,918,000. The net operating loss carryforwards and tax credits expire on
various dates through 2011. Due to the uncertainty surrounding the realization
of these favorable tax attributes in future tax returns, all of the net deferred
tax assets have been fully offset by a valuation allowance.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards may be limited under the change
in stock ownership rules of the Internal Revenue Code. As a result
Page 54
<PAGE> 57
of ownership changes which occurred in August 1997, the Company's operating tax
loss carryforwards and tax credit carryforwards are subject to these
limitations.
5. Long-term Debt Payable to Related Party:
In March 1996, the Company entered into a promissory note with
Interneuron, a previous majority shareholder, bearing interest at a rate of 1%
over the prime lending rate. A total of $3,443,050 was outstanding under the
note as of September 30, 1996, including accrued interest of $80,680. Effective
immediately prior to the consummation of the Offering, the amount outstanding
under the promissory note, $9,694,938, including accrued interest of $600,068,
was contributed to the capital of the Company.
In March 1995, the Company entered into a convertible debenture
agreement with Interneuron, at a rate of 1% over the prime lending rate. As of
September 30, 1996, the outstanding convertible debenture balance was $475,677,
including accrued interest of $59,058. Effective immediately prior to the
consummation of the Offering, the amount outstanding under the convertible
debenture, $509,333, including accrued interest of $92,714, was contributed to
the capital of the Company.
In February 1997, in connection with the Company's bridge financing to
Mercator, the Company entered into a Bridge Line of Credit Letter Agreement with
Interneuron providing for loans of up to an aggregate of $6.6 million. The
bridge loan bore interest at 10% per annum. Effective immediately prior to the
consummation of the Offering, the amount outstanding under the convertible
debenture, $3,769,519, including accrued interest of $104,519, was contributed
to the capital of the Company.
6. Commitments:
The Company has entered into various operating leases for furniture,
fixtures and equipment which expire through the year 2000.
In April 1994, the Company entered into a sale-leaseback equipment lease
financing agreement with a leasing company providing for funding of up to an
aggregate of $2.2 million for equipment purchased prior to September 30, 1996.
In January 1997, the agreement was amended to increase the aggregate funding
limit to $4.0 million and to extend the commitment period to March 31, 1997.
In connection with the acquisition of Mercator, the Company assumed
liability for amounts outstanding under equipment loan agreements and an
equipment lease line of credit agreement providing for funding of up to $3
million for equipment purchases entered into by Mercator.
The Company leases facilities under an operating lease that expires on
September 30, 1999. The lease provides for monthly rental payments of
approximately $30,100.
The minimum rental commitments under these agreements are as follows:
<TABLE>
<CAPTION>
Years ending September 30, Operating Leases Capital Lease Obligation
--------------- -----------
<S> <C> <C>
1998 $409,760 $ 903,475
1999 347,855 755,010
2000 3,444 260,189
2001 8,332
--------------- -----------
Total lease payments $761,059 1,927,006
===============
Less amount representing interest (223,381)
-----------
Present value of future lease payments 1,703,625
Less current portion (761,929)
-----------
Noncurrent portion of capital lease
obligation $ 941,696
===========
</TABLE>
Rent expense approximated $267,000, $263,000 and $186,000 during 1997,
1996 and 1995, respectively.
Page 55
<PAGE> 58
7. Related Party Transactions and Other Agreements:
a. Loans to Employees: At September 30, 1997 and 1996, net loans
to employees totaled approximately $561,000 and $60,000, respectively. Of this
amount, approximately $515,000 and $50,000 represented loans to five executives
at September 30, 1997 and 1996, respectively. Portions of the loans are
forgivable upon the achievement of specified milestones. The loans have various
terms and interest rates ranging from 0% to 7%, and are secured by second deeds
of trust on residences. In October 1997, an executive with an outstanding loan
of $150,000 resigned from the Company. The loan is due upon the earlier of the
sale of the residence or October 1998.
b. License and Research Agreements: The Company entered into a
license agreement and a sponsored research agreement with Ohio University in
January 1992, certain terms of which were amended in October 1993. The license
agreement grants the Company the exclusive worldwide license to patent and other
rights to yolk sac stem cells and related technologies in exchange for royalties
based on sales. The research agreement requires the Company to fund specified
minimum levels of research and related expenses, as well as any additional costs
approved in advance by the Company. The license agreement also contains certain
requirements related to the management and operation of the Company, including
the nomination by The Ohio University Foundation of two designees of The Ohio
University Foundation to the Board of Directors of the Company. The Ohio
University Foundation's right to designate two representatives to the Board of
Directors of the Company terminated upon the consummation of the Company's
initial public offering.
Under the terms of a stock purchase agreement, The Ohio University
Foundation purchased 58,333 shares of common stock at $6 per share in February
1996. An additional 71,900 common shares were issued to The Ohio University
Foundation in August 1997 pursuant to an anti-dilution provision. Under the
terms of a stock purchase right The Ohio University Foundation purchased an
additional 25,000 common shares at $2.69 per share in August 1997.
In April 1993, the Company entered into a second license agreement and a
sponsored research agreement with Ohio University pursuant to which the Company
agreed to fund research relating to the T7T7 gene delivery system. The license
agreement grants the Company the exclusive worldwide license to all patent and
other rights derived from this and related technologies in exchange for
royalties based on sales.
In November 1994, the Company was awarded a competitive grant of $2.0
million through the Advanced Technology Program ("ATP") of the U.S. Department
of Commerce. The funds will be received over a three-year period commencing June
1, 1995. In the years ended September 30, 1997, 1996 and 1995, the Company
recorded revenue of $641,000, $751,000 and $259,000, respectively. At September
30, 1997 and 1996, respectively, $129,699 and $175,498 was due under the ATP
grant.
In March 1995, the Company entered into a license and collaboration
agreement with Chiron Corporation ("Chiron"). As required by the agreement, an
initial cash payment of $2.5 million was paid by Chiron to the Company in April
1995 as a license fee and reimbursement of past research and development
expenses. In addition, the Company reimbursed Chiron for the start-up
manufacturing costs incurred related to this agreement of $750,000 through
September 30, 1996. Chiron paid $500,000 to the Company in January 1996 for
continued research funding. The agreement also calls for future payments
contingent upon the achievement of certain milestones.
In May 1995, the Company entered into a sponsored research and license
agreement with Novo Nordisk through its subsidiary, ZymoGenetics, Inc. The
agreement calls for research and license fees to be paid to the Company,
contingent upon certain conditions and the meeting of certain milestones.
In December 1996, the Company entered into a license agreement with
Amgen, Inc. ("Amgen"). The Company recorded revenue of $500,000 in December
1996, in consideration for the licenses granted. The agreement also provides for
a license maintenance fee as well as milestone and royalty payments to be
received contingent upon the achievement of certain milestone driven events.
Additionally, in December 1996, the Company entered into a stock purchase
agreement with Amgen, under which Amgen purchased 1,023,256 shares of the
Page 56
<PAGE> 59
Company's common stock for $5.5 million concurrently with the closing of the
Offering, with $4.5 million paid in cash and $1 million in the form of a
non-interest bearing promissory note. The promissory note will become due in two
payments, with $500,000 due in December 1997 and $500,000 due in December 1998.
In September 1997, the Company entered into a collaboration agreement
with SmithKline Beecham Clinical Laboratories ("SBCL") for the exclusive rights
to develop and perform genetic testing under the Company's patent applications
covering the gene for hereditary hemocromatosis. Under the terms of the
agreement the Company is to be paid an up-front fee of $100,000 which is
creditable against royalties due in the first year. This amount was paid in
October 1997. In addition, SBCL will pay the Company annual license fees which
will be creditable against royalties due the Company during the year. Under the
terms of the agreement, SBCL will also pay royalty fees to the Company for each
use of any diagnostic or screening test performed. No amounts were recorded
under the agreement at September 30, 1997.
Additionally, the Company has entered into various sponsored research
agreements with varying terms up to two years in length. The total sponsored
research expense was $849,224, $544,079 and $601,103 for 1997, 1996 and 1995,
respectively, and $4,083,983 for the period from May 8, 1992 (date of inception)
to September 30, 1997. Payments to Ohio University for sponsored research
totaled $0, $108,624 and $398,064 for 1997, 1996 and 1995, respectively, and
$1,389,756 for the period from May 8, 1992 (date of inception) to September 30,
1997. In addition, at September 30, 1997, the Company had commitments to fund
additional sponsored research of approximately $958,000.
c. Option Agreement: In July 1997, the Company entered into an
option agreement with Interneuron on the Company's Del-1 protein. Under the
agreement, Interneuron received a right of first refusal to acquire an exclusive
royalty-bearing right to manufacture, use and sell Del-1 on terms to be
negotiated. In the event the Company grants such rights to a third party, the
Company must share fees, milestone payments and royalties with Interneuron.
Should the Company develop and sell the technology independently, the Company
will pay Interneuron royalties on net sales. The option agreement terminates
upon the expiration of the last to expire of any issued patent, or patent that
might issue, relating to the licensed technology, or upon the conclusion of a
license agreement with Interneuron. In exchange for receiving the option,
Interneuron paid the Company $1 and relinquished its right to receive certain
minimum returns on its Series A and B Preferred Stock (see Note 12).
8. Nonrecurring Non-operating Expense:
During fiscal year 1996, the Company incurred $973,525 of costs related
to an attempted initial public offering, in connection with which a Form S-1
Registration Statement with the Securities and Exchange Commission was filed on
June 6, 1996. Such costs were expensed in accordance with accounting
requirements during fiscal 1996.
9. Employee Benefits:
Employees of the Company are eligible to participate in the Interneuron
Pharmaceuticals, Inc. 401(k) Savings Plan under which employees may defer a
portion of their annual compensation. Company contributions to the 401(k)
Savings Plan may be made on a discretionary basis. As of September 30, 1997, no
Company contributions have been made.
10. Stock Options and Warrants:
a. Stock Options: At September 30, 1997, the Company had reserved
3,928,609 shares of common stock for issuance under various stock option plans,
including plans resulting from the acquisition of Mercator (see Note 2). The
plans provide for the granting of incentive stock options to officers and
employees of the Company and nonqualified stock options to officers, employees,
directors and consultants of the Company at prices not less than fair market
value (as determined by the Compensation Committee of the Board of Directors) on
the date of grant. Options are exercisable at times and in increments specified
by the Compensation Committee. Options generally vest over three or four years
and expire in five or ten years.
Page 57
<PAGE> 60
Activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price per
Options Share
---------------------
<S> <C> <C>
Outstanding at September 30, 1994 178,625 $2.10
Granted 192,250 $5.89
Canceled (20,472) $0.84
Exercised (1,500) $0.20
---------- -----
Outstanding at September 30, 1995 348,903 $4.28
Granted 432,250 $7.22
Canceled (55,353) $3.66
Exercised (38,300) $1.74
---------- -----
Outstanding at September 30, 1996 687,500 $7.22
Granted 2,146,074 $4.11
Canceled (603,419) $7.86
Exercised (6,692) $1.11
---------- -----
Outstanding at September 30, 1997 2,223,463 $4.11
</TABLE>
At September 30, 1997, there were 1,705,146 shares of common stock
available for grant under the Company's stock option plans. In November, 1997,
the Company granted options to purchase 828,322 shares exercisable at $4.00 per
share.
The following table summarizes information with respect to stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Number
Number Remaining Average Exercisable Weighted
Range of outstanding at Contractual Exercise at September Average
Exercise Price September 30, 1997 Life (years) Price 30, 1997 Exercise Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.20 14,750 5.38 $0.20 14,750 $0.20
$ 0.68 573,930 8.88 $0.68 573,930 $0.68
$2.00-$4.58 80,047 6.53 $3.67 66,297 $3.60
$ 5.38 951,885 8.85 $5.38 150,000 $5.38
$5.50-$6.50 602,851 8.57 $5.52 265,312 $5.52
--------- ----- ----- --------- -----
2,223,463 9.10 $4.12 1,070,289 $2.72
</TABLE>
In December 1996, the Company canceled all stock options with exercise
prices of $5.50 or more. This amounted to 581,750 options originally granted
from the 1992 and 1996 plans. The options were regranted at a new exercise price
of $5.50, the estimated fair market value at the time of the regrant.
In August 1997, the Company adopted the 1996 Employee Stock Purchase
Plan (the "ESPP"). It is intended to qualify under Section 423 of the Code and
to provide employees with an opportunity to purchase the Company's common stock
through payroll deductions. Under the ESPP, employees may purchase the Company's
common stock at the lesser of (i) 85% of the common stock's fair market value on
the first day of the 24-month purchase period, or (ii) 85% of the fair market
value on the last day of each six month accrual period. A total of 100,000
shares have been reserved for issuance under the ESPP. As of September 20, 1997,
no shares have been issued under the ESPP.
The Company has elected to continue to follow the provisions of APB No.
