EXHIBIT 13.1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(▇▇▇▇ ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14758
SOMATIX THERAPY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
▇▇-▇▇▇▇▇▇▇
DELAWARE
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(▇▇▇) ▇▇▇-▇▇▇▇
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check ▇▇▇▇ whether the registrant (1) has filed all reports
required to be filed by Sections 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 ▇▇▇▇ if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 19, 1996 was approximately $124,893,190 based upon the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market System on such date. The number of outstanding shares of the
registrant's Common Stock as of August 19, 1996 was 24,369,403.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts
III and IV of this Form 10-K Report: The Proxy Statement for the Registrant's
Annual Meeting of Stockholders scheduled to be held on December 18, 1996.
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PART I
ITEM I. BUSINESS
THE COMPANY
Somatix Therapy Corporation ("Somatix" or the "Company") is a leader in the
field of gene therapy. The Company's mission is to research, develop and
commercialize proprietary processes for the genetic modification of cells and
their use in the treatment of human disease. The Company was formed through
the merger and/or acquisition of four companies since 1990: Hana Biologics,
Inc., Somatix Corporation, GeneSys Therapeutics Corporation and Merlin
Pharmaceutical Corporation.
Through the combination of these four companies and its internal development
programs, Somatix has established a substantial scientific and intellectual
property position in the technology of gene transfer. The Company is pursuing
the research and development of gene transfer and human gene therapy utilizing
retroviral, adenoviral, adeno-associated viral and synthetic vector systems.
Somatix is applying its core scientific expertise to the development of novel
treatments for cancer, neurological diseases and genetic diseases.
In August 1995, ▇▇▇▇▇▇▇-▇▇▇▇▇ Squibb ("BMS") made an initial $10 million
investment in Somatix in return for certain rights including future rights in
Somatix' cancer programs. In May 1996, BMS made a second $10 million
investment after Somatix achieved a contractual clinical development milestone
in oncology. Pursuant to the terms of the BMS agreement, once Somatix decides
to license any of its internally initiated cancer programs, it must first give
BMS 90 days to review and meet Somatix' terms of such a license. In February,
1996, Somatix made a proposal to BMS regarding its GVAX(TM)* cancer vaccine
programs. At the end of the 90 day period, BMS requested and was granted an
extension to continue its evaluation of the GVAX(TM) cancer vaccine program.
With the exception of fiscal year 1990, when the Company sold its cell
biology and diagnostic product lines, the Company's operations have been
unprofitable since its inception, and will continue to be so in the
foreseeable future, as the Company's research and development programs expand
into preclinical studies and clinical trials.
BACKGROUND OF GENE THERAPY
Gene therapy is the genetic modification of cells for therapeutic benefit.
In ex vivo gene therapy, cells are removed from the patient, genetically
modified and processed using aseptic procedures, tested, and injected or
implanted back into the patient. In vivo gene therapy involves the direct
administration, to a patient, of a gene transfer vector that delivers the gene
into specific cells. In both cases, the product of this "transgene" is
typically a protein which may act therapeutically or otherwise stimulate a
clinically beneficial process (e.g., an antitumor immune response).
Gene transfer vectors are the transport vehicles by which genes are inserted
into cells. To date, genetically engineered viruses have been the most widely
used vectors, because viruses have evolved efficient processes for cell entry
and subsequent expression of their genetic information. There are also efforts
underway in academia, government and industry to develop nonviral methods of
gene delivery. Every viral and nonviral gene transfer system has unique
benefits and unique limitations; these differences are important in evaluating
the scientific and clinical utility of each system.
Cell types may be selected or targeted for genetic modification based on
their ability to secrete proteins systemically or locally, their capability to
integrate into the tissue at the site of implantation and their life spans. As
a result, particular cell types may be better suited than others for the
delivery of a specific protein or for the treatment of a specific disease.
Researchers in the field of gene therapy are primarily working with seven
major cell types as candidates for genetic modification: epithelial cells,
fibroblasts, endothelial cells, neurons, muscle cells, hematopoietic stem
cells, and lymphocytes. These are all somatic cells, which differ from germ
cells in that the genetic information contained in them is not passed on to
future generations.
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* GVAX is a trademark of Somatix Therapy Corporation.
1
The approaches of gene therapy to treating disease are still in the
development stage. A number of scientific challenges must be met before the
therapeutic potential of gene therapy is realized and gene therapy products
are commercially available. These challenges include attaining sufficient
expression of the desired gene, controlling or regulating the amount of the
desired protein produced, targeting specific cell types for modification and
demonstrating the safety and efficacy of any given approach in human clinical
trials.
In addition to its as yet unproven therapeutic effectiveness, gene therapy
may cause unintended side effects. Because with certain gene transfer methods,
the desired gene may be randomly inserted into a cell's genetic material, it
is theoretically possible that a cancer-causing gene could be activated. The
Company believes oncogene activation is unlikely, and that additional genetic
events are required for tumorigenesis to occur. Another risk is the
possibility that a disabled virus could theoretically reassemble and become
virulent. The Company believes that its process for disabling viruses provides
sufficient safeguards against such an event and that current testing
procedures further reduce this risk. Additional research with respect to such
unintended consequences may be necessary, however, before gene therapy
products can be commercialized.
PLATFORM TECHNOLOGY
Through a strategy of mergers, acquisitions and internal development,
Somatix has built a broad-based research and development capability across
multiple gene transfer systems. The Company has research and development
programs in retroviral, adenoviral, adeno-associated viral and synthetic
vector systems, as well as hematopoietic stem cell gene transfer.
Retroviral Vectors. The retroviral vector is the most advanced system for
the efficient, ex vivo genetic modification of dividing human cells, and is
the vector Somatix is utilizing for the modification of tumor cells,
fibroblasts and hematopoietic stem cells. In addition, Somatix is working on a
second-generation retroviral vector (i.e., lentiviral vector) that will allow
the in vivo delivery of therapeutic genes into nondividing cells. In support
of this effort, Somatix obtained an exclusive, worldwide license to a
lentiviral vector developed by ▇▇. ▇▇▇▇▇ ▇▇▇▇▇ and colleagues at The Salk
Institute in July, 1996. The lentiviral vector should eventually allow
therapeutic gene transfer into cells, such as neurons, which are clinically
relevant but normally do not divide. Coincident with the licensing of the
lentiviral technology from The Salk Institute, ▇▇. ▇▇▇▇▇ was nominated to
Somatix' board of directors.
Adenoviral Vectors. With the acquisition of Merlin Pharmaceutical
Corporation in February, 1995, Somatix brought ▇▇▇▇▇▇ ▇▇▇▇▇, Ph.D., to the
Company as a director and member of the scientific advisory board. The Company
has since expanded its program in the research and development of adenoviral
vectors, which are highly efficient in the short-term genetic modification of
nondividing human cells and have the capacity to carry long segments of
genetic information. The Company is developing a GM-CSF (described further
below) encoding adenovirus that can rapidly modify a wide spectrum of tumor
cells, which may result in faster "turnaround" of the autologous cancer
vaccine and potentially lower manufacturing costs. In addition, Somatix is
developing a proprietary adenovirus which may the avoid the cellular immune
responses triggered by the in vivo administration of first generation
adenoviral vectors. This latter adenovirus is being further modified to allow
chromosomal integration and control of gene expression via the delivery of
oral agents.
Adeno-Associated Viral ("AAV") Vectors. In addition to ▇▇. ▇▇▇▇▇, the
acquisition of Merlin Pharmaceutical Corporation brought ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇,
Ph.D., to the Company's scientific advisory board and augmented Somatix'
research efforts in adeno-associated viral AAV vectors. The AAV vector is an
important gene transfer tool because it can efficiently and stably insert its
genetic information into the chromosomes of nondividing target cells. Somatix
has developed a number of adeno-associated viral vectors for the in vivo
genetic modification of neurons, muscle cells, and liver cells, and has
detected gene expression for up to twelve months in animal model systems.
Somatix is conducting experiments to define the immunogenecity of AAV vectors,
the extent of vector diffusion after injection into the brain and other
tissues, and to design a system of transgene regulation which can be
controlled through the oral administration of certain well-tolerated agents.
In addition, Somatix is developing a manufacturing process for the production
of clinical grade AAV vectors.
2
Synthetic Vectors. The Company's synthetic vector program is focused on the
development of lipid and polymer-mediated gene transfer systems for the in
vivo delivery of genetic information to cells via intravenous administration.
The near-term goal of the synthetic vector program is the targeted, nonviral
delivery of therapeutic gene sequences to cells in vivo. Longer-term goals
include the incorporation of viral proteins and genetic elements into these
vectors that will enhance the level and duration of transgene expression while
avoiding the immunogenicity and other limitations of current-generation viral
vectors.
Stem Cell Gene Therapy. Somatix is focusing on the genetic modification of
hematopoietic stem cells ("HSC") as a key strategy for the long-term gene
therapy of chronic disease. HSCs are the precursor cell population from which
the human body's entire complement of blood cells is continuously replenished.
Genetically modified HSCs, therefore, are seen as an ideal cell type for the
long-term, sustained delivery of therapeutic proteins to the circulation
(e.g., factors VIII and IX for the treatment of hemophilia). Furthermore,
there are numerous genetic diseases which result in a deficiency of proteins
required for metabolic activities (e.g., Gaucher's disease, chronic
granulomatous disease, etc.). These diseases are also good candidates for stem
cell gene transfer, and will likely provide the initial "proof of concept" for
stem cell gene therapy. Consequently, Somatix' stem cell gene transfer group
is evaluating several of the Company's proprietary technologies for use in
genetic modification of HSCs. The most advanced effort in this area is gene
therapy of chronic granulomatous disease (see below).
PRODUCT DEVELOPMENT PROGRAMS
The following table summarizes the Company's product development programs:
PRODUCT GENE INDICATION STATUS
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Autologous GVAX(TM) GM-CSF(1) Renal Cell Carcinoma Phase I/II
Cancer (complete)
Vaccine
Melanoma Phase I/II
Prostate Cancer Phase I
Allogeneic GVAX(TM) GM-CSF Prostate Cancer Preclinical
Cancer Vaccine
GM-CSF Colorectal Cancer Preclinical
Genetically Modified p47phox(2) Chronic Granulomatous Phase I
Hematopoietic Stem Cells Disease (complete)
Genetically Modified TH(3) + GTP-CHI(4) ▇▇▇▇▇▇▇▇▇'▇ Disease Preclinical
Autologous Fibroblasts
In Vivo Adeno-Associated TH + GTP-CHI Parkinson's Disease Research
Virus
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(1) Granulocyte-macrophage colony stimulating factor
(2) A protein which is deficient in chronic granulomatous disease
(3) Tyrosine hydroxylase
(4) Guanosine triphosphate cyclohydrolase I
Cancer, the second leading cause of death in the United States, is a disease
in which certain cells grow uncontrolled by the body's normal self-regulatory
mechanisms. Over 1.2 million new cases of cancer are diagnosed each year in
the United States. While there are several dozen forms of cancer, Somatix'
initial targets are melanoma, renal cell carcinoma ("RCC" or "kidney cancer"),
prostate and colorectal cancers. Hundreds of thousands of patients are newly
diagnosed with these cancers each year in the United States, with a large
percentage suffering a recurrence of their disease one to five years after
initial treatment.
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The Autologous GVAX(TM) Cancer Vaccine. Somatix' most advanced therapeutic
program is the GM-CSF transduced autologous tumor cell vaccine, or Autologous
GVAX(TM) Cancer Vaccine. The vaccine is composed of the patient's own
(autologous) tumor cells which have been genetically modified to secrete the
immune-stimulating protein granulocyte-macrophage colony stimulating factor
("GM-CSF").
The initial preclinical observations suggesting the potential efficacy of a
GM-CSF transduced tumor cell vaccine were reported by Dranoff and coworkers
(Proc. Natl. Acad. Sci. USA 90:3539[1993]). While several cytokine gene-
modified tumor cell vaccines had shown antitumor activity in murine cancer
models, the Dranoff study showed the GM-CSF gene-modified tumor cell vaccine
to be a more potent inducer of systemic antitumor immunity than those vaccines
secreting other effector molecules (e.g., ▇▇-▇, ▇▇-▇, IFN-[gamma], etc.). The
wide applicability of the GVAX(TM) cancer vaccine to multiple tumor types was
supported by data from several murine tumor models including the colon
carcinoma CT-26, renal carcinoma RENCA, fibrosarcoma CMS-5, ▇▇▇▇▇ lung
carcinoma, and the ▇▇▇▇▇▇▇ rat model of prostate carcinoma. GM-CSF secreting
tumor cells were more potent inducers of antitumor immunity than unmodified
tumor cells in every model tested.