25, "Accounting for Stock Issued to Employees", for financial reporting purposes
and has adopted the disclosure-only provisions of Statement
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<PAGE> 61
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been recognized
for the Company's Stock Option Plans (or ESPP if applicable). Had compensation
cost for the Company's Stock Option Plans been determined based on the fair
value at the grant date for awards in 1996 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
for the years ended September 30, 1997 and 1996 would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net loss applicable to common shareholders - as reported $(42,566) $(5,483)
Net loss applicable to common shareholders - pro forma $(43,381) $(5,681)
Net loss - as reported $( 9.82) $( 1.92)
Net loss per share - pro forma $( 10.01) $( 1.98)
</TABLE>
The above pro forma disclosures are not necessarily representative of
the effects on reported net income for future years.
The aggregate fair value and weighted average fair value per share of
options granted in fiscal 1997 and 1996 were $3.6 million and $1.9 million and
$1.68 and $4.45 per share, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes Option Pricing Model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected volatility 81.34% 0%
Risk-free interest rate 6.03% 6.10%
Expected life of options in years 5 years 5 years
Expected dividend yield 0% 0%
</TABLE>
b. Warrants: In June 1995, the Company issued to designees of an
affiliate of Interneuron, warrants to purchase a total of 34,901 shares of
Series B convertible preferred stock at $6.875 per share. The warrants were
issued in conjunction with the private placement offering discussed in Note 12.
Upon the completion of the Offering, the warrants were converted into warrants
to purchase 72,536 shares of common stock at an exercise price of $3.31 per
share. The warrants expire in August 2002. The Company paid the affiliate
approximately $129,000 as its share of placement agent fees.
In connection with the Offering, the Company issued 2,750,000 warrants,
which entitle the holder to purchase one share of common stock at $10.50,
subject to adjustment under certain circumstances. The warrants are exercisable
through August 2002. The outstanding warrants are redeemable by the Company at
$0.01 per warrant, under certain conditions. A holder of the warrants does not
possess any voting or other rights as a stockholder of the Company until such
holder exercises the warrant.
In connection with the acquisition of Mercator, the Company issued
warrants to purchase 33,744 shares of common stock at an exercise price of $1.48
per share on or before August 31, 2003 and 22,993 shares of common stock at an
exercise price of $5.09 on or before October 2, 2004.
11. Common Stock:
On August 6, 1997, the Company's registration statement with the
Securities and Exchange Commission was declared effective for the sale of
2,750,000 units. On August 12, 1997, the Company concluded the sale of the
2,750,000 units at an offering price of $7 per unit, with net proceeds to the
Company of $16.3 million. Each unit consisted of one share of common stock and
one Common Stock Purchase Warrant; see Note 10.
In September 1997, the underwriters exercised a portion of their
over-allotment option and purchased 125,000 units at $7 per unit.
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<PAGE> 62
12. Preferred Stock:
In December 1994, the Company's Board of Directors approved the
authorization of 2,120,000 shares of Series A and 880,000 shares of Series B
preferred stock, which were convertible into shares of Class A common stock and
had preferential rights in terms of dividends and liquidation over common stock.
Shares of preferred stock had voting rights equal to the number of shares of
their common stock equivalent. Through August 1997, the Company had issued
2,020,496 shares of Series A and 349,000 shares of Series B preferred stock in
connection with private placements, whereby the Company received a total of
approximately $1,560,000, net of offering costs, and cancelled the
then-outstanding intercompany debt. These private placements consisted of the
sale of units, each unit consisting of shares of preferred stock of the Company,
shares of preferred stock of another subsidiary of Interneuron, Transcell
Technologies, Inc., and a put protection right from Interneuron. The put
protection right provided that on the third anniversary of the final closing
date of the private placement, the owner had the right to sell to Interneuron a
percentage of the preferred stock of the Company that is deemed to be illiquid,
as defined by the agreement. The Series A and B preferred stock was convertible,
at any time at the option of the holder, into shares of Class A common stock was
based on a conversion ratio subject to adjustment based on several factors. Upon
an offering, the conversion ratio was to be adjusted so that the holders
received a minimum return of 35% annually. In July 1997, the holder of the
Series A Preferred Stock relinquished its right to receive the minimum returns
on its Series A Preferred Stock (see Note 7).
In connection with the Offering, all outstanding shares of Series A and
B preferred stock were converted into 3,074,767 shares of common stock. As a
result of the minimum return provisions described above, a preferred stock
dividend of approximately $12.3 million was recorded by the Company.
In August 1997, the Company's Board of Directors authorized the issuance
of an additional 2,000,000 shares of Preferred Stock. The total number of shares
of Preferred Stock available for issuance is 5,000,000 as of September 30, 1997.
13. Supplemental Disclosure for Consolidated Statement of Cash Flows:
The Company paid interest aggregating $78,177, $59,087 and $84,265 for
the years ended September 30, 1997, 1996 and 1995, respectively, and $244,466
for the period May 8, 1992 (date of inception) through September 30, 1997.
In 1995, Interneuron converted debt of $11,495,165 and accrued interest
of $1,132,935 into 2,020,496 shares of Series A Preferred stock.
In 1996, the Company purchased fixed assets with accounts payable in the
amount of $126,261. As of September 30, 1996, the amount was included in
accounts payable.
In August 1997, in conjunction with the acquisition of Mercator
described in Note 2, the Company issued 3,442,814 shares of common stock valued
at $15.4 million for all of the outstanding shares of Mercator. In addition,
acquisition costs of $1,154,803 were unpaid at September 30, 1997 and are
included in accounts payable and accrued liabilities.
In August 1997, in conjunction with the Offering described in Note 11,
the following non-cash transactions occurred:
1) The Company issued 1,023,256 shares of common stock to Amgen for
$4.5 million cash and a $1.0 million non-interest bearing
promissory note receivable as described in Note 7.
2) Interneuron forgave the amounts outstanding under the
convertible debenture, the promissory note and the bridge line
of credit letter agreement, totaling $13,940,814, including
accrued interest of $797,301 as described in Note 5.
Page 60
<PAGE> 63
3) As a result of certain minimum return provisions in the Series A
and B preferred stock, a preferred stock dividend and
contribution of capital of approximately $12.3 million was
recorded. See Note 12.
4) Offering costs of $1,346,761 were unpaid at September 30, 1997
and are included in accounts payable and accrued liabilities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 61
<PAGE> 64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning directors and executive officers under the
caption "Election of Directors," "Board Meetings and Committees," "Security
Ownership of Certain Beneficial Owners and Management" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on March 10, 1998
(the "Proxy Statement"), is incorporated herein by reference. In addition, see
the discussion under the caption "Executive Officers" in Item 1 of this Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Company's Proxy Statement under the
captions "Directors' Compensation," "Executive Compensation," "Stock Options,"
"Option Exercises and Holdings," "Compensation Committee Interlocks and Insider
Participation" and "Employment Arrangements" is incorporated by reference
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment Arrangements" is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Business" under Item 1, and Note 7 of "Notes to Consolidated
Financial Statements" under Item 8, of this Form 10-K. In addition, the
information included in the Company's Proxy Statement under the caption "Certain
Transactions" is incorporated by reference herein.
Page 62
<PAGE> 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
1. Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets - September 30, 1997 and 1996
Consolidated Statements of Operations - Years Ended September 30,
1997, 1996 and 1995, and May 8, 1992 (Date of Inception) to
September 30, 1997
Consolidated Statements of Stockholder's Equity (Deficit) - period
May 8, 1992 (Date of Inception) through September 30, 1997
Consolidated Statements of Cash Flows - Years Ended September 30,
1997, 1996 and 1995, and May 8, 1992 (Date of Inception) to
September 30, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules have been omitted because they are
not applicable or are not required, or because the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits
The Exhibit Index appears on page 68.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
**1.1 Form of Underwriting Agreement.
**2.1 Amended and Restated Agreement and Plan of
Reorganization, dated as of February 14, 1997, as amended
July 22, 1997 (filed as Exhibit 2.1 to the Registration
Statement on Form S-4 filed by the Company and
incorporated herein by reference).
**3.1 Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
**4.1 Specimen Stock Certificate of the Company.
**4.2 Reference is made to Exhibits 3.1 and 3.2.
**4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc. to
Phoenix Leasing Incorporated, dated August 31, 1993.
**4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc. to
Phoenix Leasing Incorporated, dated October 28, 1994.
**4.5 Form of Warrant for Purchase of Common Stock.
**4.6 Form of Warrant Agreement.
**5.1 Opinion of Morrison & Foerster LLP.
**10.1 Form of Indemnification Agreement entered into between
the Company and its directors and executive officers.
**10.2 The Company's 1992 Stock Option Plan.
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option Plan.
**10.5 The Company's 1996 Stock Incentive Plan, as amended and restated as of March 7,
1997, and form of Stock Option Agreement.
</TABLE>
Page 63
<PAGE> 66
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
**10.6 Form of Investors' Rights Agreement, entered into among
the Company, Interneuron Pharmaceuticals, Inc., Transcell
Technologies, Inc., and the holders of the Company's
Preferred Stock, Series B.
*/**10.7 License Agreement, dated as of January 28, 1992, by and
between Scimark Corp., The Castle Group Ltd. and Ohio
University, as amended October 15, 1993.
*/**10.8 Sponsored Research Agreement, dated January 31, 1992, by
and between Scimark Corp. and Ohio University, as amended
October 15, 1993, February 16, 1994, November 16, 1994
and November 22, 1995.
*/**10.9 License Agreement, dated as of April 1, 1993, by and
between the Company and Ohio University.
**10.11 License Agreement, dated as of June 8, 1994, by and
between the Company and Associated Universities, Inc.
*/**10.12 Standard License Agreement, dated as of September 1,
1994, by and between the Company and the Wisconsin Alumni
Research Foundation, as amended June 2, 1995.
*/**10.13 License and Collaboration Agreement, dated as of March
31, 1995, by and between the Company and Chiron
Corporation, as amended April 10, 1996.
*/**10.14 Sponsored Research and License Agreement, dated as of May
1, 1995, by and between the Company and Novo Nordisk A/S,
as amended January 17, 1996 and March 17, 1996.
*/**10.15 License Agreement, dated as of July 17, 1995, by and
between the Company and Vanderbilt University.
*/**10.16 License Agreement, dated as of May 30, 1996, by and
between the Company and AMRAD Developments PTY Ltd.
**10.17 Lease Agreement, dated as of November 1994, by and between the Company and Thomas R.
Eggers.
**10.18 Lease, Service and Affiliation Agreement, entered into as
of February 1995, by and between the Company and The Ohio
State University.
**10.19 Employment Agreement, dated January 3, 1993, by and between the Company and Douglass
B. Given.
**10.20 Form of Intercompany Services Agreement, dated as of ,
1997, by and between the Company and Interneuron
Pharmaceuticals, Inc.
**10.21 Form of Tax Allocation Agreement, dated as of , 1997, by
and between the Company and Interneuron Pharmaceuticals,
Inc.
**10.22 The Company's 1996 Employee Stock Purchase Plan.
*/**10.23 License Agreement, dated as of December 31, 1996, by and
between the Company and Amgen Inc.
**10.24 Stock Purchase Agreement, dated as of December 31, 1996,
by and between the Company and Amgen Inc.
*/**10.25 License Agreement, dated as of January 8, 1997, by and
between the Company and Associated Universities, Inc.,
operator of Brookhaven National Laboratory.
*/**10.26 Amended and Restated Sponsored Research and License
Agreement, dated as of February 21, 1997, by and between
the Company and Novo Nordisk A/S.
**10.27 The Company's 1997 Stock Option Plan.
*/**10.28 License Agreement, dated as of February 1, 1997, by and between Mercator Genetics,
Inc. and the Board of Trustees of The Leland Stanford Junior University.
**10.29 Lease Agreement, dated July 29, 1993, by and between
Mercator Genetics, Inc. and WVP Income Plus, III, as
amended August 11, 1993, February 7, 1994, October 10,
1994, April 27, 1995 and May 29, 1997.
**10.30 Form of Indemnification Agreement entered into between Mercator Genetics, Inc. and
its directors and executive officers.
**10.31 Employment Agreement, dated as of February 14, 1997, by
and between the Company and Elliott Sigal.
**10.32 Loan Agreement, dated as of February 14, 1997, by and
between Mercator Genetics, Inc. and the Company (filed as
Exhibit 10.35 to the Registration Statement on Form S-4
filed by the Company and incorporated herein by
reference).
*/**10.33 Scientific Collaboration Agreement, dated February 21, 1997, by and between Mercator
Genetics, Inc. and Affymetrix, Inc.
*/**10.34 Scientific Collaboration Agreement, dated March 3, 1997, by and between Mercator
Genetics, Inc. and Affymetrix, Inc.
*/**10.35 Progenitor Pangea Collaboration Agreement, dated as of
March 13, 1997, by and between the Company and Pangea
Systems, Inc.
**10.36 Employment Agreement, dated as of May 1997, by and between the Company and Douglass
B. Given.
*/**10.37 Exclusive License Agreement and Option, dated as of April
1, 1997, by and between The National Jewish Medical and
Research Center and the Company.
</TABLE>
Page 64
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
*/**10.38 Sponsored Research Agreement, dated May 1, 1997, by and
between the Ontario Cancer Institute/Princess Margaret
Hospital and the Company.
*/**10.39 Sponsored Research Agreement, dated April 15, 1997, by
and between the University of Cambridge and the Company.
*/**10.40 Sponsored Research Agreement, dated May 1, 1997, by and
between the Board of Regents of the University of
Nebraska (doing business as the University of Nebraska
Medical Center) and the Company.
*/**10.41 Sponsored Research Agreement, dated May 1, 1997, by and
between Ohio University and the Company.
**10.42 Interneuron Option Agreement, dated July 2, 1997, by and
between the Company and Interneuron Pharmaceuticals, Inc.
+10.43 Loan Agreement, dated as of February 14, 1997, and
amendment thereto dated as of July 2, 1997, by and
between the Company and Interneuron Pharmaceuticals, Inc.
*10.44 License Agreement with SmithKline Beecham Clinical Laboratories, Inc., dated September
19, 1997.
11.1 Statement of Computation of Per Share Earnings (Loss).
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
* Documents for which confidential treatment has been requested.
** Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-05369 declared effective on August 6,
1997.
+ Incorporated by reference to Exhibit 10.37 to the Company's Registration
Statement on Form S-4, Registration No. 333-23389.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
(c) EXHIBITS See item 14 (a) 3 above.
(d) FINANCIAL STATEMENT SCHEDULES See item 14 (a) 2 above.
Page 65
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PROGENITOR, INC.
Date: December 23, 1997 By: /s/ Douglass B. Given
-------------------------------
Douglass B. Given, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Douglass B. Given and Mark N.K. Bagnall
and each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments to this report
on Form 10-K, to file with same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, and to do
any and all acts and things and to execute any and all instruments that said
attorneys and agents, or either of them, determine may be necessary or advisable
or required to enable the Registrant to comply with the Securities Exchange Act
of 1934, as amended, and any rules or regulations or requirements of the
Securities and Exchange Commission in connection with this Form 10-K report,
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 such person 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 or her substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
on Form 10-K 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>
/s/ Douglass B. Given, M.D, Ph.D President, Chief Executive Officer December 23, 1997
- --------------------------------
Douglass B. Given, M.D, Ph.D
/s/ Mark N.K. Bagnall Vice President, Finance and Chief December 23, 1997
- ---------------------
Mark N.K. Bagnall Financial Officer (Principal Financial and
Accounting Officer)
/s/ Glenn L. Cooper, M.D. Chairman of the Board December 23, 1997
- -------------------------
Glenn L. Cooper, M.D.
/s/ Robert P. Axline Director December 23, 1997
- --------------------
Robert P. Axline
/s/ Alexander. M. Haig, Jr. Director December 23, 1997
- ---------------------------
Alexander. M. Haig, Jr.
/s/ Morris Laster, M.D Director December 23, 1997
- ----------------------
Morris Laster, M.D.
/s/ Robert R. Momsen Director December 23, 1997
- --------------------
Robert R. Momsen
/s/ Jerry P. Peppers Director December 23, 1997
- --------------------
Jerry P. Peppers
/s/ David B. Sharrock Director December 23, 1997
- ---------------------
David B. Sharrock
</TABLE>
Page 66
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
**1.1 Form of Underwriting Agreement.
**2.1 Amended and Restated Agreement and Plan of
Reorganization, dated as of February 14, 1997, as amended
July 22, 1997 (filed as Exhibit 2.1 to the Registration
Statement on Form S-4 filed by the Company and
incorporated herein by reference).
**3.1 Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
**4.1 Specimen Stock Certificate of the Company.
**4.2 Reference is made to Exhibits 3.1 and 3.2.
**4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc. to
Phoenix Leasing Incorporated, dated August 31, 1993.
**4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc. to
Phoenix Leasing Incorporated, dated October 28, 1994.
**4.5 Form of Warrant for Purchase of Common Stock.
**4.6 Form of Warrant Agreement.
**5.1 Opinion of Morrison & Foerster LLP.
**10.1 Form of Indemnification Agreement entered into between
the Company and its directors and executive officers.
**10.2 The Company's 1992 Stock Option Plan.
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option Plan.
**10.5 The Company's 1996 Stock Incentive Plan, as amended and restated as of March 7,
1997, and form of Stock Option Agreement.
**10.6 Form of Investors' Rights Agreement, entered into among
the Company, Interneuron Pharmaceuticals, Inc., Transcell
Technologies, Inc., and the holders of the Company's
Preferred Stock, Series B.
*/**10.7 License Agreement, dated as of January 28, 1992, by and
between Scimark Corp., The Castle Group Ltd. and Ohio
University, as amended October 15, 1993.
*/**10.8 Sponsored Research Agreement, dated January 31, 1992, by
and between Scimark Corp. and Ohio University, as amended
October 15, 1993, February 16, 1994, November 16, 1994
and November 22, 1995.
*/**10.9 License Agreement, dated as of April 1, 1993, by and
between the Company and Ohio University.
**10.11 License Agreement, dated as of June 8, 1994, by and
between the Company and Associated Universities, Inc.
*/**10.12 Standard License Agreement, dated as of September 1,
1994, by and between the Company and the Wisconsin Alumni
Research Foundation, as amended June 2, 1995.
*/**10.13 License and Collaboration Agreement, dated as of March
31, 1995, by and between the Company and Chiron
Corporation, as amended April 10, 1996.
*/**10.14 Sponsored Research and License Agreement, dated as of May
1, 1995, by and between the Company and Novo Nordisk A/S,
as amended January 17, 1996 and March 17, 1996.
*/**10.15 License Agreement, dated as of July 17, 1995, by and
between the Company and Vanderbilt University.
*/**10.16 License Agreement, dated as of May 30, 1996, by and
between the Company and AMRAD Developments PTY Ltd.
**10.17 Lease Agreement, dated as of November 1994, by and between the Company and Thomas R.
Eggers.
**10.18 Lease, Service and Affiliation Agreement, entered into as
of February 1995, by and between the Company and The Ohio
State University.
**10.19 Employment Agreement, dated January 3, 1993, by and between the Company and Douglass
B. Given.
**10.20 Form of Intercompany Services Agreement, dated as of ,
1997, by and between the Company and Interneuron
Pharmaceuticals, Inc.
**10.21 Form of Tax Allocation Agreement, dated as of , 1997, by
and between the Company and Interneuron Pharmaceuticals,
Inc.
**10.22 The Company's 1996 Employee Stock Purchase Plan.
</TABLE>
Page 68
<PAGE> 70
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
*/**10.23 License Agreement, dated as of December 31, 1996, by and
between the Company and Amgen Inc.
**10.24 Stock Purchase Agreement, dated as of December 31, 1996,
by and between the Company and Amgen Inc.
*/**10.25 License Agreement, dated as of January 8, 1997, by and
between the Company and Associated Universities, Inc.,
operator of Brookhaven National Laboratory.
*/**10.26 Amended and Restated Sponsored Research and License
Agreement, dated as of February 21, 1997, by and between
the Company and Novo Nordisk A/S.
**10.27 The Company's 1997 Stock Option Plan.
*/**10.28 License Agreement, dated as of February 1, 1997, by and between Mercator Genetics,
Inc. and the Board of Trustees of The Leland Stanford Junior University.
**10.29 Lease Agreement, dated July 29, 1993, by and between
Mercator Genetics, Inc. and WVP Income Plus, III, as
amended August 11, 1993, February 7, 1994, October 10,
1994, April 27, 1995 and May 29, 1997.
**10.30 Form of Indemnification Agreement entered into between Mercator Genetics, Inc. and
its directors and executive officers.
**10.31 Employment Agreement, dated as of February 14, 1997, by
and between the Company and Elliott Sigal.
**10.32 Loan Agreement, dated as of February 14, 1997, by and
between Mercator Genetics, Inc. and the Company (filed as
Exhibit 10.35 to the Registration Statement on Form S-4
filed by the Company and incorporated herein by
reference).
*/**10.33 Scientific Collaboration Agreement, dated February 21, 1997, by and between Mercator
Genetics, Inc. and Affymetrix, Inc.
*/**10.34 Scientific Collaboration Agreement, dated March 3, 1997, by and between Mercator
Genetics, Inc. and Affymetrix, Inc.
*/**10.35 Progenitor Pangea Collaboration Agreement, dated as of
March 13, 1997, by and between the Company and Pangea
Systems, Inc.
**10.36 Employment Agreement, dated as of May 1997, by and between the Company and Douglass
B. Given.
*/**10.37 Exclusive License Agreement and Option, dated as of April
1, 1997, by and between The National Jewish Medical and
Research Center and the Company.
*/**10.38 Sponsored Research Agreement, dated May 1, 1997, by and
between the Ontario Cancer Institute/Princess Margaret
Hospital and the Company.
*/**10.39 Sponsored Research Agreement, dated April 15, 1997, by
and between the University of Cambridge and the Company.
*/**10.40 Sponsored Research Agreement, dated May 1, 1997, by and
between the Board of Regents of the University of
Nebraska (doing business as the University of Nebraska
Medical Center) and the Company.
*/**10.41 Sponsored Research Agreement, dated May 1, 1997, by and
between Ohio University and the Company.
**10.42 Interneuron Option Agreement, dated July 2, 1997, by and
between the Company and Interneuron Pharmaceuticals, Inc.
+10.43 Loan Agreement, dated as of February 14, 1997, and
amendment thereto dated as of July 2, 1997, by and
between the Company and Interneuron Pharmaceuticals, Inc.
*10.44 License Agreement with SmithKline Beecham Clinical Laboratories, Inc., dated
September 19, 1997.
11.1 Statement of Computation of Per Share Earnings (Loss).
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ----------------------
* Documents for which confidential treatment has been requested.
** Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-05369 declared effective on August 6,
1997.
+ Incorporated by reference to Exhibit 10.37 to the Company's Registration
Statement on Form S-4, Registration No. 333-23389
Page 69
<PAGE> 1
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (hereinafter "AGREEMENT"), effective as of the
EFFECTIVE DATE (as defined below), is entered into by and between Progenitor,
Inc., a Delaware corporation having principal offices at 4040 Campbell Avenue,
Menlo Park, California 94025 (hereinafter "PROGENITOR") and SmithKline Beecham
Clinical Laboratories, Inc., a Delaware corporation having principal offices at
1201 South Collegeville Road, Collegeville, Pennsylvania 19426 (hereinafter
"SBCL").
WHEREAS, PROGENITOR is the owner of all right, title and interest in
certain patents, identified in EXHIBIT A hereto, and know-how relating to
methods for the diagnosis of and/or screening for human hereditary
hemochromatosis;
WHEREAS, SBCL desires to obtain certain licenses in certain countries of
the world from PROGENITOR to develop and commercialize tests for the diagnosis
of and/or screening for human hereditary hemochromatosis in such countries under
the aforesaid patents and know-how, and PROGENITOR is willing to grant to SBCL
such licenses under terms and conditions set forth below.
NOW, THEREFORE, in consideration of the following, and intending to be
legally bound, PROGENITOR and SBCL agree as follows:
1. DEFINITIONS
In this AGREEMENT, unless otherwise provided, the following terms shall
have the meaning set forth in this section.
1.1. AFFILIATE
The term "AFFILIATE" shall mean any corporation or other business entity
controlled by, controlling or under common control with either PROGENITOR or
SBCL. For purposes of this Section 1.1, "control" shall mean direct or indirect
beneficial ownership of greater than fifty percent (50%) of the voting stock or
equity, or greater than fifty percent (50%) interest in the income of such
corporation or other business entity; provided that, if local law requires a
minimum percentage of local ownership, control will be established by direct or
indirect beneficial ownership of one hundred percent (100%) of the maximum
ownership percentage that may, under such local law, be owned by foreign
interests.
1.2. EFFECTIVE DATE
The term "EFFECTIVE DATE" shall mean the effective date of this
AGREEMENT and shall be the date upon which this agreement is executed by both
parties.
Page 1
<PAGE> 2
1.3. HOME-BREW
The term "HOME-BREW" shall mean any diagnostic or screening test or
assay performed in a clinical laboratory for purposes of providing a service for
detecting a human genetic mutation related to human hereditary hemochromatosis
(and not packaged as a product for sale) which, if performed in the United
States, would not be subject, as of the EFFECTIVE DATE, to regulation by the
United States Food and Drug Administration.