The Autologous GVAX(TM) Cancer Vaccine began phase I/II clinical testing in
patients with renal cell carcinoma at the ▇▇▇▇▇ ▇▇▇▇▇▇▇ Oncology Center in
December, 1993. This study was completed in 1995. In May 1994, a second Phase
I/II clinical trial started at the Netherlands Cancer Institute ("NKI")
testing the GVAX(TM) cancer vaccine in patients with advanced melanoma. A
second Phase I/II advanced melanoma study at the ▇▇▇▇ ▇▇▇▇▇▇ Cancer Institute
started in early 1995. The treatment phases of both phase I/II melanoma
studies are expected to be completed in the first quarter of 1997. The Company
has also started a Phase I trial of the autologous GVAX(TM) cancer vaccine in
prostate cancer patients at the ▇▇▇▇▇ ▇▇▇▇▇▇▇ Oncology Center.
The principal end points of these initial Autologous GVAX(TM) Cancer Vaccine
clinical trials are related to safety and tolerability. To date, phase I/II
investigators have administered approximately 300 vaccinations of the
autologous GVAX(TM) cancer vaccine in over 75 patients. The vaccine has proven
to be safe; adverse events have generally been confined to redness and
swelling at the vaccination site and minor flu-like symptoms of short
duration.
Preliminary indications of therapeutic activity include a marked
infiltration of white blood cells at the vaccination site, as well as cellular
activity at metastatic sites distant from the site of vaccine injection. This
cellular activity has been associated, in some patients, with a reduction in
metastatic tumor size at residual tumor sites. The phase I/II data suggest
that the injection of irradiated, GM-CSF secreting autologous tumor cells can
trigger a systemic antitumor response in some patients with metastatic
disease. However, the critical efficacy endpoint of any therapeutic
investigation in cancer is patient survival, and the autologous vaccine will
require further clinical testing to prove whether or not it can affect this
endpoint in a statistically significant way.
The Allogeneic GVAX(TM) Cancer Vaccine. Somatix is now engaged in the
development of a second generation, genetically modified tumor cell vaccine.
The Allogeneic GVAX(TM) Cancer Vaccine is composed of lethally irradiated, GM-
CSF secreting tumor cells derived from tumor cell lines which are not patient-
specific and can therefore be manufactured at large scale. The vaccine can
thus be produced, tested, distributed and administered without first obtaining
autologous tissue from the cancer patient, reducing manufacturing costs and
promoting ease of use. The Company intends to file an investigational new drug
("IND") application in the first quarter of calendar 1997, for the initial
clinical evaluation of the allogeneic vaccine in prostate cancer. Somatix is
considering additional allogeneic vaccine development for malignant melanoma
and breast, colorectal and ovarian cancers.
Chronic Granulomatous Disease ("CGD"). The Company's initial clinical
evaluation of stem cell gene therapy is in the treatment of chronic
granulomatous disease, an immunodeficiency that compromises the ability of
white blood cells to eradicate bacterial and fungal infections. In
collaboration with ▇▇▇▇▇ ▇▇▇▇▇▇, M.D. at the National Institutes of Health
("NIH"), the Company is evaluating the use of gene therapy to treat this
inherited genetic disease. ▇▇. ▇▇▇▇▇▇ has completed a Phase I clinical trial,
in which patients received autologous hematopoetic stem cells, genetically
modified to produce the p47phox protein. The study showed that the
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p47phox- modified stem cells can be safely administered to humans and
successfully generate functional white blood cells in CGD patients. Somatix is
continuing to develop this product using a primate model system to further
optimize both stem cell gene transfer and engraftment of genetically modified
HSCs.
Gene Therapy of Neurologic Diseases. Diseases of the central nervous system
("CNS") are important targets for new drug development. Pharmaceuticals to
treat CNS diseases are the second largest drug expenditure category behind
cardiovascular drugs. However, the brain is one of the most difficult organs
to treat with drugs since the blood-brain barrier prevents many small
molecules and most proteins from passing out of the blood stream into target
areas for treatment. Additionally the brain is a highly complex, inaccessible
organ which operates as many distinct regions. Thus, systemically administered
drugs often affect multiple systems in the brain, increasing their toxicity.
Therefore, it may be a significant advantage to deliver drugs locally to the
specific region of the brain requiring therapy in order to avoid debilitating
side effects.
Gene therapy, in particular, appears to offer promise because it may be used
to promote cell-based delivery of therapeutic proteins: (i) to specific
regions of the brain; (ii) from inside the blood brain barrier; (iii) in a
continuous fashion; and (iv) for long periods of time. The lack of adequate
drug therapy for major neurodegenerative diseases such as Alzheimer's disease
and ▇▇▇▇▇▇▇▇▇'▇ disease ("PD") and the discovery of a number of neuronal
growth factors ("neurotrophic factors") that could retard degeneration and
perhaps revitalize damaged neurons, make gene therapy an attractive
experimental approach to these diseases. Gene therapy of PD is the Company's
most advanced CNS program.
Although the neurodegeneration that leads to PD is not well understood, it
is known that the loss of dopamine-producing cells causes the debilitating
movement symptoms of PD. Dopamine levels can be restored through the oral
administration of L-dopa, a precursor that is converted to dopamine, and
significantly alleviates the symptoms of PD. However, the clinical benefit of
L-dopa is attenuated after an average of five years in a majority of patients.
This is due to side effects of the drug relating to global exposure of the
brain to L-dopa, and the increased dosing required to overcome continued
degeneration of dopaminergic neurons.
Somatix is evaluating the use of gene therapy to produce a continuous and
efficacious supply of L-dopa in the brain. Several therapeutic genes may
ultimately be required to treat the disease; however, one key transgene
encodes the rate limiting enzyme in the biosynthesis of L-dopa, tyrosine
hydroxylase ("TH"). Additionally, scientists believe that administration of
neurotrophic factors to the region of the brain containing dopaminergic
neurons may retard their degeneration and keep natural dopamine production at
levels sufficient for normal motor function for a significantly longer period
of time. Recent preclinical data has suggested that neurotrophic factors may
act on such dopaminergic neurons in a potent and specific way. Eventually,
Somatix may introduce a PD therapy combining neurotrophic factors with TH gene
delivery. Somatix may have to license certain genes for these factors in order
to fully exploit a combination therapy.
CNS Program Results and Progress. The Company has conducted extensive
studies of ex vivo and in vivo gene therapy of the CNS in rodent and nonhuman
primate models over the past three years. Ex vivo studies have centered on the
striatal implantation of autologous fibroblasts genetically modified, via
retroviral vector, to produce TH. The fibroblasts are derived from skin
biopsies of the animals and are genetically modified in the Company's gene
transfer laboratories. In vivo experiments have focused on AAV vectors
encoding the TH and GTP cyclohydrolase ("GTP-CHI") enzymes, which are injected
directly into the brain where target cells are genetically modified in situ.
For either strategy, the required stereotaxic surgery has been reduced to a
routine clinical procedure and does not represent a significant technical
barrier.
In late 1995, the Company undertook a large ex vivo preclinical study
involving 24 parkinsonian, nonhuman primates. The study was designed to
measure the longevity of gene expression and, secondarily, the behavioral
effect of implanting TH-modified fibroblasts. Certain primates received the
genetically modified cells while others served as untreated controls. The
experiment was completed after six months and post mortems have been
conducted. While evidence of transgene expression was observed at the longest
time point studied to date (four months), the fibroblast grafts were shown not
to contain sufficient cells for a rigorous efficacy evaluation of the ex vivo
strategy. Experiments are planned to address the technical issues raised by
this study.
▇
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
▇▇ ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, gene therapy is regulated by the FDA's Center for
Biologics Evaluation and Research ("CBER"). CBER regulation places a statutory
emphasis on manufacturing; that is, the genetic modification and processing of
cells for ex vivo gene therapy, and the manufacture of therapeutic gene
transfer vectors for in vivo gene therapy. To ensure compliance with FDA/CBER
regulation, Somatix carries out the ex vivo modification and processing of
cells at facilities under its own control. Somatix is pioneering the
development of the regulatory and manufacturing systems required for adherence
to biologics regulation as it applies to ex vivo gene therapy. Somatix has
established a pilot cell processing facility designed to operate in compliance
with Good Manufacturing Practices ("GMP"). The production of genetically
modified cells is intensive in its requirements of labor, materials, and
facilities. Any further expansion of Somatix' cell processing capabilities
will require additional investment in the physical, systems and staffing
infrastructure required for the manufacturing of biologics in the United
States.
The Company intends to market and sell certain of its products directly,
while relying on the sales and marketing expertise of potential corporate
partners for other programs. The decision to market products directly or
through corporate partners will be based on a number of factors, including
market size and concentration, the size and expertise of the partner's sales
force in a particular market and the Company's overall strategic objectives.
The Company is currently engaged in discussions with several potential
partners.
COMPETITION
The Company is aware of several development stage and established
enterprises, including prominent pharmaceutical and biotechnology firms, which
are exploring the field of human gene therapy or are actively conducting
research in gene therapy. The Company may also experience competition from
other companies which have acquired or may in the future acquire technology
from universities and other research institutions. As these companies develop,
they may create or acquire proprietary positions involving certain aspects of
gene therapy.
Some disease indications being evaluated for gene therapy by Somatix are
treatable with existing and commercially available medicines. In some cases,
currently available therapies are not completely effective, have significant
toxicity or are very expensive. While Somatix believes that gene therapy has
the potential to provide new and more effective treatments, there is no
assurance that other companies will not develop treatments superior to
Somatix' gene therapy.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company's proprietary position includes rights under patents and patent
applications covering genetically modified cells, gene transfer vectors for
and methods of transferring foreign genes into such cells, and the use of
these genetically modified cells to treat certain diseases. Patent positions
in the field of biotechnology are generally highly uncertain and involve
complex legal and scientific questions. To date, no consistent policy has been
developed by the U.S. Patent and Trademark Office regarding the breadth of
claims allowed in biotechnology patents. Accordingly, there can be no
assurance that patent applications licensed to or submitted by the Company
will result in the issuance of patents, or that, if issued, patents will
afford the Company protection against competitors with similar technology. The
Company also relies upon unpatented proprietary technology. No assurance can
be given that the Company can meaningfully protect its rights with regard to
such unpatented proprietary technology or that competitors will not duplicate
or independently develop substantially equivalent technology.
The Company believes that there may be litigation involving patent and other
intellectual property rights in the gene therapy area. If the Company were
involved, regardless of the outcome, a substantial portion of the Company's
financial and human resources could be involved. The Company's processes and
potential future products may be found to infringe patents which have been or
may be granted to competitors or research institutions. As the biotechnology
industry expands and more patents are issued, the possibility of infringement
6
may increase. Should this occur, legal action could be brought against the
Company, damages sought, and certain research and products enjoined, if a
competitor's patents were found by a court of competent jurisdiction to be
valid, enforceable and infringed. If such action were successful, in addition
to any potential liability for damages, the Company could be required to
obtain a license in order to continue to use the affected process or
manufacture the affected product, or to cease using such process or product.
There can be no assurance that the Company would prevail in such litigation,
or that any required license would be made available on acceptable terms, or
at all.
One of the Company's competitors holds an exclusive license to a United
States patent issued to the National Institutes of Health covering ex vivo
gene therapy (U.S. Patent No. 5,399,346 to ▇▇▇▇▇▇▇▇, et al.). This patent is
exclusively licensed to Genetic Therapy Inc., which in 1995 was acquired by
Sandoz Pharmaceuticals. The United States Patent and Trademark Office ("PTO")
has declared an interference between a pending patent application exclusively
licensed to the Company, a patent application of another company, and the
▇▇▇▇▇▇▇▇ et al. patent. The PTO will conduct an interference proceeding, which
is primarily intended to determine the priority of the invention rights among
the three parties, and, in addition, will review the validity and
patentability of the parties' patent filings. Somatix' application has been
accorded senior party status based on its priority filing date of July 5,
1985. The outcome of these proceedings is uncertain, and is expected to take
at least a year. However, there can be no assurance that the ▇▇▇▇▇▇▇▇ et al.
patent or the third party patent application will not prevail, and that, if
one or the other of them prevails, that any rights under such will be
available to the Company on commercially reasonable terms.
In addition, the Company is aware that a competitor has licensed pending
patent applications relating to certain types of genetically modified cells.
In particular, the Company is aware of a pending application covering certain
genetically modified endothelial cells and their use in gene therapy. The
patent application is assigned to the U.S. government, and the Company
believes that it is exclusively licensed to such competitor. This application
has a filing date later than the filing date of the endothelial cell patent
licensed to the Company. Nevertheless, many issues will have to be resolved
before priority is determined.
Because patent applications in the United States are maintained in secrecy
until patents issue, and because publication of discoveries in the scientific
or patent literature often lags behind the actual discoveries, Somatix cannot
be certain that its licensors were the first creators of inventions covered by
its pending patent applications or that they were the first to file such
applications.
In order to manufacture and market its potential products, the Company may
be required to obtain licenses to patents or other proprietary rights of third
parties. There can be no assurance that the Company will be able to obtain a
license to any third party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a
reasonable cost. If the Company does not obtain such licenses, it could
encounter delays in introducing any such potential products while it attempts
to design around such patents, or it could find that the development,
manufacture or sale of such products could be foreclosed. Failure by the
Company to obtain a license to any technology that it may require to
commercialize its technologies or potential products may have a material
adverse effect on the Company. In addition, the Company could incur
substantial costs in defending itself in suits brought against it on such
patents or in suits in which the Company's patents may be asserted by it
against another party.