1.4. KNOW-HOW
The term "KNOW-HOW" shall mean all present and future technical
information and know-how which relates to an ASSAY which is confidential or is
not in the public domain and shall include, without limitation, all biological,
chemical, pharmacological, toxicological, clinical, assay, control and
manufacturing data, and biological material samples required for ASSAY
development purposes, and any other information relating to an ASSAY and useful
for the development and commercialization of an ASSAY.
1.5. KIT
The term "KIT" shall mean any set of components or reagents provided,
together as a unit, to a THIRD PARTY for the purpose of performing a diagnostic
or screening test or assay for detecting a human genetic mutation related to
human hereditary hemochromatosis which has been approved by the federal Food and
Drug Administration (or its equivalent outside of the U.S.A. if required) for
diagnosis or screening clinical use.
1.6. PATENTS
The terms "PATENTS" shall mean all patents and patent applications which
are or become owned by PROGENITOR, or to which PROGENITOR otherwise has, now or
in the future, the right to grant licenses, which generically or specifically
claim an ASSAY or its components, a process for manufacturing an ASSAY or its
components, an intermediate used in making or using the ASSAY or its components,
or a use of an ASSAY for detecting a human genetic mutation related to human
hereditary hemochromatosis. Included within the definition of PATENTS are all
continuations, continuations-in-part, divisions, patents of addition, reissues,
re-examinations, renewals or extensions thereof and all SPCs (i.e., a right
based upon a PATENT to exclude others from making, using, importing or selling
ASSAY, such a Supplementary Protection Certificate). Also included within the
definition of PATENTS are any patents or patent applications which generically
or specifically claim any improvements on an ASSAY, or its components, or
intermediates or manufacturing processes required or useful for production of an
ASSAY or its components which are developed by PROGENITOR, or which PROGENITOR
otherwise has the right to grant licenses, now or in the future, during the term
of this AGREEMENT. The current list of patent applications and patents
encompassed within PATENTS is set forth in EXHIBIT A which is attached hereto
and fully incorporated herein.
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1.7. ASSAY
The term "ASSAY" shall mean any HOME-BREW covered by an ENFORCEABLE
CLAIM.
1.8. TERRITORY
The term "TERRITORY" shall mean the United States of America, Mexico,
the United Kingdom, France, Germany, Spain, South Africa, Australia, Malaysia,
Singapore, Indonesia, Thailand, Brazil, Bolivia, Paraguay, Uruguay, Argentina,
Chile, Peru, Ecuador, Columbia, Venezuela, Guyana, Surinam, French Guyana,
Galapagos Islands, Falkland Islands, South Georgia, Belize, Costa Rica, El
Salvador, Guatemala, Honduras, Nicaragua and Panama.
1.9. ENFORCEABLE CLAIM
The term "ENFORCEABLE CLAIM" shall mean either (i) any claim in an
issued patent within PATENTS that has not expired or been held or otherwise
determined to be invalid or unenforceable by a court or administrative agency of
competent jurisdiction and of last resort from which no further appeal may be
taken or is available, or (ii) a pending claim in a patent application within
PATENTS filed with the United States Patent and Trademark Office (or foreign
equivalent) either prior to EFFECTIVE DATE or during the term of this AGREEMENT,
provided that such patent application is diligently prosecuted during the term
of this AGREEMENT.
1.10. THIRD PARTY(IES)
The term "THIRD PARTY(IES)" shall mean any party other than SBCL and
PROGENITOR and their AFFILIATES.
2. GRANTS
2.1. EXCLUSIVE LICENSE
(a) Subject to the terms and conditions of this AGREEMENT, PROGENITOR hereby
grants to SBCL an exclusive right and license including, without limitation, the
right to grant sublicenses, under PATENTS and KNOW-HOW to make, use, have made,
and import materials or components for the sole purpose of developing ASSAYS,
and offering to sell, selling, and performing HOME-BREW in the TERRITORY. (* *
*) The right and license to make, use, have made, import and sell shall include
all activities related to offering to sell, selling, having made, and performing
HOME-BREW in the TERRITORY concerning the subject matter of PATENTS and KNOW-HOW
which activities would, but for the right and license herein granted, infringe
an ENFORCEABLE CLAIM. These rights shall include the right to contract with
THIRD PARTIES for the purpose of running of ASSAYS and for the purpose of
making, having made, using and selling components of ASSAYS for the benefit of
SBCL or its AFFILIATES which THIRD
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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PARTIES, for purposes of this AGREEMENT, shall be deemed not to be sublicensees
of SBCL and Section 2.1(b)(iv) shall not apply.
(b) (i) Any agreement whereby SBCL grants a sublicense to a THIRD
PARTY under this Section 2.1 shall include terms and conditions which are no
less restrictive and no more expansive than as set forth in this Agreement. (ii)
Any such sublicense shall provide expressly that SBCL and SBCL's sublicensee
intend that PROGENITOR shall benefit from, and shall be entitled to enforce the
provisions of, such agreement. (iii) Within thirty (30) days after the effective
date of any THIRD PARTY sublicense granted by SBCL under this Section 2.1, SBCL
shall provide to PROGENITOR, in writing, a notice of the identity of the
sublicensee.
2.2. NONEXCLUSIVE LICENSE
Subject to the terms and conditions of this AGREEMENT, at any time (* *
*), SBCL, upon SBCL's written election, may convert in such country the
exclusive right and license granted by PROGENITOR pursuant to Section 2.1 to a
nonexclusive, nontransferable right and license. Such right and license shall
not include a right to grant sublicenses other than the right to grant
sublicenses to AFFILIATES. The effective date of such conversion shall be the
date of receipt by PROGENITOR of written notice of SBCL's election under this
Section 2.2.
2.3. RIGHT OF NEGOTIATION
Subject to the terms and conditions of this AGREEMENT, PROGENITOR hereby
grants to SBCL a right of negotiation to obtain a right and license under
PATENTS and KNOW-HOW, and all other appropriate patents and know-how owned or
controlled by PROGENITOR, to make, have made, use, offer to sell, sell and
import KITS in the TERRITORY, such right to extend until the earlier of either
(i) the date which is 90 days after the date of initiation of sales of services
utilizing an ASSAY anywhere in the TERRITORY , or (ii) the date which is 180
days after the EFFECTIVE DATE (the "DATE"). PROGENITOR will not enter into an
agreement with any THIRD PARTY whereby PROGENITOR would grant a right and
license under any such patents or know-how to make, have made, use, offer to
sell, sell and import KITS in the TERRITORY prior to the DATE. At any time prior
to the DATE, SBCL or PROGENITOR may initiate good faith negotiations to grant
SBCL a right and license under PATENTS and KNOW-HOW, and all other appropriate
patents and know-how owned or controlled by PROGENITOR, to make, have made, use,
offer to sell, sell and import KITS in the TERRITORY. If SBCL and PROGENITOR
have not agreed upon the material commercial terms of such right and license
prior to the DATE, PROGENITOR may enter into any agreement with any THIRD PARTY
granting a right and license under PATENTS and KNOW-HOW, and all other
appropriate patents and know-how owned or controlled by PROGENITOR, to make,
have made, use, offer to sell, sell and import KITS in the TERRITORY.
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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2.4. NO OTHER RIGHTS
Except as expressly provided herein, no right, title, or interest is
granted by PROGENITOR to SBCL in, to or under PATENTS and KNOW-HOW or in or to
an ASSAY or in or to a KIT, or any components thereof.
3. CONSIDERATION
3.1. INITIAL FEE
In partial consideration for the rights and license granted pursuant to
Section 2, within thirty (30) days after the EFFECTIVE DATE, SBCL shall pay to
PROGENITOR an initial fee equal to (* * *). Such fee shall be creditable against
royalties due and payable to PROGENITOR pursuant to Section 3.5 during the
(***).
3.2. EXCLUSIVE LICENSE ANNUAL FEES
(a) In partial consideration for the rights and license granted
pursuant to Section 2.1, SBCL shall pay to PROGENITOR an annual fee to be paid
within thirty (30) days after the occurrence of the following:
(i) First Anniversary of EFFECTIVE DATE U.S. $(***)
(ii) Second Anniversary of EFFECTIVE DATE U.S. $(***)
(iii) Third Anniversary of EFFECTIVE DATE U.S. $(***)
(iv) Fourth Anniversary of EFFECTIVE DATE U.S. $(***)
(v) Fifth Anniversary of EFFECTIVE DATE U.S. $(***)
(b) Annual fees actually paid pursuant to Section 3.2(a) shall be
nonrefundable to SBCL except that (i) in the event of a conversion of the
exclusive right and license granted to SBCL hereunder to a nonexclusive right
and license which occurs earlier than the expiration of the annual period for
which such fee was paid, such annual fee shall be prorated for the remaining
annual period, and the unused amount shall be fully creditable against future
payments due to PROGENITOR for the remaining term of the AGREEMENT, and any
portion not fully credited at the expiration or termination of the AGREEMENT
shall be refunded to SBCL no later than thirty (30) days after such expiration
or termination, and no further annual payments will accrue, and (ii) in the
event of any termination or expiration of this AGREEMENT which occurs earlier
than the expiration of the annual period for which such fee was paid, such
annual fee shall be prorated for the remaining annual period, and the unused
amount shall be fully refunded to SBCL no later than thirty (30) days after such
expiration or termination, unless this AGREEMENT is terminated as a result of
action by SBCL other than as a consequence of a material breach or default by
PROGENITOR. Furthermore, such annual fees shall be
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* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 6
creditable against royalties due and payable to PROGENITOR pursuant to Section
3.5; provided, however, than any such annual fee shall be creditable (* * *).
3.3. SUBLICENSE ROYALTIES.
Royalties based on actual use of an ASSAY by a sublicensee of SBCL shall
be paid to PROGENITOR by SBCL in accordance with Section 3.5 or Section 3.6.
3.4. NONEXCLUSIVE LICENSE FEES.
In partial consideration for the nonexclusive rights and license held by
SBCL after SBCL's election pursuant to Section 2.2, or in the event SBCL's
exclusive license is converted to a nonexclusive license as a result of Section
9.1(b), SBCL shall pay to PROGENITOR an annual fee equal to (* * *) per annual
period following the conversion of SBCL. The first such fee shall be due and
shall be paid within thirty (30) days after the date of SBCL's written notice to
PROGENITOR pursuant to Section 2.2 or the effective date of the conversion under
Section 9.1(b), subject to any credit remaining under Section 3.2(b).
Thereafter, each such annual fee shall be due and shall be paid within thirty
(30) days after the date of each twelve (12) month anniversary of the date of
SBCL's written notice under Section 2.2, subject to any credit remaining under
Section 3.2(b). Fees paid to PROGENITOR under this Section 3.4 shall be
creditable against royalties due and payable to PROGENITOR pursuant to Section
3.6; provided, however, that such fee shall be creditable (* * *), except that
in the event of any termination or expiration of this AGREEMENT which occurs
earlier than the expiration of the annual period for which such fee was paid,
such annual fee shall be prorated for the remaining annual period, and the
unused amount shall be fully refunded to SBCL no later than thirty (30) days
after such expiration or termination unless this AGREEMENT is terminated as a
result of action by SBCL other than for material breach or default by
PROGENITOR.
3.5. EXCLUSIVE LICENSE ROYALTIES
In partial consideration for the exclusive rights and license granted
pursuant to Section 2.1, and subject to any credit that may be due SBCL under
Section 3.2(b), SBCL shall pay to PROGENITOR royalties in accordance with the
following:
(A) (* * *) for each use of an ASSAY in each human sample
analysis conducted in a country of the TERRITORY either by SBCL, its AFFILIATES
or a sublicensee of SBCL from which SBCL derives revenue in such country
provided such ASSAY is covered by an ENFORCEABLE CLAIM of an issued patent or a
pending but enforceable patent application within such country, provided there
is no Substantial Competition; or
(B) (* * *) for each use of an ASSAY in each human sample
analysis conducted in a country of the TERRITORY either by SBCL, its AFFILIATES
or a sublicensee of SBCL from which SBCL derives revenue in such country
provided such ASSAY is either (i) claimed in an unenforceable pending patent
application within such country, or
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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(ii) covered by an ENFORCEABLE CLAIM of an issued patent or a pending but
enforceable patent application within such country and Substantial Competition
exists in such country.
"Substantial Competition," as used herein, exists when the combined volume sales
in a particular country of the TERRITORY of all THIRD PARTY assays for detecting
human hereditary hemochromatosis equals at least (* * *) of SBCL's or its
AFFILIATES or sublicensees volume market share of ASSAYS in such country
(compared to actual volume sales from the previous calendar year). A
determination of the existence of Substantial Competition in a country during
any calendar year shall be applied retroactively to the royalty payments due for
each use of an ASSAY in such country during such calendar year in accordance
with Section 4.2(c). Substantial Competition will be evaluated by SBCL on an
annual basis.
The phrase "in each human sample analysis conducted either by SBCL, its
AFFILIATES or a sublicensee of SBCL from which SBCL derives revenue" as used in
this Section 3.5 and in Section 3.6 shall not include (* * *). Further, the
phrase "from which SBCL derives revenue" as used in this Section 3.5 and in
Section 3.6 shall (* * *).
If SBCL decides, using its reasonable business judgment, that the consideration
under this Section 3.5 is no longer commercially reasonable, SBCL will notify
PROGENITOR in writing, and the parties shall meet and renegotiate SBCL's payment
obligations under this AGREEMENT in good faith.
3.6. NONEXCLUSIVE LICENSE ROYALTIES
In the event that SBCL elects to convert the exclusive right and
license granted by PROGENITOR in a particular country of the TERRITORY pursuant
to Section 2.1 to a nonexclusive, non-transferable right and license in
accordance with Section 2.2, or in the event such conversion occurs as a result
of Section 9.1(b), Section 3.5 shall not apply and SBCL, in partial
consideration for such nonexclusive rights and license, and subject to any
credit that may be due SBCL under Section 3.2(b) or Section 3.4, shall pay to
PROGENITOR royalties equal to (* * *) for each use of an ASSAY in such country
in each human sample analysis conducted either by SBCL, its AFFILIATES or a
sublicensee of SBCL from which SBCL derives revenue in such country. If
PROGENITOR in any country of the TERRITORY grants a nonexclusive license to any
THIRD PARTY for an ASSAY, SBCL shall have the benefit in such country of the
terms granted to such THIRD PARTY to the extent that such terms are more
favorable when viewed as a whole than those of this AGREEMENT.
3.7. THIRD PARTY ROYALTIES
(a) During the term of this AGREEMENT, if either PROGENITOR or SBCL becomes
aware of patent rights owned or controlled by a THIRD PARTY which may relate to
carrying out the ASSAY or utilizing components thereof, such party shall notify
the other party promptly in writing to the extent that such party is not
prohibited from
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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doing so by an obligation of confidentiality to a THIRD PARTY which disclosed
such information to such party.
(b) (* * *)
(c) In the event that PROGENITOR enters into such a license
agreement with a THIRD PARTY to obtain from such THIRD PARTY any rights and
license necessary for SBCL, its AFFILIATES and sublicensees to carry out the
ASSAY or utilize components thereof, SBCL shall reimburse to PROGENITOR (* * *)
paid by PROGENITOR to any THIRD PARTY as a result of the exercise of the license
herein granted, in a particular country of the TERRITORY, provided that the
license acquired by PROGENITOR from such THIRD PARTY was as a result of a
necessity determination in accordance with Section 3.7(b), and further provided
that, in no event shall such reimbursement exceed (* * *) in such country of an
ASSAY in each human sample analysis conducted either by SBCL, its AFFILIATE or a
sublicensee of SBCL from which SBCL derives revenue. The phrase "in each human
sample analysis conducted either by SBCL or a sublicensee of SBCL from which
SBCL derives revenue" as used in this Section 3.7 shall not include (* * *).
(d) PROGENITOR shall keep accurate records in sufficient detail
to enable royalties paid by PROGENITOR to THIRD PARTIES for each use of an ASSAY
in each human sample analysis conducted either by SBCL, its AFFILIATE or a
sublicensee of SBCL from which SBCL derives revenue in accordance with this
Section 3.7 to be determined. Such records shall be maintained by PROGENITOR at
PROGENITOR's principal place of business for at least two (2) years after the
period covered by such records. Within forty-five (45) days after receiving a
report from PROGENITOR regarding the payment of such royalties to such THIRD
PARTIES, SBCL shall make the reimbursement to PROGENITOR for such royalties
provided for in this Section, subject to any credit which may be due SBCL under
Sections 3.2(a), 3.2(b) and/or 3.4.
3.8. CURRENCY
All payments to be made by one party to another party hereunder shall be
made in United States of America dollars. If governmental regulations prevent
remittances from a foreign country with respect to sales made in that country,
the obligation of SBCL to pay royalties on sales in that country shall be
suspended until such remittances are possible. PROGENITOR shall have the right,
upon giving written notice to SBCL, to receive payment in that country in local
currency.
3.9. TAXES
Any tax, duty or other levy paid or required to be withheld by SBCL or
its AFFILIATES or sublicensees on account of royalties payable to PROGENITOR
under this AGREEMENT shall be deducted from the amount of royalties otherwise
due. SBCL shall
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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secure and send to PROGENITOR proof of any such taxes, duties or other levies
withheld and paid by SBCL or its AFFILIATES or sublicensees for the benefit of
PROGENITOR.
4. REPORTS AND AUDIT RIGHTS
4.1. RECORDS
SBCL shall keep, and shall require SBCL's sublicensees to keep, accurate
records in sufficient detail to enable royalties and other payments due
PROGENITOR hereunder to be determined. Such records shall be maintained by SBCL
at SBCL's principal place of business for at least two (2) years after the
period covered by such records.
4.2. REPORTS
Within thirty (30) days after the first day of each calendar quarter,
SBCL shall:
(a) deliver to PROGENITOR a written report containing information
and data concerning the number of ASSAYS SBCL, its AFFILIATES and its
sublicensees have performed during the relevant period in each country in the
TERRITORY.
(b) deliver to PROGENITOR a written report containing information
and data concerning the total amount due and payable to PROGENITOR hereunder for
SBCL's, its AFFILIATES' and its sublicensees' activities during such calendar
quarter; and
(c) pay to PROGENITOR the full amount of royalties and other
payments due to PROGENITOR hereunder for SBCL's its AFFILIATES' and its
sublicensees' activities during the calendar quarter covered by such report,
subject to any credit which may be due SBCL under Sections 3.2(a), 3.2(b), 3.4
and/or 3.5(b) (with respect to any retroactive application of set off against
the royalty obligation in Section 3.5(b) as a result of a determination of the
existence of Substantial Competition in a particular country duirng the
immediately preceding calendar year).
Payment of royalties and other payments due and payable to PROGENITOR
but not paid when due shall accrue interest at the prime commercial lending rate
prevailing on the payment due date at the Bank of America, San Francisco,
California.
4.3. AUDIT RIGHTS
During the term of this AGREEMENT and for six (6) months after its
termination, after receipt by SBCL of PROGENITOR's written request and after
reasonable prior notice, SBCL shall permit an independent certified public
accountant, selected by PROGENITOR and reasonably acceptable to SBCL, to examine
SBCL's and SBCL's sublicensees' records to determine the accuracy of any report
delivered or payment made by SBCL to PROGENITOR hereunder. Only one such
examination may be made in each year and shall not cover records for more than
the preceding two (2) years, and further provided that such accountant shall
report to PROGENITOR only as to the accuracy of the royalty
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statements and payments. Except as otherwise provided below, the cost and
expense of such examination shall be borne by PROGENITOR. If any such
examination determines that additional payment amounts are owed to PROGENITOR
for any period, SBCL shall pay such additional payment amounts to PROGENITOR
promptly. If any such examination determines that an overpayment has been made
to PROGENITOR for any period, PROGENITOR shall reimburse such overpayment amount
to SBCL promptly. In addition, if any such examination reveals that SBCL
underpaid PROGENITOR by an amount equal to or greater than 10% of the total
amount due PROGENITOR in any reporting period, the reasonable cost and expense
of such examination shall be borne by SBCL.
5. DILIGENCE AND OTHER OBLIGATIONS OF SBCL
5.1. MANUFACTURING AND DISTRIBUTION
SBCL shall bear all costs and expenses associated with making, having
made, using and importing an ASSAY or its components for the purpose of offering
to sell, selling, and performing HOME-BREW in the TERRITORY.
5.2. MARKETING DILIGENCE
(a) SBCL shall use reasonable efforts to promote and develop a
commercial market for performing HOME-BREW in the TERRITORY utilizing an ASSAY
using the same standards SBCL would use in promoting and developing an ASSAY of
its own making which had the same technical and commercial potential as an
ASSAY. Notwithstanding the above, SBCL shall have satisfied its obligations to
use such reasonable efforts, within the relevant country of the TERRITORY, upon
the occurrence of the following:
(i) Initiating and thereafter continuing sales of services
utilizing an ASSAY to THIRD PARTY customers upon which royalties are to be paid
to PROGENITOR in the United States of America within (* * *) after the EFFECTIVE
DATE;
(ii) Initiating and thereafter continuing sales of services
utilizing an ASSAY to THIRD PARTY customers upon which royalties are to be paid
to PROGENITOR in each of Mexico, the United Kingdom, and Australia within (* *
*) after the EFFECTIVE DATE; and
(iii) Initiating and thereafter continuing sales of services
utilizing an ASSAY to THIRD PARTY customers upon which royalties are to be paid
to PROGENITOR in the relevant country in the TERRITORY which is not mentioned in
Section 5.2(a)(i) or (ii) within (* * *) after the EFFECTIVE DATE.
(b) If SBCL fails to initiate sales of services in any country of
the TERRITORY in accordance with the schedule set forth in Section 5.2(a) and
subject to Section 5.2(c), PROGENITOR shall be entitled to terminate any right
and license then held by SBCL in such country under PATENTS and KNOW-HOW to
make, have made, use and
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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import an ASSAY for the purpose of offering to sell, selling and performing
HOME-BREW in such country, such termination to be effective, with no opportunity
to cure, upon receipt by SBCL of written notice of such termination by
PROGENITOR, provided such termination shall not be effective if SBCL has
initiated sales of such services in such country at the time SBCL receives such
notice from PROGENITOR. In the event that SBCL initiates sales of services in a
country of the TERRITORY in accordance with the schedule set forth in Section
5.2(a), but thereafter fails to continue sales of such services, and such
failure is due (i) to circumstances which are within SBCL's reasonable control
and (ii) continues for more than (* * *), unless SBCL is proceeding as
diligently as reasonably possible, PROGENITOR shall be entitled, at its
discretion, to terminate any right and license then held by SBCL in such country
under PATENTS and KNOW-HOW to make, have made, use and import an ASSAY for the
purpose of offering to sell, selling and performing HOME-BREW in such country,
such termination to be effective, with no opportunity to cure, upon receipt by
SBCL of written notice of such termination by PROGENITOR, provided such
termination shall not be effective if SBCL has resumed sales of such services in
such country at the time SBCL receives such notice from PROGENITOR. PROGENITOR's
termination of SBCL's license rights in a particular country of the TERRITORY
under this Section 5.2 shall be PROGENITOR's sole remedy with respect to SBCL's
activities under this AGREEMENT with respect to such country.
(c) In the event that, after the EFFECTIVE DATE, the federal Food
and Drug Administration (or its equivalent in a country outside of the U.S.A.)
passes legislation or other rules which require the approval of ASSAY by such
agency, the timelines outlined in Section 5.2(a) shall be extended such that
they shall not come into effect until after approval of the ASSAY in such
country has been achieved.
5.3. MARKETING
SBCL shall bear all costs and expenses associated with marketing of
services in the TERRITORY utilizing an ASSAY. SBCL shall develop a marketing and
market development plan within (* * *) after the EFFECTIVE DATE and deliver such
plan to PROGENITOR on or before such date. In connection with its marketing
activities, including without limitation the development of a market development
and marketing plan, SBCL shall spend not less than (* * *) in support of
marketing and commercialization of services in the TERRITORY utilizing an ASSAY,
such expenditure to be made during the term of SBCL's exclusive license rights
under this AGREEMENT at a rate which is within SBCL's sole discretion.
Notwithstanding the above, in the event that the exclusive term of the license
granted to SBCL hereunder is converted to a non-exclusive license prior to the
expiration of (* * *) after the EFFECTIVE DATE, or in the event that the
AGREEMENT is terminated prior to the expiration of (* * *) after the EFFECTIVE
DATE, the amount of money that SBCL shall be required to have spent under this
Section 5.3 shall be determined at the rate of (* * *), on a pro-rated basis.
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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6. PROVISION OF KNOW-HOW AND CONFIDENTIALITY
6.1. PROVISION OF KNOW-HOW
Promptly after the EFFECTIVE DATE, PROGENITOR shall disclose and supply
to SBCL all KNOW-HOW. Thereafter, PROGENITOR shall promptly disclose and supply
to SBCL any further KNOW-HOW which may become known to PROGENITOR. During the
term of the AGREEMENT, PROGENITOR shall provide SBCL with reasonable technical
assistance, within PROGENITOR's area of expertise, with respect to the
utilization of such KNOW-HOW in the development and commercialization of ASSAYS.