Somatix' policy is to file, where appropriate, patent applications based on
its own research to protect technology, inventions, and improvements that are
important to the development of its business. The Company also relies upon
trade secrets, expertise, continuing technological innovations, and licensing
opportunities to develop and maintain its competitive position. Somatix plans
to aggressively pursue patent applications to issuance and to defend its
patents against third parties. To date, Somatix' proprietary position also
includes patents and patent applications licensed from academic institutions
and a corporation. The Company's proprietary position is as follows:
Gene Transfer Methodology. Somatix has exclusively licensed from the
▇▇▇▇▇▇▇▇▇ Institute patent applications that have been filed in the United
States, Europe, Japan, Canada, and several other countries. These
7
applications cover vectors (modified disabled retroviruses used to transfer
genes into cells) that the Company is developing in its gene therapy programs.
Somatix also has an exclusive license from The ▇▇▇▇▇▇▇▇▇ Institute to patent
applications in the United States, Europe, and Japan that covers packaging
cell lines used to produce vectors, methods of construction, and methods of
use for introducing DNA into cells.
In connection with its acquisition of Merlin Pharmaceutical Corporation in
February 1995, the Company acquired rights to novel adeno-associated virus
vector methodology, including licenses from DNX, Inc., the University of
Pittsburgh and the State University of New York. Under such licenses, the
Company has exclusive rights to several important inventions and patent
applications for AAV vectors, and to the production of those vectors for gene
therapy applications.
In July 1996, Somatix licensed a new gene transfer technology from The Salk
Institute. This technology, based on lentiviral vectors, appears to be a
highly efficient method of introducing genes into non-dividing cells.
The Company is also developing adenovirus and non-viral, synthetic vectors
for use in gene therapy, expanding its technology platform to five distinct
types of gene transfer system. The Company has filed, and will continue to
file, patent applications on technology developed internally, where
appropriate.
Cell Types. Somatix has an exclusive license from The ▇▇▇▇▇▇▇▇▇ Institute to
two U.S. patents, and a pending U.S. patent application, covering genetically
modified epithelial cells and methods for creating them; a European patent has
also been issued. Somatix also has an exclusive, worldwide license from the
▇▇▇▇▇▇▇▇▇ Institute to a U.S. patent, and to a U.S. patent application and a
related European patent, covering genetically modified fibroblasts fixed in an
extracellular matrix for implantation in patients.
Somatix also has an exclusive, worldwide license from The ▇▇▇▇▇▇▇▇▇
Institute to patent applications for genetically modified hepatocytes and
endothelial cells as well as methods for their creation and use in gene
therapy. A European patent has issued on the creation and use of genetically
modified endothelial cells.
Gene Therapy Applications. Somatix has an exclusive, worldwide license from
the University of California to an issued patent and a U.S. patent application
covering methods for treating diseases of the central nervous system using
genetically modified cells. The Company also has an exclusive license to a
patent application covering the genetic modification of cells to express GTP
cyclohydrolase, which may be useful for the gene therapy treatment of PD.
Somatix also has an exclusive, worldwide license from The ▇▇▇▇▇ ▇▇▇▇▇▇▇
University and the University of Texas to a patent application, and an issued
European patent, for the use of genetically modified cells for cancer
vaccines. The Company also has an exclusive, worldwide license from the
▇▇▇▇▇▇▇▇▇ Institute to their interest in a patent application for the use of
genetically modified tumor cells expressing GM-CSF for use as cancer vaccines.
Additionally, the Company is currently negotiating or has obtained exclusive
rights to patents and patent applications covering the use of AAV vectors for
gene therapy via muscle tissue, cardiac tissue, the central nervous system,
and the gut, which may be useful in the Company's programs.
The Company has acquired significant proprietary rights under license
agreements that permit the licensors to terminate those agreements in the
event of certain material breaches by the Company. Although the Company has no
reason to believe it is currently in default under any of these agreements,
there can be no assurance that such defaults will not occur in the future.
Should a default occur, and should any of those agreements be terminated in
the future, the Company could lose the right to continue to develop one or
more of these potential products. Patent prosecution involves collaboration
between Somatix' in-house patent counsel and outside intellectual property
counsel.
8
ACCESS TO PROPRIETARY GENES
Some of the genes used by the Company in its gene therapy products are or
may become patented by third parties. As a result, the Company may be required
to obtain licenses under such patents in order to conduct certain research or
to manufacture or market products that contain proprietary genes. There can be
no assurances that these licenses will be granted. The Company is aware of
proceedings to determine rights to the human GM-CSF cDNA sequence in the
United States and Europe. In the United States, in the most recent public
disclosure of which the Company is aware, the Board of Patent Appeals and
Interferences granted a motion by a third party in an interference proceeding
stating that the human GM-CSF cDNA sequence is not patentable over the prior
art. In Europe, a hearing in an opposition proceeding initiated by a third
party to invalidate a European patent covering the human GM-CSF cDNA was
unsuccessful. The decision by the European Patent Office Opposition Division
upholding the patent has been appealed by this third party. There can be no
assurance of the outcome of these proceedings or the outcome of these
proceedings on appeal, or that, if required, a license of rights to the gene
sequence will be available to the Company on commercially reasonable terms, if
at all.
GOVERNMENT REGULATION
The Company's potential products will be subject to regulation by the FDA
and will require FDA approval before being commercially marketed for human
therapeutic use in the United States. Similar regulatory approval is also
required in foreign countries. The Company believes that its potential
products will be regulated by the FDA as biologic products. In order to
initiate the clinical trials needed to obtain supporting data for marketing
approval, the Company must file an IND with the FDA. An IND includes the
results of preclinical studies, methods of manufacturing and the proposed plan
for clinical trials. If the FDA finds deficiencies in the proposed plan, or
otherwise concludes that it would not be reasonably safe to proceed with the
planned studies, it may require changes in the IND before allowing the
clinical studies to begin.
Clinical trials are usually conducted in three phases that may take several
years to complete. The initial Phase I clinical studies are primarily
conducted to establish safety; however, some Phase I clinical studies that
involve terminal diseases may include preliminary efficacy evaluations as
well. Phase I studies may last from six months to over one year, and usually
involve 15 to 50 people. Once safety parameters are established, Phase II
studies are initiated to determine therapeutic activity, as well as optimal
dosing and route of administration. Phase II studies may involve 20 to 100
people or more. Phase III studies are conducted to demonstrate therapeutic
efficacy in a statistically significant manner at the optimal dose, route and
schedule of administration. These studies may include 200 to 1,000 patients.
During all phases of clinical trails, the FDA must be given periodic progress
reports and must be notified regarding adverse reactions, clinical protocol
changes and product changes. The FDA may suspend clinical studies if clinical
data indicate that patients are being subjected to unreasonable risks. The
uncertainty of the regulatory and clinical research process could adversely
affect the Company's ability to clinically test, manufacture or market
products.
Once clinical trials are completed, the product must receive FDA marketing
approval. The Company must submit a Product License Application ("PLA") and
Establishment License Application ("ELA"). Generally, the FDA takes between
one and five years to review these applications, and once approved, continues
to monitor the effects of the treatment. Even if a product is made
commercially available, the FDA has the power to limit or prevent further
production, based on findings of its surveillance program.
Additionally, the NIH has established guidelines for research involving
recombinant DNA molecules, which Somatix uses. The Company now complies with,
and intends to continue to comply with these guidelines. Until recently,
guidelines stated that proposals to conduct clinical research involving gene
therapy be reviewed by the NIH's Recombinant DNA Advisory Committee (the
"RAC"). Somatix' renal cell carcinoma, prostate cancer and U.S. melanoma
protocols were approved by this body. However, new guidelines are being
developed that may remove RAC's oversight responsibilities for many gene
therapy protocols. The impact of these new guidelines on the cost of or timing
of clinical trials cannot be determined at this time.
9
As discussed, gene therapy is a novel approach to treating disease. Since it
has not been tested extensively in humans, regulatory requirements governing
its testing are subject to review. The uncertainty of these requirements may
result in extensive delays in initiating clinical trials and in the regulatory
approval process. Regulatory requirements ultimately imposed could adversely
affect the Company's ability to test, manufacture or market products.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's business is subject to regulation under state and federal laws
regarding environmental protection and hazardous substances control. The
Company believes that its compliance with these laws has had no adverse impact
upon its capital expenditures, earnings or competitive position. Federal and
state agencies and congressional committees have expressed interest in further
regulation of biotechnology. The Company is unable to estimate the extent and
impact of regulation in the biotechnology field resulting from such future
federal, state or local legislation or administrative action.
This Form 10-K contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors" as well as those discussed elsewhere
in this Form 10-K.
10
RISK FACTORS
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company anticipates that its existing cash and interest income will be
adequate to satisfy its capital requirements for at least the next 12 months.
The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development, the scope
and results of preclinical studies and clinical trials, the cost of obtaining
regulatory approvals, the rate of technological advances, determinations as to
the commercial potential of the Company's products under development, the
status of competitive products and the establishment of manufacturing
capacity. The Company anticipates that it will be required to raise
substantial additional funds, including funds raised through collaborative
relationships and public or private financings. Because of the Company's
significant long-term capital requirements, it may seek to access the public
equity markets whenever conditions are favorable, even if it does not have an
immediate need for additional capital at that time. No assurance can be given
that additional financing will be available on acceptable terms, or at all. If
adequate funds are not available, the Company will be required to curtail
significantly its research and development programs or may be required to
discontinue its programs in their entirety and liquidate its assets.
EARLY STAGE OF DEVELOPMENT; NO DEVELOPED OR APPROVED PRODUCTS
Somatix' potential gene therapy products are in research and development. No
revenues have been generated from the sale of any of such products, nor are
any such revenues expected for at least the next several years. The products
currently under development by the Company will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There can be no
assurance that the Company's research and development efforts will be
successful, that any of the Company's potential gene therapy products will
prove to be safe and effective in clinical trials or that any commercially
successful products will ultimately be developed by the Company. Even if
developed, these products may not receive regulatory approval or be
successfully introduced and marketed at prices that would permit the Company
to operate profitably.
TECHNOLOGICAL UNCERTAINTY
Gene therapy is a new technology, and existing preclinical and clinical data
on the safety and efficacy of gene therapy are very limited. Data relating to
the Company's specific gene therapy approaches are even more limited. The
Company's GVAX(TM) cancer vaccine product is being tested in Phase I human
clinical trials primarily to determine its safety; none of the other products
under development at the Company are in human clinical trials. The results of
preclinical studies do not predict safety or efficacy in humans. Possible
serious side effects of gene therapy include viral infections, the initiation
of cancers and possible autoimmune diseases in the patient. There can be no
assurance that unacceptable side effects will not be discovered during
preclinical and clinical testing of the Company's potential products or
thereafter. There are many reasons that potential products that appear
promising at an early stage of research or development do not result in
commercialization. Although the Company is testing one of its proposed
products in Phase I clinical trials, there can be no assurance that the
Company will be permitted to undertake human clinical trials for any of its
other products or that the results of such testing will demonstrate safety or
efficacy. Even if clinical trials are successful, there is no assurance that
the Company will obtain regulatory approval for any indication, or that an
approved product can be produced in commercial quantities at reasonable costs,
or be successfully marketed. The Company has also recently begun development
of in vivo approaches to gene therapy that will target specific cells. There
can be no assurance that the desired specificity will be attained or that such
products will not have serious side effects.
OPERATING LOSS AND ACCUMULATED DEFICIT
The Company has incurred net losses since its inception. At June 30, 1996,
the Company's accumulated deficit was approximately $170.2 million. Such
losses have resulted principally from expenses incurred in the Company's
research and development programs, the acquisition of new technology, and to a
lesser extent, from
11
general and administrative expenses. The Company incurred a loss of $20.7
million in fiscal 1996 and expects to incur substantial and increasing losses
for at least the next several years due primarily to the expansion of its
research and development programs, including preclinical studies, clinical
trials and manufacturing. The Company expects that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial. There can be
no assurance that the Company will successfully develop, commercialize,
manufacture or market its products or ever achieve or sustain product revenues
or profitability.
VOLATILITY OF STOCK PRICE
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products by the
Company or its competitors, governmental regulation, developments in patent or
other proprietary rights, public concern as to the safety of products
developed by the Company or others and general market conditions may have a
significant effect on the market price of the Common Stock.
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL PROCESS
Because gene therapy is a relatively new technology and has not been
extensively tested in humans, the regulatory requirements governing gene
therapy products are uncertain and may be subject to substantial further
review by various regulatory authorities in the United States and abroad.
These uncertain requirements may result in extensive delays in initiating
clinical trials and in the regulatory approval process. Regulatory
requirements ultimately imposed could adversely affect the Company's ability
to clinically test, manufacture or market products.