6.2. GENERAL PROVISION REGARDING CONFIDENTIALITY
During the term of this AGREEMENT and for (* * *) thereafter,
irrespective of any termination earlier than the expiration of the term of this
AGREEMENT, and except as otherwise expressly provided in this AGREEMENT, each
party shall hold in strict confidence and not use or disclose to any THIRD PARTY
(other than employees, consultants and advisors who are similarly bound in
writing) any assay, product, technical, marketing, financial, business or other
information, ideas or know-how identified in writing as confidential
("Confidential Information") by the other party or otherwise developed by either
party in the performance of activities in furtherance of this AGREEMENT without
first obtaining the written consent of the disclosing party; provided, however,
that Confidential Information of a party shall not include:
(a) Information which at the time of disclosure to the receiving
party was previously known to the receiving party as demonstrated by written
records; or
(b) Information which at the time of disclosure to the receiving
party is published or otherwise generally available to the public; or
(c) Information which, after disclosure to the receiving party by
the other party, is published or otherwise becomes generally available to the
public through no breach of this AGREEMENT by the receiving party.
(d) Information which is subsequently and independently developed
by employees of the receiving party or AFFILIATES thereof who had no knowledge
of the confidential information disclosed.
6.3. EXCEPTIONS AND OTHER PROVISION RELATED TO CONFIDENTIAL
INFORMATION
A party may disclose Confidential Information of the other party:
(a) As required, in connection with the order of a court or other
governmental body; or
(b) As required by or in compliance with laws or regulations; or
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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(c) In confidence to accountants, banks and financing sources and
their advisors; or
(d) In confidence to consultants and advisors in connection with
a merger or acquisition or proposed merger or acquisition, or the like; or
(e) as may be required for purposes of investigating, developing,
manufacturing, having manufactured or marketing an ASSAY or its components under
this AGREEMENT or for securing essential or desirable authorizations, privileges
or rights from governmental agencies, or is required to be disclosed to a
governmental agency or is necessary to file or prosecute patent applications
concerning an ASSAY or its components which arises under this AGREEMENT.
The parties shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to such
information is granted.
Nothing herein shall be construed as preventing SBCL from disclosing any
information received from PROGENITOR hereunder to an AFFILIATE, sublicensee or
distributor of SBCL provided, in the case of a sublicensee or distributor, such
sublicensee or distributor has undertaken a similar obligation of
confidentiality with respect to the confidential information. Nothing herein
shall be construed as preventing PROGENITOR from disclosing any information
received from SBCL hereunder to an AFFILIATE or distributor of PROGENITOR,
provided, in the case of a distributor, such distributor has undertaken a
similar obligation of confidentiality with respect to the confidential
information. In no event shall PROGENITOR be permitted to disclose any
information received from SBCL hereunder to a sublicensee.
All confidential information disclosed by one party to the other shall
remain the intellectual property of the disclosing party. If a court or other
legal or administrative tribunal, directly or through an appointed master,
trustee or receiver, assumes partial or complete control over the assets of a
party to this AGREEMENT based on the insolvency or bankruptcy of such party, the
bankrupt or insolvent party shall promptly notify the court or other tribunal
(i) that confidential information received from the other party under this
AGREEMENT remains the property of the other party and (ii) of the
confidentiality obligations under this AGREEMENT. In addition, the bankrupt or
insolvent party shall, to the extent permitted by law, take all steps necessary
or desirable to maintain the confidentiality of the other party's confidential
information and to ensure that the court, other tribunal or appointee maintains
such information in confidence in accordance with the terms of this AGREEMENT.
6.4. PUBLIC DISCLOSURE REGARDING THE TERMS OF THIS AGREEMENT OR ASSAY
(a) Except as otherwise required by law, each of the parties
agree not to disclose, directly or indirectly, by public announcement or other
disclosure, the existence, financial terms or conditions or any other terms of
this AGREEMENT to any THIRD PARTY without the prior written consent of the other
party regarding the nature and
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text of such announcement or disclosure. The party desiring to make any such
public announcement or other disclosure shall inform the other party of the
proposed announcement or disclosure in reasonably sufficient time prior to
public release, and shall provide the other party with a written copy thereof,
in order to allow such other party to comment upon such announcement or
disclosure. Each party agrees that it shall cooperate fully with the other with
respect to all disclosures regarding this AGREEMENT to the Securities Exchange
Commission and any other governmental or regulatory agencies, including requests
for confidential treatment of proprietary information of either party included
in any such disclosure.
(b) Notwithstanding the above, subject to any restrictions which
may be imposed by any governmental agency, including without limitation the
Securities and Exchange Commission, PROGENITOR and SBCL agree that a public
announcement of this AGREEMENT will be made within (* * *) after the EFFECTIVE
DATE. Such announcement shall be drafted by PROGENITOR and SBCL jointly and
shall be mutually acceptable to PROGENITOR and SBCL.
(c) PROGENITOR shall not submit for written or oral publication
any manuscript, abstract or the like which includes data or other information
relating to an ASSAY without first obtaining the prior written consent of SBCL,
which consent shall not be unreasonably withheld. The contribution of each party
shall be noted in all publications or presentations by acknowledgment or
coauthorship, whichever is appropriate.
(d) Nothing in this AGREEMENT shall be construed as preventing or
in any way inhibiting SBCL from complying with statutory and regulatory
requirements governing the development, manufacture, use and sale or other
distribution of an ASSAY in any manner which it reasonably deems appropriate,
including, for example, by disclosing to regulatory authorities confidential or
other information received from PROGENITOR or THIRD PARTIES.
7. INDEMNIFICATION AND WARRANTIES
7.1. INDEMNIFICATIONS
(a) SBCL INDEMNIFICATION
(i) SBCL shall defend, indemnify and hold harmless
PROGENITOR, its AFFILIATES, and its and their respective officers, directors,
employees, agents, successors and assigns from any loss, damage, or liability,
including reasonable attorney's fees, resulting from any claim, complaint, suit,
proceeding or cause of action against any of them alleging physical or other
injury, including death, rising out of the provision of an ASSAY, or services
utilizing an ASSAY, to the injured party by SBCL, its AFFILIATES, (or its
permitted sublicensees); provided that:
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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<PAGE> 15
(A) SBCL shall not be obligated under this Section 7.1(a) if
it is shown by evidence acceptable in a court of law having jurisdiction over
the subject matter and meeting the appropriate degree of proof for such action,
that the injury was the result of the negligence or willful misconduct of any
employee or agent of PROGENITOR or the breach of any warrant or representation
made by PROGENITOR in this AGREEMENT;
(B) SBCL shall have no obligation under this Section 7.1(a)
unless PROGENITOR (i) gives SBCL prompt written notice of any claim or lawsuit
or other action for which it seeks to be indemnified under this AGREEMENT, (ii)
SBCL is granted full authority and control over the defense, including
settlement, against such claim or lawsuit or other action, and (iii) PROGENITOR
cooperates fully with SBCL and its agents in defense of the claims or lawsuit or
other action; and
(C) PROGENITOR shall have the right to participate in the
defense of any such claim, complaint, suit, proceeding or cause of action
referred to in this Section 7.1(a) utilizing attorneys of its choice, at its own
expense, provided, however, that SBCL shall have full authority and control to
handle any such claim, complaint, suit, proceeding or cause of action, including
any settlement or other disposition thereof, for which PROGENITOR seeks
indemnification under this Section.
(b) PROGENITOR INDEMNIFICATION
(i) PROGENITOR shall defend, indemnify and hold harmless
SBCL, its AFFILIATES, and its and their officers, directors, employees, agents,
successors and assigns from any loss, damage, or liability, including reasonable
attorney's fees, resulting from any claim, complaint, suit, proceeding or cause
of action against any of them alleging physical or other injury, including
death, rising out of either the provision of ASSAY services to the injured party
by PROGENITOR, its AFFILIATES, (or its permitted sublicensees) or the breach of
any warranty or representation made by PROGENITOR in this AGREEMENT; provided
that:
(A) PROGENITOR shall not be obligated under this
Section 7.1(b)(i) if it is shown by evidence acceptable in a court of law having
jurisdiction over the subject matter and meeting the appropriate degree of proof
for such action, that the injury was the result of the negligence or willful
misconduct of any employee or agent of SBCL; and
(B) PROGENITOR shall have no obligation under this
Section 7.1(b)(i) unless SBCL (i) gives PROGENITOR prompt written notice of any
claim, complaint, suit, proceeding or cause of action for which it seeks to be
indemnified under this AGREEMENT, (ii) PROGENITOR is granted full authority and
control over the defense, including settlement or other disposition, against
such claim, complaint, suit, proceeding or cause of action, and (iii) SBCL
cooperates fully with PROGENITOR and its agents in defense of such claim,
complaint, suit, proceeding or cause of action.
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<PAGE> 16
(C) SBCL shall have the right to participate in the
defense of any claim, complaint, suit, proceeding or cause of action referred to
in this Section 7.1(b)(i) utilizing attorneys of its choice, at its own expense.
(ii) PROGENITOR shall defend, indemnify and hold harmless
SBCL and its officers, directors, employees, successors and assigns from and
against any and all loss, damage, or liability, including reasonable attorney's
fees, arising out of, or resulting from or in connection with alleged
infringement of THIRD PARTY patent rights by exercise of the license herein
granted by SBCL, its AFFILIATES, or its sublicensees; provided that such patent
rights owned or controlled by such THIRD PARTY (i) are required to practice the
DNA-based diagnosis of human hereditary hemochromatosis by methods and materials
disclosed in the PATENTS and KNOW-HOW and licensed hereunder pursuant to Section
2.1 or Section 2.2, and (ii) disclose subject matter disclosed in the PATENTS
AND KNOW-HOW; and provided further that:
(A) PROGENITOR shall have no obligation under this
Section 7.1(b)(ii) unless such intellectual property rights (i) are required to
exercise the license granted herein; and (ii) claim (literally or under the
doctrine of equivalents) necessary embodiments and use of an ASSAY or its
components disclosed in Patents;
(B) PROGENITOR receives prompt written notice of any
claim, complaint, suit, proceeding or cause of action for which indemnification
is sought under this Section 7.1(b)(ii); and
(C) PROGENITOR is granted full authority and control
over the defense against such claim, complaint, suit, proceeding or cause of
action, including without limitation settlement or other disposition thereof;
(D) SBCL cooperates fully with PROGENITOR and its
agents in defense of such claim, complaint, suit, proceeding or cause of action;
(E) SBCL, at SBCL's expense, shall have the right to
participate in the defense of any claim, complaint, suit, proceeding or cause of
action referred to in this Section 7.1(b)(ii) utilizing attorneys of its choice;
and
(F) In the event that damages, losses and liabilities
allegedly arising out of, or resulting from or in connection with infringement
of THIRD PARTY patent rights by exercise of the license herein granted by SBCL,
AFFILIATES of SBCL or sublicensees of SBCL are assessed against SBCL and awarded
to such THIRD PARTY in a final judgment either affirmed on appeal to a court of
next level above the trial court or not appealed, PROGENITOR's obligation under
Section 7.1(b)(ii) to indemnify SBCL shall be (* * *) of any such damages which
are based on royalties to be paid such THIRD PARTY as a result of the exercise
of the license herein granted, in a particular country of the TERRITORY,
provided that, in no event shall such reimbursement exceed (* * *) in such
country of an ASSAY in each human sample analysis conducted either by SBCL, its
AFFILIATE or a sublicensee of SBCL from
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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which SBCL derives revenue. The term "in each human sample analysis conducted
either by SBCL or a sublicensee of SBCL from which SBCL derives revenue" as used
in this Section 7.1(b)(ii) shall not include any repeats conducted with the same
human sample which are required to produce a reliable result or any analysis
conducted on a blinded sample for purposes of training or establishing a service
laboratory or any testing for validation purposes.
7.2. WARRANTIES AND REPRESENTATIONS
(a) (i) PROGENITOR warrants and represents that it owns the
entire right, title and interest in the PATENTS listed in Appendix A, or filed
by or on behalf of PROGENITOR pursuant to Section 7, and the KNOW-HOW provided
to SBCL under this AGREEMENT, and that it otherwise has the right to enter into
this AGREEMENT.
(ii) PROGENITOR further warrants and represents that it will
not encumber any such PATENTS and KNOW-HOW with liens, mortgages, security
interests or otherwise.
(iii) PROGENITOR further warrants and represents that there
is nothing in any THIRD PARTY agreement PROGENITOR has entered into as of the
EFFECTIVE DATE which, in any way, will limit Progenitor's ability to perform all
of the obligations undertaken by PROGENITOR hereunder, and that it will not
enter into any AGREEMENT after the EFFECTIVE DATE under which PROGENITOR would
incur any such limitations.
(iv) Nothing in this AGREEMENT shall be construed as a
warranty or representation by PROGENITOR as to the validity of any patent claim
or patent within the PATENTS. Nothing in this AGREEMENT shall be construed as a
warranty or representation by PROGENITOR that any ASSAY made, used or imported,
or any service offered for sale or sold, pursuant to the rights and license
granted under this AGREEMENT is or will be free from infringement of any patent
right held by any THIRD PARTY. PROGENITOR hereby warrants and represents that it
has no present knowledge that PATENTS are invalid.