The Company believes that its potential products will be regulated by the
FDA as biologics. Each potential product for a specific disease application
may be subject to regulation as a separate biologic, depending on its intended
use and FDA policy. The regulatory process for new therapeutic products,
including the required preclinical and clinical testing, is lengthy and
expensive, and there can be no assurance that FDA approvals will be obtained
in a timely manner, if at all. Future United States or foreign legislative or
administrative actions could also prevent or delay regulatory approval of the
Company's products. There can be no assurance that the Company will be able to
obtain the necessary authorizations to initiate clinical trials or approvals
to market any of its potential products. Even if FDA regulatory approvals are
obtained, a marketed product is subject to continual review. Later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in product marketing restrictions or
withdrawal of the product from the market, as well as possible civil or
criminal sanctions. In addition, many academic institutions and companies
doing research in the gene therapy field are using a variety of approaches and
technologies. Any adverse results obtained by such researchers in preclinical
or clinical studies could adversely affect the regulatory environment for gene
therapy products generally, possibly leading to delays in the approval process
for the Company's potential products.
On October 25, 1993, the vaccines and related biological products advisory
committee to the Center for Biologics Evaluation and Research ("CBER") of the
FDA met to review issues related to gene therapy, including the use of
retroviruses and adenoviruses. The committee did not recommend limiting the
use of viral vectors in gene therapies and made certain recommendations that
will be incorporated into a revision of the FDA's 1991 "Points to Consider"
document related to gene therapies and somatic cell therapies. There can be no
assurance, however, that new guidelines will not be instituted, or that
Somatix will be able to continue to comply with existing or future
regulations.
The Company's business is subject to regulation under state and federal laws
regarding environmental protection and hazardous substances control. The
Company believes that its efforts to comply with these laws have had no
adverse impact upon its capital expenditures, results of operations or
competitive position, but there
12
can be no assurance that this situation will continue. Federal and state
agencies and congressional committees have expressed interest in further
regulation of biotechnology. The Company is unable to estimate the extent and
impact of regulation in the biotechnology field resulting from any future
federal, state or local legislation or administrative action.
DEPENDENCE UPON KEY PERSONNEL AND COLLABORATIVE RELATIONSHIPS
The Company's success is highly dependent on the retention of principal
members of its management and scientific staff and the recruitment of
additional qualified personnel. The loss of key personnel or the failure to
recruit necessary additional qualified personnel could have an adverse effect
on the operations of the Company. There is intense competition from other
companies, research and academic institutions and other organizations for
qualified personnel in the areas of the Company's activities. There is no
assurance that Somatix will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. These
activities are expected to require the addition of new personnel with
expertise in the areas of clinical testing, manufacturing, marketing and
distribution and the development of additional expertise by existing
personnel. The failure to acquire such personnel or develop such expertise
could adversely affect prospects for the Company's success.
The Company has clinical trial arrangements with The ▇▇▇▇▇ ▇▇▇▇▇▇▇
University covering a Phase I clinical trial to treat kidney cancer patients,
now in progress, and a Phase I/II clinical trial to treat prostate cancer
patients for which RAC approval has been obtained, but for which no patients
have yet been enrolled. The Company has additional arrangements with the
Netherlands Cancer Institute and the ▇▇▇▇ ▇▇▇▇▇▇ Cancer Center to treat
melanoma patients in two separate Phase I clinical trials. Both trials are
currently in progress. In the event that any of these relationships are
terminated, the completion and evaluation of clinical trials could be
adversely affected. In addition, the Company has an arrangement with the
▇▇▇▇▇▇▇▇▇'▇ Institute of Santa Clara, California to provide animal facilities,
animals and consulting services in connection with preclinical testing of its
gene therapy product for PD. If the relationship were terminated, progress of
preclinical testing would be adversely affected.
The Company depends in part on the continued availability of outside
scientific collaborators performing research, which may be funded by the
Company, in certain areas relevant to the Company's research. These
relationships generally may be terminated at any time by the collaborator,
typically by giving 30 days' notice to the Company. The Company's scientific
collaborators are not employees of the Company. As a result, the Company has
limited control over their activities and can expect that only limited amounts
of their time will be dedicated to Company activities. The Company's
agreements with these collaborators as well as those with the Company's
scientific consultants provide that any rights the Company obtains as a result
of the research efforts of these individuals will be subject to the rights of
the research institutions in such work. In addition, some of these
collaborators have consulting or other advisory arrangements with other
entities that may conflict with their obligations to the Company. For these
reasons, there can be no assurance that inventions or processes discovered by
the Company's scientific collaborators or scientific consultants will become
the property of the Company.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
Patent positions in the field of biotechnology are generally highly
uncertain and involve complex legal and scientific questions. To date, there
has emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents, especially in the area of gene therapy. Accordingly,
there can be no assurance that patent applications and patents licensed to the
Company will result in patents being issued or that, if and when issued, the
patents will afford protection against competitors with similar technology.
The Company has licensed two U.S. patents covering the ex vivo modification of
cells to treat diseases of the central nervous system, and all three patents
have filing dates earlier than the filing date of the competitor's patent.
However, there can be no assurance that the competitor's patent will not
remain in force, and if it does, that any rights under the patent will be
available to the Company on commercially reasonable terms. The Company also
relies upon unpatented proprietary technology. No assurance can be given that
the Company can meaningfully protect its rights in such
13
unpatented proprietary technology or that others will not duplicate or
independently develop substantially equivalent technology.
The Company's processes and potential products may conflict with patents
which have been or may be granted to competitors, academic institutions,
universities or others. As the biotechnology industry expands and more patents
are issued, the risk increases that the Company's processes and potential
products may give rise to claims that they infringe the patents of others.
Such other persons could bring legal actions against the Company claiming
damages and seeking to enjoin certain research, manufacturing and marketing of
the affected process or potential product. If any such actions are successful,
in addition to any potential liability for damages, the Company could be
required to obtain a license in order to continue to use the affected process
or to manufacture or use the affected product or cease using such product or
process if enjoined by a court. There can be no assurance that the Company
would prevail in any such action or that any license required under any such
patent would be made available on acceptable terms, or at all. The Company
believes that there may be significant litigation in the industry regarding
patent and other intellectual property rights. If the Company becomes involved
in such litigation, it could consume a substantial portion of the Company's
financial and human resources, regardless of the outcome of such litigation.
One of the Company's competitors has been granted an exclusive license to a
United States patent issued to the National Institute of Health covering ex
vivo gene therapy. While the Company has licensed two U.S. patents covering
the ex vivo modification of epithelial cells and one U.S. patent covering the
ex vivo modification of cells to treat diseases of the central nervous system,
and while all three patents' filing dates are earlier than the filing date of
the competitor's licensed patent, there can be no assurance that the
competitor's patent will not prevail and that if it prevails, that any rights
under such will be available to the Company on commercially reasonable terms,
if at all.
In addition, the Company is aware of pending patent applications which have
been licensed to another competitor of the Company relating to certain types
of genetically modified cells. For example, the Company is aware of a pending
application covering genetically modified endothelial cells and their use in
gene therapy. The patent application is assigned to the United States
Government, and it is believed that the patent application is exclusively
licensed to a competitor. There is no assurance that a license to this or
related patent applications will be available to the Company. Furthermore, as
gene therapy becomes more established, others may enter the field who have
patent rights to genes and technology which may be used in gene therapy. If
the Company is unable to obtain licenses to such patents, its business may be
substantially and adversely affected. In addition, since patent applications
in the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, Somatix cannot be certain that its licensors were
the first creators of inventions covered by its pending patent applications or
that they were the first to file patent applications for such inventions.
In order to manufacture and market its products, the Company may be required
to obtain licenses to patents or other proprietary rights of third parties.
There can be no assurance that the Company will be able to obtain a license to
any third party technology that it may require to conduct its business or
that, if obtainable, such technology can be licensed at a reasonable cost. If
the Company does not obtain such licenses, it could encounter delays in
introducing any such potential products while it attempts to design around
such patents, or it could find that the development, manufacture or sale of
such potential products could be adversely effected. Failure by the Company to
obtain a license to any technology that it may require to commercialize its
technologies or potential products may have a material adverse effect on the
Company. In addition, the Company could incur substantial costs in defending
itself in lawsuits brought against it on such patents or in lawsuits in which
the Company's patents may be asserted by it against another party.
A number of the DNA sequences which the Company expects to use in its gene
therapy products are or may become patented by third parties. As a result, the
Company may be required to obtain licenses under such patents in order to
conduct certain research, to manufacture or to market products that contain
proprietary genes. There can be no assurance that such licenses will be
available on commercially reasonable terms, if at all.
14
Although the rights to the DNA Sequence for the Form of Factor VIII used by
the Company have not yet been determined, the Company is aware of United
States patents for factor VIII DNA sequences that have been licensed to
competitors for exclusive use in their gene therapy programs. Unless the
Company can similarly license such sequences or other sequences, the Company
may not be able to commercialize its hemophilia program. The Company is aware
of proceedings to determine rights to the human GM-CSF cDNA sequence in the
United States and Europe. In the United States, in the most recent public
disclosure of which the Company is aware, the Board of Patent Appeals and
Interferences granted a motion by a third party in an interference proceeding
stating that the human GM-CSF cDNA sequence is not patentable over the prior
art. In Europe, an Opposition proceeding initiated by a third party to
invalidate a European patent covering human GM-CSF cDNA was unsuccessful. The
decision by the European Patent Office Opposition Division upholding the
patent has been appealed by this third party. There can be no assurance of the
outcome of these proceedings or the outcome of these proceedings on appeal, or
that, if required, a license of rights to the gene sequence will be available
to the Company on commercially reasonable terms, if at all.
The Company has acquired significant proprietary rights under license
agreements that permit the licensors to terminate those agreements in the
event of certain material breaches by the Company. Although the Company is not
currently in default under any of these agreements, there can be no assurance
that such defaults will not occur in the future. Should a default occur, and
should any of those agreements be terminated in the future, the Company could
lose the right to continue to develop one or more of these potential products.
COMMERCIALIZATION: LACK OF MANUFACTURING OR MARKETING EXPERIENCE
The Company intends to market and sell some of its potential products
directly, while relying on sales and marketing expertise of potential
corporate partners for other programs. The Company has no experience in sales,
marketing or distribution of biopharmaceutical products and has not developed
a specific sales and marketing plan with respect to any of its potential
products. The decision to market products directly or through corporate
partners will be based on a number of factors including market size and
concentration, the size and expertise of the partner's sales force in a
particular market and the Company's overall strategic objectives. The Company
is currently engaged in various stages of discussions with potential partners.
There can be no assurance that the Company will be able to establish such
relationships on acceptable terms and conditions, or at all.
The Company's current commercialization strategy is to sell genetically
modified cells to hospitals and clinics. The Company will be required to
operate facilities in which each patient's cells are genetically modified,
processed and tested in compliance with the Good Manufacturing Practices
published in the U.S. Code of Federal Regulations. Currently, the Company can
manufacture genetically modified cells in quantities sufficient to meet its
needs for clinical testing but does not have the capability to manufacture
sufficient quantities to meet large-scale commercial requirements. The Company
believes that its processes can be scaled-up efficiently to meet its
anticipated future requirements, but there can be no assurance that problems
or delays will not arise in such scale-up. The manufacture of sufficient
quantities of the Company's potential products can be an expensive, time-
consuming and complex process. If the Company is unable to develop such
manufacturing capabilities, the Company's ability to commercialize its
products will be adversely affected. This could prevent or delay submission of
products for regulatory approval and initiation of new development programs,
which would have a material adverse effect on the Company.
COMPETITION
The gene therapy field is relatively new and rapidly evolving, and it is
expected to continue to undergo significant and rapid technological change.
Rapid technological development could result in the Company's potential
products, services or processes becoming obsolete before the Company recovers
a significant portion of its related research, development and capital
expenditures. The Company will experience competition both from other
companies in the field of gene therapy and from companies which have other
forms of treatment for the diseases targeted by the Company. The Company is
aware of several development stage and established enterprises, including
major pharmaceutical and biotechnology firms as well as several major
universities, which
15
are exploring the field of human gene therapy or are actively engaged in
research and development in areas including both retroviral vectors and other
methods of gene transfer. To the Company's knowledge, at least one of these
companies and several universities have participated in clinical trials using
retroviral vectors. The Company may also experience competition from companies
that have acquired or may acquire technology from such universities and other
research institutions. As these companies develop their technologies, they may
develop proprietary positions in certain aspects of gene therapy. Certain
competitors and potential competitors of the Company have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than the Company, and other competitors of the Company may
enter into collaborative relationships with other companies having such
greater resources. Other companies may succeed in developing products earlier
than the Company, obtaining FDA approvals for such products more rapidly than
the Company, or developing products that are more effective than those
proposed to be developed by the Company. There can be no assurance that
research and development by others will not render the Company's technology or
products obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies.
PRODUCT LIABILITY AND INSURANCE
Clinical trials or marketing of any of the Company's potential products may
expose the Company to liability claims resulting from the use of such
products. These claims might be made directly by consumers, health care
providers or by others selling such products. The Company currently maintains
product liability insurance with respect to its former product lines and this
coverage includes clinical trials. The policy coverage is $5 million and is on
a claims made basis. There can be no assurance that the Company will be able
to maintain such insurance or, if maintained, that sufficient coverage can be
acquired at a reasonable cost. An inability to maintain insurance at
acceptable cost or at all could prevent or inhibit the clinical testing or
commercialization of products developed by the Company. A product liability
claim or recall could have a material adverse effect on the business or
financial condition of the Company.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals, viruses and various radioactive compounds.
The Company is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company. The Company may be required to incur significant costs to comply with
environmental laws and regulations in the future. The Company's operations,
business or assets may be materially or adversely affected by current or
future environmental laws or regulations.
REIMBURSEMENT
In both domestic and foreign markets, sales of the Company's potential
products will depend in part upon coverage and reimbursement from third-party
payors, including health care organizations, including government agencies,
private health care insurers and other health care payors such as health
maintenance organizations, self-insured employee plans and the Blue Cross/Blue
Shield plans. There is considerable pressure to reduce the cost of drug
products. In particular, reimbursement from government agencies and insurers
and large health organizations may become more restricted in the future. The
Company's potential products represent a new mode of therapy, and, while the
cost-benefit ratio of the products may be favorable, the Company expects that
the costs associated with its products will be substantial. There can be no
assurance that the Company's proposed products, if successfully developed,
will be considered cost-effective by third party payors, that insurance
coverage will be available or, if available, that such payors' reimbursement
policies will not adversely affect the Company's ability to sell its products
on a profitable basis. In addition, there can be no assurance that insurance
coverage
16
will be provided by such payors at all or without substantial delay, or, if
such coverage is provided, that the approved reimbursement will provide
sufficient funds to enable the Company to become profitable.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of and availability of capital for
biotechnology companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government
control. In the United States, there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to
implement similar government control. While the Company cannot predict whether
any such legislative or regulatory proposals will be adopted, the announcement
or adoption of such proposals could have a material adverse effect on the
Company's prospects.
ITEM 2. PROPERTIES
The Company operates a laboratory facility in Alameda, California. This
facility houses the research and development staff and laboratories of the
Company. The Company has occupied this facility since March 1987 and believes
that it is well maintained and generally adequate for the Company's present
needs and intended uses. The facility is located in a building of
approximately 40,000 square feet at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The facility is leased through February 2007, at an
approximate annual rent of $633,000. In addition, on July 1, 1994 the Company
leased approximately 16,000 square feet of office space for the corporate
headquarters and administrative staff at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and on
March 1, 1994 leased 26,000 square feet of shell space at ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇
▇▇▇▇▇, ▇▇▇▇▇▇▇ for a prospective manufacturing site which has been subleased
for the balance of the lease. The approximate annual rents are $237,000 and
$425,000, respectively, through February 2004. The Company has a one-time
option to terminate these leases after five years. On January 25, 1996 the
Company leased approximately 13,000 square feet for an animal facility at 2061
Challenger Drive, Alameda through February 2007 at an approximate annual rent
of $197,000. Office space at ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, consisting of 13,000
square feet, leased at an approximate annual rent of $211,000 until September
1993 and $277,000 per year thereafter through November 1997 has been subleased
for the remainder of the lease.
ITEM 3. LEGAL PROCEEDINGS
(a) No material legal proceedings to which Somatix was a party or of which
any of its property was the subject were pending during fiscal 1996.
(b) No material legal proceedings were terminated in the fourth quarter of
fiscal 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
last quarter of the fiscal year ended June 30, 1996.
17
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's common stock commenced trading in the over-the-
counter market on the Nasdaq National Market on June 5, 1986, under the symbol
"HANA". On March 15, 1991, as a result of the Merger of Hana and Somatix and
the subsequent name change to Somatix Therapy Corporation, the trading symbol
was changed to "SOMA". As of June 30, 1996, there were approximately 961
holders of record of the Company's common stock.
The Company has never paid cash dividends on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable
future. See Note 3 to Financial Statements.
The following table sets forth, for fiscal periods indicated, the range of
high and low closing sale prices available for the fiscal years 1996 and 1995.
HIGH LOW
------- ------
1996
Fourth Quarter................................................. $9 3/4 $6
Third Quarter.................................................. 7 1/4 5 1/8
Second Quarter................................................. 6 1/2 3 3/4
First Quarter.................................................. 7 5/8 3 7/8
HIGH LOW
------- ------
1995
Fourth Quarter................................................. $5 1/16 $3
Third Quarter.................................................. 5 1/4 2 7/8
Second Quarter................................................. 5 1/2 2 7/8
First Quarter.................................................. 6 5/8 4 1/8
18
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statements of Operations Data:
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues:
Licensing agreement....... $ -- $ -- $ 2,000 $ -- $ --
Research agreements....... -- 250 900 -- --
Contract manufacturing.... -- -- -- -- 69
-------- -------- -------- -------- --------
Total revenues.......... -- 250 2,900 -- 69
Costs and Expenses:
Cost of revenues.......... -- -- -- -- 1,035
Research and development.. 17,509 18,395 13,186 12,732 7,444
General and
administrative........... 4,035 4,699 3,895 3,903 2,568
Restructuring costs....... -- 2,752 -- -- --
In-process technology..... -- 13,679 -- -- 33,038
-------- -------- -------- -------- --------
Total costs and
expenses............... 21,544 39,525 17,081 16,635 44,085
-------- -------- -------- -------- --------
Operating loss.............. (21,544) (39,275) (14,181) (16,635) (44,016)
Other income, net........... 856 222 474 964 793
-------- -------- -------- -------- --------
Net loss.................... $(20,688) $(39,053) $(13,707) $(15,671) $(43,223)
======== ======== ======== ======== ========
Net loss per share.......... $ (.90) $ (2.34) $ (0.95) $ (1.19) $ (4.43)
======== ======== ======== ======== ========
Shares used in calculation
of net loss per share...... 22,971 16,661 14,418 13,191 9,752
Consolidated Balance Sheet
Data:
Total assets................ $ 19,370 $ 19,128 $ 25,747 $ 23,524 $ 38,755
Capital lease obligations,
noncurrent portion......... 1,217 1,692 1,627 176 330
Stockholders' equity........ 12,203 10,489 21,846 21,552 36,510
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview. In February 1995, the Company completed the acquisition of Merlin
Pharmaceutical Corporation ("Merlin") a privately held gene therapy company,
pursuant to a stock transaction whereby a subsidiary of the Company was merged
into Merlin. As a result of the Merlin acquisition, the Company wrote-off to
operations an amount equal to $13.7 million in fiscal year 1995. With the
exception of fiscal year 1990, when the Company sold its cell biology and
diagnostic product line, the Company has been unprofitable since its inception
and expects to continue to incur operating losses in future periods due to
continued requirements for product development, clinical trials, regulatory
activities and other areas. As of June 30, 1996, the Company had an
accumulated deficit of $170.2 million.
Results of Operations. There were no revenues for the fiscal year ending
June 30, 1996 compared to $250,000 in fiscal year 1995. Revenues in fiscal
year 1994 were $2,900,000. Revenue in fiscal year 1995 was derived from a
research agreement with ▇▇▇▇▇▇ Healthcare Corporation. In fiscal year 1994,
revenues were derived from research and licensing agreements with ▇▇▇▇▇▇
Healthcare Corporation and a private group of investors.
On June 29, 1995, the Company completed a restructuring and cost savings
program separating its research and development infrastructure into two
groups. The development group will focus on clinical trials and product
development and the research group will focus on gene transfer technologies
for various medical applications. As a result of the restructuring, the
Company recorded in fiscal year 1995 a restructuring charge of $2,752,000,
19
consisting principally of employee severance pay, the accrual of future rent
obligations including the write-off of leasehold improvements, and the write-
down of certain assets.
Research and development expenses decreased by $886,000 in fiscal year 1996
and increased by $5,209,000 in fiscal year 1995. The decrease in research and
development expenses in fiscal year 1996 was primarily due to restructuring
and cost saving programs. The increase in research and development expenses in
fiscal year 1995 was primarily due to increased staffing, recruitment costs,
patent legal services, technology license fees, supplies, and research
contracts to meet the requirements of increased preclinical and clinical
activities in progress. The Company expects research and development expenses
to increase in future periods as the Company's preclinical and clinical
activities progress.
General and administrative expenditures decreased $664,000 in fiscal year
1996 and increased $804,000 in fiscal year 1995. The increase in fiscal year
1995 was primarily due to the write-off of $741,000 of future rent expenses
and leasehold improvements associated with the former corporate headquarters
which the Company is currently marketing for sublease. The Company expects
general and administrative expenses to increase in future periods due to
expanded research and development efforts.
Other income consists principally of interest income earned on the Company's
cash balances. Changes in other income are due to fluctuations in cash
balances available for investment and returns on cash invested in recent
periods.
Liquidity and Capital Resources. On June 30, 1996, the Company had cash,
cash equivalents, and marketable securities of $15,036,000 compared with
$14,576,000 on June 30, 1995. Subsequent to June 30, 1996, the Company
received $5 million in cash from a private placement of convertible preferred
stock (see Note 9 to the Consolidated Financial Statements). Operating
expenses have exceeded revenues every fiscal year, except 1990, since the
Company's inception. For the year ending June 30, 1996, capital expenditures
were $1,207,000. The Company expects its cash requirements and net losses to
increase significantly in future periods due to higher research and
development costs, the cost of Phase III clinical trials due to start December
31, 1996 and other expenses. The Company has no material capital commitments.
The Company anticipates that its existing cash will be sufficient to meet
its cash requirements for at least the next 12 months. The Company has
financed its operations since inception principally through the sale of equity
securities, contract research revenues, license fees and interest income. The
Company's future capital requirements will depend on many factors, including
the progress of the Company's research and development, the scope and results
of preclinical studies and clinical trials, the cost of obtaining regulatory
approvals, the rate of technological advances, determinations as to the
commercial potential of the Company's products under development, the status
of competitive products and the establishment of manufacturing capacity. The
Company anticipates that it will be required to raise substantial additional
funds, including funds raised through collaborative relationships and public
or private financings. Because of the Company's significant operating and
capital requirements, it may be required to seek additional financings. It may
also seek to access the public equity markets whenever conditions are
favorable, even if it does not have an immediate need for additional capital
at that time. No assurance can be given that additional financing will be
available on acceptable terms, or at all. If adequate funds are not available,
the Company will be required to curtail significantly its research and
development programs or may be required to discontinue its programs in their
entirety and liquidate its assets.
20
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS: PAGE
--------------------- -----
Report of Independent Auditors.......................................... 22
Consolidated Balance Sheets at June 30, 1996 and 1995................... 23
Consolidated Statements of Operations for Years Ended June 30, 1996,
1995, and 1994......................................................... 24
Consolidated Statements of Stockholders' Equity for Years Ended June 30,
1996, 1995, and 1994................................................... 25
Consolidated Statements of Cash Flows for Years Ended June 30, 1996,
1995, and 1994......................................................... 26
Notes to Consolidated Financial Statements.............................. 27-34
All financial statement schedules of the registrant for the years ended June
30, 1996, 1995, and 1994 have been omitted since the information is not
required or is not so material as to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or the notes thereto.
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Somatix Therapy Corporation
We have audited the accompanying consolidated balance sheets of Somatix
Therapy Corporation as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Somatix
Therapy Corporation at June 30, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Walnut Creek, California
July 25, 1996 except for Note 9, as
to which the date is September 25,
1996
22
SOMATIX THERAPY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30
----------------------------
1996 1995
------------- -------------
Current assets:
Cash and cash equivalents...................... $ 6,703,000 $ 14,326,000
Marketable securities.......................... 7,738,000 250,000
Other current assets........................... 889,000 726,000
------------- -------------
Total current assets......................... 15,330,000 15,302,000
Marketable securities............................ 595,000 --
Restricted cash.................................. 650,000 300,000
Equipment and improvements, at cost:
Laboratory and production equipment............ 4,136,000 3,942,000
Equipment under capital leases................. 3,435,000 3,078,000
Furniture and office equipment................. 1,266,000 1,115,000
Leasehold improvements......................... 4,286,000 3,781,000
------------- -------------
Total equipment and improvements............. 13,123,000 11,916,000
Less accumulated depreciation and
amortization.................................. 10,459,000 8,523,000
------------- -------------
Net equipment and improvements............... 2,664,000 3,393,000
Other assets..................................... 131,000 133,000
------------- -------------
Total assets................................. $ 19,370,000 $ 19,128,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities....... $ 2,237,000 $ 2,642,000
Accrued compensation and related expenses...... 1,169,000 992,000
Capital lease obligations, current portion..... 861,000 718,000
Accrued restructuring costs, current portion... 414,000 859,000
Other current liabilities...................... 186,000 186,000
------------- -------------
Total current liabilities.................... 4,867,000 5,397,000
Capital lease obligations, net of current
portion......................................... 1,217,000 1,692,000
Accrued restructuring costs, net of current
portion......................................... 834,000 1,288,000
Other liabilities................................ 249,000 262,000
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, par value $0.01 per
share; liquidation preference of $5,995,275 in
1996, $6,350,000 in 1995; authorized 1,000,000
shares, issued and outstanding 239,811 shares
in 1996 and 254,000 in 1995................... 2,000 3,000
Common stock, par value $0.01 per share;
40,000,000 shares, issued and outstanding
24,369,403 shares in 1996 and 20,991,996
shares in 1995................................ 244,000 210,000
Additional paid-in capital..................... 182,118,000 159,749,000
Accumulated deficit............................ (170,161,000) (149,473,000)
------------- -------------
Total stockholders' equity....................... 12,203,000 10,489,000
------------- -------------
Total liabilities and stockholders' equity... $ 19,370,000 $ 19,128,000
============= =============
See accompanying notes.