(v) PROGENITOR warrants and represents that it has not, up
through and including the EFFECTIVE DATE, omitted to furnish SBCL with any
information in its possession concerning ASSAYS or the transactions contemplated
by this AGREEMENT, which would be material to SBCL's decision to enter into this
AGREEMENT and to undertake the commitments and obligations set forth herein.
(b) PROGENITOR GRANTS NO WARRANTIES WITH RESPECT TO THE PATENTS
OR ASSAY OR SERVICES UTILIZING ASSAY, EXPRESS OR IMPLIED, EITHER IN FACT OR BY
OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND PROGENITOR SPECIFICALLY DISCLAIMS
ANY IMPLIED WARRANTY OF QUALITY, WARRANTY OF MERCHANTABILITY, WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY OF NONINFRINGEMENT EXCEPT AS
OTHERWISE PROVIDED IN SECTION 7.2(a).
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8. PATENT PROSECUTION, ENFORCEMENT AND DEFENSE
8.1. INVENTIONS AND PROSECUTION
(a) Each party shall have and retain sole and exclusive title to
all inventions, discoveries and know-how which are made, conceived, reduced to
practice or generated by its employees, agents, or other persons acting under
its authority in the course of or as a result of this AGREEMENT. Each party
shall own a fifty percent (50%) undivided interest in all such inventions,
discoveries and KNOW-HOW made, conceived, reduced to practice or generated
jointly by employees, agents, or other persons acting under the authority of
both parties in the course of or as a result of this AGREEMENT. Except as
expressly provided in this AGREEMENT, each joint owner may make, use, sell,
keep, license, assign, or mortgage such jointly owned inventions, discoveries
and know-how, and otherwise undertake all activities a sole owner might
undertake with respect to such inventions, discoveries and know-how, without the
consent of and without accounting to the other joint owner.
(b) PROGENITOR warrants and represents that it has disclosed to
SBCL the complete texts of all patent applications filed by PROGENITOR as of the
EFFECTIVE DATE which relate to an ASSAY or its components as well as all
information received as of the EFFECTIVE DATE concerning the institution or
possible institution of any interference, opposition, re-examination, reissue,
revocation, nullification or any official proceeding involving a PATENT anywhere
in the TERRITORY. PROGENITOR further warrants and represents that it will
disclose to SBCL the complete texts of all patent applications filed by
PROGENITOR after the EFFECTIVE DATE which relate to an ASSAY or its components
to which SBCL holds exclusive rights hereunder as well as all information
received after the EFFECTIVE DATE concerning the institution or possible
institution of any interference, opposition, re-examination, reissue,
revocation, nullification or any official proceeding involving a PATENT anywhere
in the TERRITORY. SBCL shall have the right to review all such pending
applications and other proceedings and make recommendations to PROGENITOR
concerning them and their conduct. PROGENITOR agrees to keep SBCL promptly and
fully informed of the course of patent prosecution or other proceedings
including by providing SBCL with copies of substantive communications, search
reports and third party observations submitted to or received from patent
offices throughout the TERRITORY. SBCL shall provide such patent consultation to
PROGENITOR at no cost to PROGENITOR. SBCL shall hold all information disclosed
to it under this section as confidential subject to the provisions of Sections
6.1 and 6.2.
(c) During the term of this AGREEMENT, PROGENITOR shall, at its
expense and in its sole discretion, file, prosecute and maintain PATENTS,
including those which embrace inventions outlined in Section 8.1(a) in which
PROGENITOR has an ownership interest. During the term of the AGREEMENT in which
SBCL has an exclusive right to an ASSAY under PATENTS and KNOW-HOW, SBCL shall
have the right, but not the obligation, to assume responsibility for any PATENT
or any part of a PATENT which
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PROGENITOR intends to abandon or otherwise cause or allow to be forfeited.
PROGENITOR shall give SBCL reasonable written notice prior to abandonment or
other forfeiture of any PATENT or any part of a PATENT so as to permit SBCL to
exercise its rights under this Section.
8.2. ENFORCEMENT
(a) If either PROGENITOR or SBCL determines that a THIRD PARTY is
making, using, offering for sale, selling or importing an ASSAY or its
components or that may infringe PATENTS in the TERRITORY, the party that has
made such determination will notify the other party promptly in writing.
(b) SBCL, in its own name or jointly with PROGENITOR if required
by law, at SBCL's expense, shall have the first right, at SBCL's election, but
no obligation to (i) bring and prosecute actions, proceedings, suits and
countersuits for enforcement of PATENTS covering an ASSAY or its components or
HOME-BREW in the TERRITORY, and/or (ii) settle any claim or demand, including
without limitation any suit, for enforcement of PATENTS covering an ASSAY or its
components or HOME-BREW in the TERRITORY; provided that the right and license
held by SBCL hereunder at the time of such election is exclusive with respect to
the particular country of the TERRITORY. If SBCL elects to bring any action,
proceeding, suit or countersuit for infringement of PATENTS covering an ASSAY or
its components or HOME-BREW in the relevant country of the TERRITORY, SBCL shall
direct and control such action, proceeding, suit or countersuit and shall
provide prompt and regular updates to PROGENITOR of SBCL's intentions and
progress toward resolution of such action, proceeding, suit or countersuit. If,
prior to a final resolution of any such action, proceeding, suit or countersuit,
or the conclusion of such settlement negotiations, either (x) SBCL, in
accordance with Section 2.2, converts the right and license granted by
PROGENITOR hereunder to a nonexclusive right and license, or (y) this AGREEMENT
is terminated in accordance with the provisions hereof, PROGENITOR shall assume,
and SBCL shall relinquish, direction and control of such action, proceeding,
suit or countersuit. In addition, SBCL agrees that SBCL shall not settle any
claim or demand, including without limitation any suit, for enforcement of
PATENTS covering an ASSAY or its components or HOME-BREW in the TERRITORY which
would adversely affect the scope and/or validity of PATENTS without the express
prior written consent of PROGENITOR. PROGENITOR, at Progenitor's expense and
with counsel of PROGENITOR's choosing, shall have a right to participate in any
action, proceeding, suit or countersuit, or any settlement negotiations relating
to PATENTS.
(c) If SBCL brings any action, proceeding, suit or countersuit to
enforce rights within PATENTS covering an ASSAY or its components or HOME-BREW
in the TERRITORY against any infringer pursuant to Section 8.2(b), PROGENITOR,
at its expense, shall cooperate with SBCL in connection with such action,
proceeding, suit or countersuit, including without limitation by joining as a
party if necessary and appropriate, and executing such documents as SBCL may
reasonably request. PROGENITOR and SBCL shall recover their respective actual
out-of-pocket expenses, or
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equitable proportions thereof, associated with any litigation or settlement
thereof from any recovery made by any party. Any excess amount shall be shared
equally between SBCL and PROGENITOR, provided in no event shall PROGENITOR's
share of the excess amount exceed the royalties which would otherwise be due
PROGENITOR for the sales of an ASSAY that were the subject of the litigation had
such sales been made by SBCL, its AFFILIATES or its sublicensees under this
AGREEMENT.
(d) If SBCL does not commence an action, proceeding or suit
against a THIRD PARTY to enforce any rights within PATENTS covering an ASSAY or
its components or HOME-BREW in the TERRITORY, or does not otherwise take action
to abate infringement of PATENTS by a THIRD PARTY in the TERRITORY, within 3
months after giving or receiving notice thereof pursuant to Section 8.2(a), and
thereafter pursues such action or proceeding diligently, PROGENITOR, at
PROGENITOR's expense, shall have a right but not an obligation to commence or
take control of such action, proceeding or suit. In the event that PROGENITOR
elects to commence or take control of any action, proceeding or suit pursuant to
this Section 8.2(d), SBCL, at SBCL's expense, shall cooperate with PROGENITOR in
connection with such action, proceeding or suit, including without limitation by
joining as a party if necessary and appropriate, and executing such documents as
PROGENITOR may reasonably request. PROGENITOR and SBCL shall recover their
respective actual out-of-pocket expenses, or equitable proportions thereof,
associated with any litigation or settlement thereof from any recovery made by
any party. Any excess amount shall be (* * *) by SBCL, its AFFILIATES or its
sublicensees under this AGREEMENT.
8.3. DEFENSE
Except as otherwise set forth in Sections 7.1(b)(ii) and 9.3(b), SBCL
shall defend or, at SBCL's option, settle, at SBCL's expense, any action,
proceeding, suit or claim brought against SBCL and PROGENITOR on the issue of
infringement by the making, having made, using or importing an ASSAY or its
components, or for offering for sale, selling or performing HOME-BREW, in the
TERRITORY; provided, however, that SBCL shall not settle any such action,
proceeding, suit or claim which would adversely affect the scope and/or validity
of PATENTS without the express prior written consent of PROGENITOR.
9. TERM AND TERMINATION
9.1. TERM - INITIAL AND EXTENDED.
(a) The initial term of this AGREEMENT will commence on the
EFFECTIVE DATE and shall remain in full force and effect until the (* * *)
anniversary of the EFFECTIVE DATE, unless terminated at an earlier date in
accordance with the terms and conditions of this Section 9 or as otherwise
provided in Section 5.2(b).
(b) Notwithstanding the above, SBCL, at any time during the (* * *) after the
EFFECTIVE DATE, upon written notice to PROGENITOR, may extend the term of
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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this AGREEMENT for up to (* * *) additional periods of (* * *) each; provided
that this AGREEMENT has not expired or terminated prior to the date of
PROGENITOR's receipt of any such written notice of extension. If SBCL still has
an exclusive license under PATENTS and KNOW-HOW under Section 2 at the time SBCL
provides such notice to PROGENITOR, the terms and conditions of each and any
such extension shall be, at PROGENITOR's option and discretion, either (i) an
exclusive, non-transferable right and license, including without limitation the
right to grant sublicenses, under PATENTS to make, have made, use and import an
ASSAY for the sole purpose of offering for sale, selling and performing
HOME-BREW in the TERRITORY in accordance with Section 2.1 above subject to the
terms and conditions set forth in this AGREEMENT as applied during the sixth and
final year of the initial term of this AGREEMENT, or (ii) a nonexclusive,
nontransferable right and license, with no right to grant sublicenses, under
PATENTS and KNOW-HOW to make, have made, use and import ASSAY for the purpose of
offering for sale, selling and performing HOME-BREW in the TERRITORY subject to
terms and conditions of this AGREEMENT as applied to SBCL's nonexclusive license
rights, such as Sections 2.2 and 3.4.
9.2. TERMINATION FOR MATERIAL BREACH OR DEFAULT.
(a) Either PROGENITOR or SBCL may terminate this AGREEMENT in the
event of a material breach of or default under this AGREEMENT by the other
party.
(b) The effective date of termination of this AGREEMENT for
material breach or default shall be the date of receipt by the breaching party
of written notice of termination of this AGREEMENT by the non-breaching party,
such written notice to be provided at any time after (* * *) after the date of a
written notice by the non-breaching party to the breaching party of a material
breach or default, unless the breaching party shall have cured such breach or
default within such (* * *) period.
9.3. AT-WILL TERMINATION
(a) SBCL may terminate this AGREEMENT, on a country by country
basis, at any time upon (* * *) prior written notice to PROGENITOR. In addition,
SBCL may terminate this AGREEMENT, on a country by country basis, at any time
upon (* * *) prior written notice in the event that a KIT is commercially
launched in such country by a THIRD PARTY who is not a licensee or marketing
partner of PROGENITOR. In addition, SBCL may terminate this AGREEMENT, on a
country by country basis, at any time upon (* * *) prior written notice in the
event that the federal Food and Drug Administration (or its equivalent outside
of the U.S.A.) passes legislation requiring the federal regulation of HOME-BREW.
(b) PROGENITOR, upon (* * *) written notice to SBCL, may
terminate this AGREEMENT with respect to any country in the TERRITORY in which
SBCL has received notice of infringement of patent rights owned or controlled by
a THIRD PARTY by exercise of the license herein granted at any time after the (*
* *) anniversary of the date of issuance in such country of such patent rights.
The effective date of such
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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termination shall be (* * *) after the date of PROGENITOR's written notice to
SBCL. Notwithstanding the above, termination of this AGREEMENT shall not occur
under this Section 9.3(b) if, prior to the effective date of such termination,
SBCL agrees, in writing, to release PROGENITOR of PROGENITOR's obligation with
respect to such particular patent rights under Section 7.1(b)(ii) as of the date
(* * *) after the date of PROGENITOR's written notice to SBCL hereunder. In such
event, SBCL shall assume such obligation with respect to such patent rights with
respect to all damages, losses and liabilities attributable to activities
allegedly arising out of, or resulting from or in connection with the
infringement of such patent rights in such country by the manufacture, use
and/or sale of ASSAY under this AGREEMENT by SBCL, AFFILIATES of SBCL and
sublicensees of SBCL after such date, but SBCL shall have no obligation to
PROGENITOR with respect to any such damages, losses and liabilities assessed
against PROGENITOR, its officers, directors, shareholders, employees, successors
and assigns which are attributable to activities of SBCL, AFFILIATES of SBCL and
sublicensees of SBCL allegedly arising out of, or resulting from or in
connection with the infringement of such patent rights in such country by the
manufacture, use and/or sale of ASSAY under this AGREEMENT by SBCL, AFFILIATES
of SBCL and sublicensees of SBCL prior to or after such date.