23
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues:
Licensing agreement............... $ -- $ -- $ 2,000,000
Research agreements............... -- 250,000 900,000
------------ ------------ ------------
Total revenues.................. -- 250,000 2,900,000
------------ ------------ ------------
Costs and Expenses:
Research and development.......... 17,509,000 18,395,000 13,186,000
General and administrative........ 4,035,000 4,699,000 3,895,000
In-process technology............. -- 13,679,000 --
Restructuring costs............... -- 2,752,000 --
------------ ------------ ------------
Total costs and expenses........ 21,544,000 39,525,000 17,081,000
------------ ------------ ------------
Operating loss...................... (21,544,000) (39,275,000) (14,181,000)
Other income, net................... 856,000 222,000 474,000
------------ ------------ ------------
Net loss............................ $(20,688,000) $(39,053,000) $(13,707,000)
============ ============ ============
Net loss per share.................. $ (0.90) $ (2.34) $ (0.95)
============ ============ ============
Shares used in calculation of net
loss per share..................... 22,971,053 16,660,528 14,417,679
============ ============ ============
See accompanying notes.
24
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------- ---------- -------- ------------ ------------- -------------
Balances, June 30,
1993................... -- -- 13,266,606 $133,000 $118,132,000 $ (96,713,000) $ 21,552,000
Issuance of shares of
common stock under
stock option and
purchase plans......... -- -- 13,521 -- 69,000 -- 69,000
Private investment in
public equity financing
at $5.85 per share, net
of issuance costs...... -- -- 2,005,483 20,000 10,842,000 -- 10,862,000
Issuance of common stock
to investors at $6.88
per share, net of
issuance costs......... -- -- 232,558 2,000 1,582,000 -- 1,584,000
Issuance of common stock
to investors at $6.50
per share, net of
issuance costs......... -- -- 230,769 2,000 1,484,000 -- 1,486,000
Net loss................ -- -- -- -- -- (13,707,000) (13,707,000)
------- ------- ---------- -------- ------------ ------------- ------------
Balances, June 30,
1994................... -- -- 15,748,937 $157,000 $132,109,000 $(110,420,000) $ 21,846,000
Issuance of shares of
common stock under
stock option and
purchase plans......... -- -- 215,782 2,000 30,000 -- 32,000
Issuance of common stock
to and assumptions of
options and warrants
upon the acquisition of
Merlin Pharmaceutical
Corporation............ -- -- 2,257,385 23,000 12,574,000 -- 12,597,000
Private placement of
common stock at $3.68
per share, net of
issuance costs......... -- -- 2,769,892 28,000 8,689,000 -- 8,717,000
Private placement of
preferred stock at
$25.00 per share, net
of issuance costs...... 254,000 $ 3,000 -- -- 6,347,000 -- 6,350,000
Net loss................ -- -- -- -- -- (39,053,000) (39,053,000)
------- ------- ---------- -------- ------------ ------------- ------------
Balance, June 30, 1995.. 254,000 $ 3,000 20,991,996 $210,000 $159,749,000 $(149,473,000) $ 10,489,000
Issuance of shares of
common stock under
stock option and
purchase plans......... -- -- 323,666 3,000 857,000 -- 860,000
Paid in kind dividends
for preferred stock.... 16,354 -- -- -- -- -- --
Conversion of preferred
stock into common
stock.................. (30,543) (1,000) 190,893 2,000 (1,000) -- --
Exercise of warrants to
purchase common stock.. -- -- 559,627 6,000 1,572,000 -- 1,578,000
Purchase of common stock
by ▇▇▇▇▇▇▇-▇▇▇▇▇
Squibb, net of issuance
costs.................. -- -- 2,303,221 23,000 19,941,000 -- 19,964,000
Net loss................ -- -- -- -- -- (20,688,000) (20,688,000)
------- ------- ---------- -------- ------------ ------------- ------------
Balances, June 30,
1996................... 239,811 $ 2,000 24,369,403 $244,000 $182,118,000 $(170,161,000) $ 12,203,000
======= ======= ========== ======== ============ ============= ============
See accompanying notes.
25
SOMATIX THERAPY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net loss........................... $(20,688,000) $(39,053,000) $(13,707,000)
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation and amortization.... 1,936,000 1,965,000 1,466,000
Write-off of acquired in-process
technology...................... -- 13,679,000 --
Write-off of leasehold
improvements.................... -- 324,000 --
Decrease (increase) in other
current assets.................. (163,000) 198,000 (140,000)
Decrease (increase) in other
assets.......................... 2,000 55,000 (54,000)
Increase (decrease) in accounts
payable and accrued
liabilities..................... (405,000) 119,000 244,000
Increase (decrease) in accrued
compensation and related
expenses........................ 177,000 681,000 (45,000)
Increase (decrease) in other
current liabilities............. -- 171,000 (17,000)
Increase (decrease) in accrued
restructuring costs............. (899,000) 2,147,000 --
Increase (decrease) in other
liabilities..................... (13,000) 249,000 (48,000)
------------ ------------ ------------
Net cash used in operating
activities.................... (20,053,000) (19,465,000) (12,301,000)
Cash flows from investing activities:
Maturities of marketable securities
and changes in restricted cash.... 11,490,000 25,975,000 9,625,000
Purchases of marketable
securities........................ (19,923,000) (6,830,000) (16,198,000)
Purchases of equipment and
improvements...................... (1,207,000) (1,496,000) (1,359,000)
------------ ------------ ------------
Net cash (used in) provided by
investing activities.......... (9,640,000) 17,649,000 (7,932,000)
Cash flows from financing activities:
Borrowings under sale/leaseback
agreements........................ 519,000 971,000 2,000,000
Principal payments under capital
lease obligations................. (851,000) (705,000) (205,000)
Net proceeds from issuance of
capital stock..................... 22,402,000 15,099,000 14,001,000
------------ ------------ ------------
Net cash provided by financing
activities.................... 22,070,000 15,365,000 15,796,000
Net (decrease) increase in cash.... (7,623,000) 13,549,000 (4,437,000)
Cash and cash equivalents, beginning
of period........................... 14,326,000 777,000 5,214,000
------------ ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 6,703,000 $ 14,326,000 $ 777,000
============ ============ ============
Cash paid for interest............... $ 309,000 $ 300,000 $ 132,000
Supplemental disclosures of non-cash
investing and financing activities:
Conversion of preferred stock into
common stock...................... $ 743,000 $ -- $ --
See accompanying notes.
26
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Company and Basis of Presentation. Somatix Therapy Corporation ("Somatix" or
the "Company") is a leader in the emerging field of gene therapy. Somatix is
applying its gene therapy expertise to research and develop therapies to treat
a variety of diseases. The Company is the result of three transactions. The
first transaction, which was consummated in March 1991, combined Somatix
Corporation and Hana Biologics, Inc. The second transaction occurred in
January 1992, when the Company acquired GeneSys Therapeutics Corporation. The
third transaction occurred in February 1995, when the Company acquired Merlin
Pharmaceutical Corporation (see Note 2). The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
The Company anticipates that it will be required to raise substantial
additional funds, including funds raised through collaborative relationships
and public or private financings. Because of the Company's significant
operating and capital requirements, it may be required to seek additional
financings. It may also seek to access the public equity markets whenever
conditions are favorable, even if it does not have an immediate need for
additional capital at that time. No assurance can be given that additional
financing will be available on acceptable terms, or at all. If adequate funds
are not available, the Company will be required to curtail significantly its
research and development programs or may be required to discontinue its
programs in their entirety and liquidate its assets.
Cash and Cash Equivalents. At June 30, 1996, cash equivalents consist of
government securities totaling $4,600,000 and short-term corporate debt
securities totaling $1,500,000 with maturities at the date of acquisition of
three months or less. Cash equivalents are stated at cost which approximates
fair value.
Revenue Recognition. License revenue is recorded as revenue when all
contractual obligations have been met. Research revenue is recorded when
earned as defined under the term of the respective agreements. Payments
received which are related to future performance are deferred and recognized
as income when earned.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Marketable Securities. At June 30, 1996, current marketable securities
consist of government securities totaling $6,698,000 and corporate debt
securities totaling $1,040,000 having maturities between three months and one
year. Non-current marketable securities consist of government securities
having maturities greater than one year. Marketable securities are stated at
cost which approximates fair value and the unrealized gains and losses at June
30, 1996 are not significant.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted
the provisions of the new standard for investments held as of or acquired
after July 1, 1994. In accordance with SFAS 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. The Company has classified its entire investment portfolio as held-
to-maturity. There is no impact of adopting SFAS 115 on results of operations
or financial position because the difference between cost and fair value was
not significant.
In accordance with SFAS 115, debt securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Interest on
securities classified as held-to-maturity is included in investment income.
27
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
It is the Company's policy to invest funds not required for current
operations in financial instruments with strong credit ratings. The Company
has not experienced significant losses to date on these investments.
Equipment and Improvements. Depreciation of equipment and furniture is
provided over estimated useful lives of three to ten years using the straight-
line method. Assets under capital leases are amortized by the straight-line
method over their useful lives of three to five years. Leasehold improvements
are amortized over the remaining lives of the applicable leases.
Retirement Plan. On January 1, 1993, the Company established a defined
contribution plan which covers all employees 21 years and older. The Company's
contributions to the plan are at the discretion of the Company's Board of
Directors. Amounts contributed to the plan for the years ended June 30, 1996,
1995, and 1994 were $74,000, $61,000 and $46,000, respectively.
Stock-Based Compensation. The Company accounts for its stock option plan in
accordance with the provisions of the Accounting Principles Board's Opinion
▇▇. ▇▇ ("▇▇▇ ▇▇"), "Accounting for Stock Issued to Employees". In 1995, the
Financial Accounting Standards Board released the Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". SFAS 123 provides an alternative method of accounting for
stock-based compensation to APB 25 and is effective for the fiscal years
beginning after December 15, 1995. The Company expects to continue to account
for its stock-based compensation in accordance with the provision of APB 25.
Accordingly, SFAS 123 is not expected to have any material impact on the
Company's financial position or results of operations. The Company will make
the proforma disclosures required by FAS 123 in fiscal year 1997.
Income Taxes. The liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Per Share Information. Per share information is based on the weighted
average number of common shares outstanding during each period. Shares
issuable upon the exercise of stock options and warrants and the conversion of
preferred stock are not included since their inclusion would be anti-dilutive.
In addition, the paid in kind dividends on the preferred stock are excluded as
their impact would also be anti-dilutive.
NOTE 2. ACQUISITION OF MERLIN PHARMACEUTICAL CORPORATION
On February 13, 1995, the Company completed its acquisition (the
"Acquisition") of Merlin Pharmaceutical Corporation ("Merlin"), a privately-
held gene therapy company. The Company issued 2,257,385 shares of common stock
in exchange for all of the outstanding capital stock of Merlin and assumed
options and warrants to purchase an aggregate of 743,371 shares of the
Company's common stock at exercise prices between $0.01 and $1.94 per share.
The transaction was accounted for as a purchase and the consideration issued
by the Company was allocated to the tangible assets and intangible in-process
technology acquired based on their estimated fair values on the Acquisition
date. The aggregate purchase price of $13,702,000 consisted of (in thousands):
Fair value of common stock issued................................... $ 9,144
Fair value of warrants and options assumed.......................... 3,110
Acquisition costs................................................... 900
Liabilities assumed................................................. 548
-------
Total purchase price.............................................. $13,702
=======
28
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
The aggregate purchase price exceeded the fair value of Merlin's tangible
assets by $13,679,000. This amount was allocated to acquired in-process
technology and charged to operations in fiscal year 1995. The allocation of
the aggregate purchase price was as follows (in thousands):
Current assets....................................................... $ 23
In-process technology................................................ 13,679
-------
$13,702
=======
NOTE 3. STOCKHOLDERS' EQUITY
T-body Technology Research and Development Agreement
On April 29, 1994, the Company signed collaborative research and equity
purchase agreements with ▇▇▇▇▇▇ Healthcare Corporation ("▇▇▇▇▇▇") to jointly
research, develop and commercialize T-body technology for the treatment of
cancer. Under the terms of the agreements, the Company and Baxter will be
responsible for their own research expenditures. In fiscal year 1994, the
Company received a non-refundable technology license fee of $400,000, as well
as $1,600,000 for the sale of 232,558 shares of common stock to Baxter at
$6.88/share. Baxter agreed to purchase $1,000,000 in common stock at the then-
market price along with making a milestone payment of $1,000,000 after the
first patient has been treated in a phase I clinical trial. Before initiating
phase III clinical trials, the companies will have the opportunity to form a
joint venture to complete clinical development and commercialization of this
technology. The funding supported by each party at that time will determine
the ownership of the joint venture; provided, however, that each party can
supplement its funding contributions so that the total amount funded by each
party equals at least 30 percent and up to 50 percent of the total
expenditures under the program.
Colorectal Cancer Treatment Research and Development Agreement
On May 12, 1994, the Company signed an agreement with a private group of
investors (the "Investors") to develop the Company's GVAX(TM) cancer vaccine
technology for the treatment of colorectal cancer. Under the terms of the
agreement, the Company received $500,000 to fund preclinical research and
$1,500,000 for the sale of 230,769 shares of common stock to the Investors, at
$6.50 per share. These initial research funds have been used to finance
staffing, overhead, and supply costs associated with the Company's preclinical
development of the GVAX(TM) cancer vaccine for colorectal cancer. Upon filing
an IND, the Investors have agreed to provide an additional $2,500,000
consisting of research funding of $1,250,000 and $1,250,000 from the sale of
additional shares of common stock at the then-current market price. In
exchange for funding the program, the Investors will receive royalty payments
of 2% of net sales of the colorectal product, although such payments are to be
terminated when the Investors have received aggregate payments of $1,750,000,
therefore recovering research funding under the agreement.
▇▇▇▇▇▇▇-▇▇▇▇▇ Squibb Equity Investment
On August 14, 1995, the Company entered into an agreement with ▇▇▇▇▇▇▇-▇▇▇▇▇
Squibb to evaluate possible areas for collaboration in gene therapy and the
Company received an initial equity investment of $10 million for 1,195,572
shares of common stock or $8.36 per share. Upon obtaining protocol clearance
from the Food and Drug Administration (FDA) for a Phase III clinical trial for
GVAX(TM) cancer vaccine in April 1996, the Company received a second equity
investment of $10 million for 1,107,649 shares of common stock or $9.03 per
share. In addition, ▇▇▇▇▇▇▇-▇▇▇▇▇ Squibb received one board of directors seat.
The agreement also allows ▇▇▇▇▇▇▇-▇▇▇▇▇ Squibb a five year right of first
offer with regard to collaborations with the Company in any of its internally
initiated oncology programs.
29
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
Other Benefit or Bonus Plans
1992 Stock Option Plan. Under the 1992 Stock Option Plan, 3,200,000 shares
have been authorized for the grant to employees of either non-qualified or
incentive stock options and the grant to consultants of non-qualified options.
Incentive stock options are to be granted with exercise prices not less than
the fair market value of common stock at the date of grant and non-qualified
options at not less than 85% of fair market value. Options are exercisable as
determined by the Board of Directors, and the Company may be granted the right
to repurchase shares acquired in diminishing amounts over varying periods of
time (none through June 30, 1996). The following table summarizes the activity
under the Plan for the years ended June 30, 1996, 1995, and 1994:
OPTIONS EXERCISE
FOR THE YEARS ENDED JUNE 30, OUTSTANDING PRICE
---------------------------- ----------- -------------
1993
Balance............................................. 1,399,045 $ 2.44-$25.00
1994
Options granted..................................... 483,538 $ 5.63-$ 6.88
Options canceled.................................... (56,737) $ 3.75-$25.00
Options exercised................................... (13,521) $ 2.88-$ 7.00
--------- -------------
Balance............................................. 1,812,325 $ 2.44-$25.00
1995
Options granted..................................... 763,500 $ 3.00-$ 5.63
Options canceled.................................... (189,820) $ 2.88-$25.00
Options exercised................................... (3,200) $ 2.88-$ 3.00
--------- -------------
Balance............................................. 2,382,805 $ 2.44-$25.00
========= =============
1996
Options granted..................................... 423,000 $ 5.69-$ 6.94
Options canceled.................................... (165,581) $ 3.00-$ 8.50
Options exercised................................... (263,444) $ 3.00-$ 6.88
--------- -------------
Balance............................................. 2,376,780 $ 2.44-$25.00
========= =============
Of the options outstanding at June 30, 1996, options to purchase 1,355,596
shares were exercisable at prices from $2.44 to $18.72; 101,561 would be
subject to repurchase rights if exercised, and 1,021,184 were unvested and
unexercisable.
Other Option Plans. As a result of the mergers and acquisitions described in
Note 1 and 2, the Company adopted additional option plans. At June 30, 1996,
options to purchase 479,436 shares were outstanding with an exercise price
ranging from $0.0116 to $14.04 per share. All shares are exercisable; 9,375
are subject to repurchase rights.
Stock Option Cancellation/Regrant
On December 14, 1994, the Compensation Committee of the Board of Directors
approved a stock option cancellation/regrant program for employees with stock
option exercise prices in excess of the then current fair value of the
Company's common stock, or $3.00 per share. The holders of such options were
offered new options with an exercise price of $3.00 per share in exchange for
the cancellation of the old options.
30
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
Private Placement of Common and Preferred Stock
On June 29, 1995 the Company closed a private placement of units of common
and preferred stock in the aggregate amount of $16,543,000, before issuance
costs of $1,476,000. The financing consisted of $10,100,000 in common stock
units of the Company ("Common Stock Units"; 2,769,892 shares) and $6,400,000
in preferred stock units of the Company ("Preferred Stock Units"; 254,000
shares).
The Common Stock Units were priced at $3.68, and consisted of one share of
the Company's common stock ("Common Stock") and a warrant to purchase 0.56 of
a share of Common Stock. The Preferred Stock Units were priced at $25.00, and
consisted of one share of the Company's convertible preferred stock (the
"Preferred Stock"), convertible to 6.25 shares of Common Stock at $4.00 per
share, and warrants for 3.5 shares of Common Stock. In both cases the warrants
have exercise prices of $4.00 per share and have three year terms.
The Preferred Stock terms include a paid-in-kind dividend paid quarterly
until converted to common stock at the rate of 7% per year, a liquidation
preference of $25.00 per share, extraordinary voting rights in the event the
Company's net cash position, as defined, falls below $5,000,000, and a
conversion price reset provision. Under the reset provision, thirteen months
after closing, the conversion price may be reset to the lower of the current
conversion price or the twenty day average closing price of the Common Stock
in the thirteenth month. The conversion price after reset may not be less than
$2.00 per share. Purchasers of the Preferred Stock Units have agreed to
certain trading restrictions during this measurement period. The Preferred
Stock will automatically convert to Common Stock at any time after two and
one-half years after closing if the Common Stock trades at a 100% premium to
the then-applicable conversion price.
Outstanding Warrants
As of June 30, 1996 and 1995, the Company had outstanding warrants to
purchase 2,290,781 and 3,099,168 shares of common stock, respectively, at
prices ranging from $0.01 to $7.25 per share. The outstanding warrants
resulted from the private placement of preferred and common stock during
fiscal year 1995 and the sale/leaseback agreements entered into during fiscal
year 1994 (see Note 6). The warrants became exercisable in 1995 and expire at
various dates through 1999. At June 30, 1996 and 1995, 2,290,781 and 3,099,168
shares of common stock respectively, were reserved for that purpose.
Shares Reserved
At June 30, 1996 and 1995, common stock was reserved for the following
reasons:
1996 1995
--------- ---------
Exercise of stock warrants............................... 2,290,781 3,099,168
Conversion of preferred stock............................ 1,498,820 1,587,500
Stock option plans....................................... 3,200,355 3,525,021
--------- ---------
6,989,956 8,211,689
========= =========
NOTE 4. JOINT RESEARCH AND DEVELOPMENT AGREEMENT
On November 2, 1993, Baxter and the Company signed an agreement to jointly
research and develop a gene therapy approach for the treatment of hemophilia.
Under the terms of the agreement, the Company received a non-refundable
technology license fee of $2,000,000 in fiscal year 1994. The agreement grants
Baxter worldwide marketing rights to products developed.
31
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
As a part of this relationship, Baxter and the Company will collaborate in
areas of research and manufacturing and Baxter will make certain milestone
payments to the Company. Baxter will conduct clinical trials and market the
product worldwide. The Company will receive royalties on product sales. The
Company has also agreed to provide Baxter with a right of first negotiations
for certain other approaches for the treatment of hemophilias A and B.
NOTE 5. INCOME TAXES
Significant components of the Company's deferred tax assets (in thousands)
are as follows at June 30, 1996 and 1995:
1996 1995
------------ ------------
Net operating loss carryforward................. $ 37,000,000 $ 29,400,000
Research and development credit carryforward.... 4,600,000 4,600,000
Capitalized research and development............ 2,900,000 2,100,000
Restructuring costs............................. 500,000 800,000
------------ ------------
Gross deferred tax assets....................... 45,000,000 36,900,000
Valuation allowance............................. (45,000,000) (36,900,000)
------------ ------------
Net deferred tax asset.......................... $ 0 $ 0
------------ ------------
The valuation allowance increased $8,100,000 and $9,200,000 in the fiscal
years 1996 and 1995, respectively.
At June 30, 1996 the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $103,000,000 and
$32,000,000, respectively, which expire in the years 1996 through 2010. The
Company has federal tax credit carryforwards of approximately $3,700,000 which
will expire in the years 1996 through 2010.
Because of "change in ownership" provisions of the Tax Reform Act of 1986, a
portion of the Company's net operating loss carryforwards and tax credits will
be subject to an annual limitation regarding their utilization against taxable
income in future periods.
32
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
NOTE 6. COMMITMENTS
The Company leases certain laboratory, production, and office equipment
under capital leases, and all office and laboratory space under operating
leases. The operating lease agreements generally require the Company to pay
operating costs including property taxes, insurance and maintenance.
Future minimum lease payments under capital and operating leases at June 30,
1996 are as follows:
CAPITAL OPERATING
LEASES LEASES
---------- -----------
1997................................................. $1,109,000 $ 1,678,000
1998................................................. 1,037,000 1,517,000
1999................................................. 271,000 1,214,000
2000................................................. 86,000 780,000
2001................................................. -- 803,000
Thereafter........................................... -- 5,017,000
---------- -----------
Total minimum lease payments......................... $2,503,000 $11,009,000
===========
Less amount representing interest.................... 425,000
----------
Present value of minimum lease payments.............. 2,078,000
Less current portion................................. 861,000
----------
Long-term portion.................................... $1,217,000
==========
At June 30, 1996, the Company has certificates of deposit totaling $650,000
which secure obligations under certain operating leases.
Rent expense was $1,033,000, $1,438,000, and $1,051,000 for fiscal years
1996, 1995, and 1994, respectively. At June 30, 1996, the net book value of
equipment under capital leases is $1,307,000 ($1,683,000 in 1995). Certain
other facilities are sub-leased under a non-cancelable lease for terms
substantially identical to the original lease.
In May 1994, the Company entered into a $2,000,000 sale/leaseback
transaction for equipment used in the Company's operations. The Company's
resulting gain of $358,000 has been recorded on the accompanying balance
sheets as an offset to equipment under capital leases and is being amortized
over the lease term. The lessor also received warrants, exercisable until May
24, 1999, to purchase 25,000 shares of the Company's common stock at an
exercise price of $7.00 per share.
In June 1994, the Company entered into a $2,000,000 lease line for equipment
used in the Company's operations and such line expires December 31, 1996. As
of June 30, 1996, the Company had borrowed a total of $1,490,000 under this
line in the form of sale/leaseback transactions. The lessor also received
warrants that became exercisable in fiscal year 1995. Such warrants expire on
December 31, 1999, and grant the lessor the right to purchase 19,310 shares of
the Company's common stock at an exercise price equal to the lesser of $7.25
per share or the closing sales price per share of the Company's common stock
as listed on the NASDAQ National Market on the date the warrants become
exercisable, but in no event less than $6.00 per share.
33
SOMATIX THERAPY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
NOTE 7. OTHER INCOME
Other income is comprised of the following:
YEAR ENDED JUNE 30
-------------------------------
1996 1995 1994
--------- --------- ---------
Interest income............................. $ 863,000 $ 525,000 $ 731,000
Interest expense............................ (309,000) (300,000) (132,000)
Other income (expense), net................. 302,000 (3,000) (125,000)
--------- --------- ---------
$ 856,000 $ 222,000 $ 474,000
========= ========= =========
NOTE 8. RESTRUCTURING COSTS
In June 1995, the Company initiated certain changes in the structure of its
research and development efforts. These changes included a selective reduction
in the Company's overall research, clinical and administrative work force.
Accordingly, the Company recorded restructuring costs of $2,752,000 in the
fourth quarter of fiscal year 1995, which included employee severance costs
for 20 employees, totaling $314,000, of which $176,000 was paid during 1995.
Restructuring costs also included the write-down of certain assets to net
realizable value and the accrual of future rent obligations on vacated
buildings and other such future costs related to the restructuring. As of June
30, 1996, the remaining accrued costs amounted to $1,248,000 which relate to
future rent obligations.