9.4. BANKRUPTCY
(a) Either party may terminate this AGREEMENT if, at any time,
the other party shall file in any court or agency pursuant to any statute or
regulation of any state or country, a petition in bankruptcy or insolvency or
for reorganization or for an arrangement or for the appointment of a receiver or
trustee of the party or of its assets, or if the other party proposes a written
agreement of composition or extension of its debts, or if the other party shall
be served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed within sixty (60) days
after the filing thereof, or if the other party shall propose or be a party to
any dissolution or liquidation, or if the other party shall make an assignment
for the benefit of creditors.
(b) Notwithstanding the bankruptcy of PROGENITOR, or the
impairment of performance by PROGENITOR of its obligations under this AGREEMENT
as a result of bankruptcy or insolvency of PROGENITOR, SBCL shall be entitled to
retain the licenses granted herein, subject to PROGENITOR's rights to terminate
this AGREEMENT for reasons other than bankruptcy or insolvency as expressly
provided in this AGREEMENT.
(c) All rights and distribution rights granted under or pursuant
to this AGREEMENT by PROGENITOR to SBCL are, and shall otherwise be deemed to
be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of
rights to "intellectual property" as defined under Section 101(52) of the U.S.
Bankruptcy Code. The parties agree that SBCL, as a licensee of such rights under
this AGREEMENT, shall retain and may fully exercise all of its rights and
elections under the U.S. Bankruptcy Code, subject to performance by SBCL of its
preexisting obligations under this AGREEMENT. The parties further agree that, in
the event of the commencement of a bankruptcy proceeding by or against
PROGENITOR under the U.S. Bankruptcy Code,
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
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SBCL shall be entitled to a complete duplicate of (or complete access to, as
appropriate) any such intellectual property and all embodiments of such
intellectual property, and same, if not already in its possession, shall be
promptly delivered to SBCL (i) upon any such commencement of a bankruptcy
proceeding upon written request therefor by SBCL, unless PROGENITOR elects to
continue to perform all of its obligations under this Agreement, or (ii) if not
delivered under (i) above, upon the rejection of this AGREEMENT by or on behalf
of PROGENITOR upon written request therefor by SBCL; provided, however, that
upon PROGENITOR's (or its successor's) written notification to SBCL that it is
again willing and able to perform all of its obligations under this AGREEMENT,
SBCL shall promptly return all such tangible materials to PROGENITOR, but only
to the extent that SBCL does not require continued access to such materials to
enable SBCL to perform its obligations under this AGREEMENT.
9.5. EFFECT OF EXPIRATION OR TERMINATION
(a) Upon termination of this AGREEMENT, PROGENITOR shall have the
right to retain any sums already paid by SBCL hereunder, and SBCL shall pay all
sums accrued hereunder which are then due.
(b) Termination of this AGREEMENT in its entirety shall terminate
all outstanding obligations and liabilities between the parties arising from
this AGREEMENT except those described in Sections 4, 6, 7, 9.5 and 10. In
addition, any other provision required to interpret and enforce the parties'
rights and obligations under this AGREEMENT shall also survive, but only to the
extent required for the full observation and performance of this AGREEMENT. (c)
Termination of the AGREEMENT in accordance with the provisions hereof shall not
limit remedies which may be otherwise available in law or equity.
10. MISCELLANEOUS PROVISIONS
10.1. GOVERNING LAW
This AGREEMENT shall be governed by, and construed and interpreted in
accordance with, the law of the State of Delaware, without reference to conflict
of laws principles.
10.2. ASSIGNMENT
The rights and liabilities of the parties hereto will bind and inure to
the benefit of their successors, executors or administrators; provided that, as
PROGENITOR has specifically contracted with SBCL, SBCL may not assign or
delegate any right or obligation received by SBCL from PROGENITOR under this
Agreement, either in whole or in part, to any entity, without the express prior
written consent of PROGENITOR; provided, however, that SBCL may assign this
AGREEMENT or any part of its rights and obligations hereunder to any AFFILIATE
of SBCL or to any corporation with which SBCL
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<PAGE> 24
may merge or consolidate, or to which it may transfer all or substantially all
of its assets to which this AGREEMENT relates, without obtaining the consent of
PROGENITOR. PROGENITOR shall be entitled to assign this AGREEMENT to a THIRD
PARTY upon written notice thereof to SBCL. Any permitted assignee or transferee
shall agree in writing to comply with all the terms and conditions contained in
this AGREEMENT. Any attempted assignment in violation of the provisions of this
Section 10.2 will be void.
10.3. ENTIRE AGREEMENT
This AGREEMENT constitutes the entire and exclusive agreement between
the parties with respect to the subject matter hereof and supersedes and cancels
all previous registrations, agreements, commitments and writings in respect
thereof.
10.4. MODIFICATION
No modification to this AGREEMENT shall be effective unless consented to
in writing by the party to be charged.
10.5. WAIVER
No waiver of any rights shall be effective unless consented to in
writing by the party to be charged and the waiver of any breach of default shall
not constitute a waiver of any other right hereunder or any subsequent breach or
default.
10.6. NOTICES
Any notice, request, approval or other document required or permitted to
be given under this AGREEMENT shall be in writing and shall be deemed to have
been given when delivered in person, or sent by overnight courier service,
postage prepaid, or sent by certified or registered mail, return receipt
requested, or by facsimile transmission, to the following addresses of the
parties (or to such other address or addresses as may be specified from time to
time in written notice). Any notices given pursuant to this AGREEMENT shall be
deemed to have been given and delivered upon the earlier of (i) if sent by
overnight courier service, on the date when received at the address set forth
below as proven by a written receipt from the delivery service verifying
delivery, or (ii) if sent by certified or registered mail, three (3) business
days after mailed by certified or registered mail postage prepaid and properly
addressed, with return receipt requested, or (iii) if sent by facsimile
transmission, on the day when sent by facsimile as confirmed by automatic
transmission report coupled with certified or registered mail or overnight
courier service receipt proving delivery, or (iv) if delivered in person, on the
date of delivery to the address set forth below as proven by written signature
of the recipient.
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<PAGE> 25
PROGENITOR
Progenitor, Inc.
4040 Campbell Avenue
Menlo Park, California 94025
Attention: Chief Executive Officer
SBCL
SmithKline Beecham Clinical Laboratories
1201 South Collegeville Road
Collegeville, Pennsylvania 19426
Attention: President
copies to:
SmithKline Beecham Corporation
One Franklin Plaza (Mail Code FP2225)
P.O. Box 7929
Philadelphia, Pennsylvania 19101, U.S.A.
Attention: Corporate Law-U.S.
10.7. DESCRIPTIVE HEADINGS
The headings of the several sections of this AGREEMENT are intended for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this AGREEMENT.
10.8. COUNTERPARTS
This AGREEMENT may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
10.9. TRADEMARKS AND NO GRANT OF RIGHTS TO SBCL INTELLECTUAL PROPERTY
RIGHTS
(a) SBCL shall be responsible for the selection of all trademarks
and service marks which it employs in connection with an ASSAY in the TERRITORY
and shall own and control such marks. SBCL shall be responsible for registration
and maintenance of all such marks. Nothing in this AGREEMENT shall be construed
as a grant of rights, by license or otherwise, to PROGENITOR to use such marks
or any other marks or trade names owned by SBCL for any purpose. SBCL shall own
such trade names and marks and shall retain such ownership upon termination or
expiration of this AGREEMENT.
(b) Nothing in this AGREEMENT shall be construed to grant
PROGENITOR any rights whatsoever to any intellectual property owned by SBCL, its
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<PAGE> 26
AFFILIATES or its sublicensees, whether or not such intellectual property is
related to an ASSAY or its components or to HOME-BREW or to any KIT.
10.10. FORCE MAJEURE
If the performance of any part of this AGREEMENT by either party, or of
any obligation under this AGREEMENT, is prevented, restricted, interfered with
or delayed by reason of any cause beyond the reasonable control of the party
liable to perform, unless conclusive evidence to the contrary is provided, the
party so affected shall, upon giving written notice to the other party, be
excused from such performance to the extent of such prevention, restriction,
interference or delay, provided that the affected party shall use its reasonable
best efforts to avoid or remove such causes of non-performance and shall
continue performance with the utmost dispatch whenever such causes are removed.
When such circumstances arise, the parties shall discuss what, if any,
modification of the terms of this AGREEMENT may be required in order to arrive
at an equitable solution.
10.11. SEPARABILITY
(a) If any portion of this AGREEMENT shall be held illegal, void
or ineffective, the remaining portions hereof shall remain in full force and
effect.
(b) If any of the terms or provisions of this AGREEMENT are in
conflict with any applicable statute or rule of law, then such terms or
provisions shall be deemed inoperative to the extent that they may conflict
therewith and shall be deemed to be modified to conform with such statute or
rule of law.
(c) If the terms and conditions of this AGREEMENT are materially
altered as a result of Sections 10.11(a) or 10.11(b), the parties will
renegotiate the terms and conditions of this AGREEMENT to resolve any
inequities.
10.12. RECORDING
SBCL shall have the right, at any time, to record, register, or
otherwise notify this AGREEMENT in appropriate governmental or regulatory
offices anywhere in the TERRITORY, and PROGENITOR shall provide reasonable
assistance to SBCL in effecting such recording, registering or notifying.
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
AGREEMENT on behalf of PROGENITOR and SBCL, as applicable.
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<PAGE> 27
PROGENITOR, INC. SMITHKLINE BEECHAM CLINICAL
("PROGENITOR") LABORATORIES, INC.
("SBCL")
By: /s/ Douglass B. Given M.D., Ph.D. By: /s/ Tachi Yamada
---------------------------------- -------------------------------
Title: President and Chief Executive Title: President, SmithKline Beecham
Officer Healthcare Services
Date: September 18, 1997 Date: September 18, 1997
-------------------------------- -------------------------------
Page 27
<PAGE> 28
LICENSE AGREEMENT
SMITHKLINE BEECHAM CLINICAL LABORATORIES-PROGENITOR, INC.
EXHIBIT A
PATENTS
Page 28
<PAGE> 29
EXHIBIT A
(* * *)
* Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.
Page 29
<PAGE> 1
EXHIBIT 11.1
PROGENITOR, INC.
(A Development Stage Company)
Statement of Computation of Per Share Loss
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $ 30,282,543 $ (5,483,804) $ (2,875,467)
Preferred stock dividend (12,283,481)
------------ ------------ ------------
Net loss attributable to common stockholders $ 42,566,024 $ (5,483,804) $ (2,875,467)
============ ============ ============
Weighted average number of shares outstanding:
Weighted average shares outstanding, beginning
of year 2,885,904 2,789,271 2,818,668
Add: Common and common share equivalents issued
at prices below the anticipated Offering
price during the last 12 months immediately
preceding the filing date of the Offering 16,383 32,765 32,765
Add: Weighted average common shares issued
(repurchased) during year 1,431,097 41,174 (40,580)
------------ ------------ ------------
Weighted average number of shares outstanding
used in computing net loss per share 4,333,384 2,863,210 2,810,853
============ ============ ============
Net loss per share $ (9.82) $ (1.92) $ (1.02)
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 21.1
PROGENITOR, INC.
Subsidiaries of the Company
Subsidiary Name Jurisdiction of Incorporation
--------------- -----------------------------
Mercator Genetics, Inc. Delaware, United States
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Progenitor, Inc. on Form S-1 (File No. 333-05369) of our report dated December
4, 1997, on our audits of the financial statements of Progenitor, Inc. as of
September 30, 1997 and 1996 and for the years ended September 30, 1997, 1996 and
1995 and for the period from May 8, 1992 (date of inception) to September 30,
1997, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 19,673,252
<SECURITIES> 0
<RECEIVABLES> 691,157
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,224,362
<PP&E> 3,167,856
<DEPRECIATION> (1,248,895)
<TOTAL-ASSETS> 23,584,921
<CURRENT-LIABILITIES> 6,703,128
<BONDS> 0
0
0
<COMMON> 13,405
<OTHER-SE> 15,926,692
<TOTAL-LIABILITY-AND-EQUITY> 23,584,921
<SALES> 0
<TOTAL-REVENUES> 1,396,941
<CGS> 0
<TOTAL-COSTS> 30,941,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 737,708
<INCOME-PRETAX> (30,282,543)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,282,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,282,543)
<EPS-PRIMARY> (9.82)
<EPS-DILUTED> (9.82)
</TABLE>