NOTE 9. SUBSEQUENT EVENTS
On September 25, 1996, the Company sold 33,333 shares of convertible Series
B-1 preferred stock ("Preferred Stock") in a private placement pursuant to
Regulation S under the Securities Act of 1933, as amended, for an aggregate
consideration of $5,000,000 in cash. In addition, the Company has the right to
sell up to $10,000,000 in additional shares of Preferred Stock during the
three (3) year period ending September 25, 1999. No more than $5,000,000 may
be sold during any given six month period. The Preferred Stock is not entitled
to dividends and is convertible into common stock at a premium over an average
of the market price of the Company's Common Stock on the earlier of (i) the
investor's option, (ii) immediately following any sixty (60) day trading
period after March 1997 in which the Company's common stock has traded above
130% of the closing price of the common stock on September 24, 1996, or (iii)
September 25, 1999. The Company also issued to the investor a warrant to
purchase 650,000 shares of the Company's common stock at a price equal to 130%
of the closing price of the Company's common stock on September 24, 1996. Such
warrant is exercisable between March 1998 and September 2002.
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 with respect to the identification
of Directors is hereby incorporated by reference from the information under
the caption "Proposal One--Election of Directors" in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on November 21,
1996 (the "Proxy Statement").
The information required by Section 16(a) is hereby incorporated by
reference from the information under the caption "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company:
NAME AGE POSITION
---- --- --------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇......... 56 Chairman, President and Chief Executive
Officer
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇... 40 Executive Vice President, Commercial
Development; Chief Financial Officer since
August 15, 1996
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, 41 Executive Vice President, Research and
Ph.D.(1)............... Chief Scientific Officer
▇▇▇ ▇. ▇▇▇▇▇▇, M.D., 50 Executive Vice President, Gene Therapy
Ph.D................... Development
▇▇▇▇ ▇.▇. ▇▇▇▇▇▇▇(2).... 39 Vice President, Finance and Chief Financial
Officer
--------
(1) ▇▇. ▇▇▇▇▇▇▇▇ resigned from the Company effective as of November 30 1995.
(2) ▇▇. ▇▇▇▇▇▇▇ resigned from the Company effective as of August 15, 1996.
▇▇. ▇▇▇▇▇▇ has been President and Chief Executive Officer of the Company
since September 1991, and has served as a director of the Company since 1988.
In September 1994, ▇▇. ▇▇▇▇▇▇ was appointed Chairman of the Board of Directors
of the Company. From 1986 until joining Somatix in 1991, he was President and
Chief Operating Officer of Northfield Laboratories, a company developing an
artificial blood product. ▇▇. ▇▇▇▇▇▇ is a member of the Board of Directors of
Northfield Laboratories.
▇▇. ▇▇▇▇▇▇▇▇ joined the Company in July 1992 as Executive Vice President,
Commercial Development. Since August 15, 1996, ▇▇. ▇▇▇▇▇▇▇▇ has also served as
the Company's Chief Financial Officer. From December 1991 to July 1992, he was
Senior Vice President of Business Development and Marketing at Celtrix
Pharmaceuticals, Inc., a pharmaceutical company. From 1988 to 1991 he was
President and Chief Executive Officer of BioGrowth, Inc., a pharmaceutical
company. ▇▇. ▇▇▇▇▇▇▇▇ previously has held positions with Biotherapeutics,
Inc., Synergen, Inc. and ▇▇▇ Lilly & Company.
In November 1995, Dr. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ resigned his position as Director and
Executive Vice President, Research and Chief Scientific Officer to accept a
position as a ▇▇▇▇▇▇ ▇▇▇▇▇▇ Professor at Harvard University. ▇▇. ▇▇▇▇▇▇▇▇, a
founder and a director of Somatix Corporation from its formation in January
1988 to November 1995, is currently a consultant to Somatix and chairman of
the Scientific Advisory Board. He will remain active on the Company's
Scientific Advisory Board.
35
▇▇. ▇▇▇▇▇▇ joined Somatix in March 1995. From 1990 to March, 1995, he served
as Senior Vice President of Scientific Affairs at ▇.▇. ▇▇▇▇▇▇▇▇▇, a leading
clinical research organization, where he worked closely with Somatix in the
areas of clinical development and regulatory affairs. ▇▇. ▇▇▇▇▇▇ was also with
Boeringer Ingelheim as Director of Clinical Research. He sits on the editorial
boards of several clinical development journals.
▇▇. ▇▇▇▇▇▇▇ resigned as Vice President, Finance, and Chief Financial Officer
of Somatix in August 1996, a position he had held since July 1992. From
September 1990 to July 1992, ▇▇. ▇▇▇▇▇▇▇ served as Treasurer and Secretary
after joining the Company as the Controller in May 1988. ▇▇. ▇▇▇▇▇▇▇ remained
secretary of the Company until his resignation in 1996. Prior to joining the
Company, ▇▇. ▇▇▇▇▇▇▇ held positions in high technology companies as well as
with ▇▇▇▇▇▇ ▇▇▇▇▇ and Company. ▇▇. ▇▇▇▇▇▇▇ is a certified public accountant.
Officers are appointed to serve, at the discretion of the board of
directors, until their successors are appointed. There are no family
relationships among any of the executive officers of the Company.
EMPLOYEES
As of June 30, 1996, the Company employed 110 individuals full-time, of whom
16 hold Ph.D. degrees, and 8 hold M.D. degrees. Of these employees, 41 were
engaged in research, 52 in gene therapy development, and 17 in finance and
administration. None of the Company's employees is represented by a labor
union or is the subject of a collective bargaining agreement. The Company has
never experienced a work stoppage and believes that it maintains good
relations with its employees.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the information under the captions "Proposal One--Election of Directors",
"Summary of Cash and Certain Other Compensation", "Stock Options" and "Option
Holdings" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
from the information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to Financial Statements under Item 8.
2. Financial Statement Schedules
All financial statement schedules of the registrant for the years ended June
30, 1996, 1995, and 1994 have been omitted since the information is not
required or is not so material as to require submission of the schedule, or
because the information requested is included in the consolidated financial
statements or the notes thereto.
(b) Reports on Form 8-K
None
(c) Exhibits
The following documents are referenced or included in this report.
EXHIBIT
NO.
-------
3.1(1) Amended and Restated Certificate of Incorporation effective May 16, 1986.
Reference Exhibit 3.1.
3.2(1) Certificates of Determination. Reference Exhibit 3.2.
3.3(2) Bylaws. Reference Exhibit 3.3.
3.4(8) Certificate of Amendment of Certificate of Incorporation effective January
22, 1987. Reference Exhibit 3.2.
3.5(8) Certificate of Amendment of Restated Certificate of Incorporation effective
March 15, 1991. Reference Exhibit 3.4.
3.6(8) Certificate of Amendment of Restated Certificate of Incorporation effective
January 17, 1992. Reference Exhibit 3.5.
3.7(8) Certificate of Designation of Preferences of Preferred Shares effective
December 12, 1988. Reference Exhibit 3.3
3.8(15) Certificate of Amendment of Restated Certificate of Incorporation effective
December 16, 1993.
3.9(19) Amended and Restated Certificate of Incorporation effective November 29,
1994. Reference Exhibit 3.1.
3.10(22) Certificate of Designation of Preferences of Preferred Shares effective June
27, 1995. Reference Exhibit 3.3.
3.11 Certificate of Designation of Preferences of Series B-1 Preferred Stock
effective September 23, 1996.
3.12(19) Bylaws, as amended and restated September 29, 1994. Reference Exhibit 3.2.
3.13(23) Bylaws, as amended and restated September 14, 1995. Reference Exhibit 3.3.
10.1(2) Lease Agreement dated June 16, 1986, between Hana Biologics, Inc. and
Alameda Marina Village Associates. Reference Exhibit 10.37.
10.2(3) 1988 Directors Stock Option Plan. Reference Exhibit 10.67.
37
EXHIBIT
NO.
-------
10.3(4) Trade Secrets Agreement dated September 13, 1989, between Hana Biologics,
Inc. and Irvine Scientific Sales Company, Inc. Reference Exhibit 3.
10.4(4) License Agreement dated September 13, 1989, between Hana Biologics, Inc. and
Irvine Scientific Sales Company, Inc. Reference Exhibit 4.
10.5(4) Manufacturing and Supply Agreement dated September 13, 1989, between Hana
Biologics, Inc. and Irvine Scientific Sales Company, Inc. Reference Exhibit
5.
10.6(5) Development Agreement dated May 1, 1990, between Hana Biologics, Inc. and
The Polymer Technology Group, Incorporated. Reference Exhibit 10.68.
10.7(6) License Agreement dated February 1, 1988, between Somatix Corporation and
the Massachusetts Institute of Technology. Reference Exhibit 10.1.
10.8(6) Somatix Corporation's 1988 Stock Option Plan, as amended, and forms of
agreement currently used thereunder. Reference Exhibit 10.2.
10.9(7) Consulting Agreement dated March 14, 1991, between the Company and Dr.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇. Reference Exhibit 10.29.
10.10(8) Lease Agreement dated September 7, 1990, between GeneSys Therapeutics
Corporation and Ventana Leasing, Inc. Reference Exhibit 10.49.
10.11(8) License Agreement dated October 1, 1990, between GeneSys Therapeutics
Corporation and Washington University. Reference Exhibit 10.34.
10.12(8) License Agreement dated April 4, 1991, between GeneSys Therapeutics
Corporation and the Regents of the University of California. Reference
Exhibit 10.37.
10.13(8) Warrant Agreement dated April 15, 1991, between GeneSys Therapeutics
Corporation and Ventana Leasing, Inc. Reference Exhibit 10.50.
10.14(8) Letter Agreement dated April 17, 1991, between GeneSys Therapeutics
Corporation and the Regents of the University of California, as amended by
that Letter Agreement dated May 10, 1991. Reference Exhibit 10.51.
10.15(8) License Agreement dated June 7, 1991, between GeneSys Therapeutics
Corporation and the ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ Cancer Research Center. Reference
Exhibit 10.38.
10.16(8) License Agreement No. 1 dated August 20, 1991, between GeneSys Therapeutics
Corporation and The Salk Institute for Biological Studies. Reference
Exhibit 10.39.
10.17(8) Scientific Consulting Agreement dated November 8, 1991, between Somatix and
▇▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇. Reference Exhibit 10.41.
10.18(8) Scientific Consulting Agreement dated November 8, 1991, between Somatix and
▇▇. ▇▇▇▇▇▇▇▇▇ ▇▇▇▇. Reference Exhibit 10.42.
10.19(8) Scientific Consulting Agreement dated November 8, 1991, between Somatix and
▇▇. ▇▇▇▇▇ ▇▇▇▇▇. Reference Exhibit 10.43.
10.20(8) Consulting Agreement dated November 13, 1991, between Somatix and ▇▇. ▇▇▇▇▇
▇. ▇▇▇▇▇▇, ▇▇. Reference Exhibit 10.44.
10.21(8) Warrant Agreement dated November 9, 1991, between GeneSys Therapeutics
Corporation and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ V. Reference Exhibit
10.45.
10.22(8) Agreement dated January 15, 1992, between Somatix and The Board of Trustees
of the ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Jr. University. Reference Exhibit 10.46.
38
EXHIBIT
NO.
-------
10.23(8) Registration Rights Agreement dated January 17, 1992, among Somatix
and certain Investors as set forth on Exhibit A thereto. Reference
Exhibit 10.47.
10.24(8) Shareholder Agreement dated January 21, 1992, among Somatix,
GeneSys Therapeutics Corporation and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ &
▇▇▇▇▇ V. Reference Exhibit 10.48
10.25(9) License Agreement dated March 4, 1992, by and among Somatix, The
▇▇▇▇▇ ▇▇▇▇▇▇▇ University and The University of Texas System.
Reference Exhibit 10.56.
10.26(9) Lease Agreement dated July 15, 1992, between Somatix and Alameda
Real Estate Investments. Reference Exhibit 10.58.
10.27(9) 1992 Stock Option Plan, as amended and restated. Reference Exhibit
10.63.
10.28(10) GeneSys Therapeutics Corporation 1991 Stock Option Plan and forms
of agreement currently used thereunder. Reference Exhibit 28.5.
10.29(11) Sublease Agreement dated March 26, 1992, by and among GeneSys
Therapeutics Corporation, Del Mar Plaza, Ltd. and Ligand
Pharmaceuticals, Inc.; Consent to Sublease Agreement dated April
10, 1992. Reference Exhibit 10.57.
10.30(11) Employment Agreement dated July 10, 1992, between Somatix and ▇▇.
▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇. Reference Exhibit 10.66.
10.31(12) Agreement dated January 15, 1993, by and between Somatix and the
Regents of the University of California on behalf of its ▇▇▇▇▇
Campus. Reference Exhibit 10.70.
10.32(12) Agreement dated February 10, 1993, by and between Somatix and the
California ▇▇▇▇▇▇▇▇▇'▇ Foundation. Reference Exhibit 10.71.
10.33*(12) Letter Agreement dated March 16, 1993, between Somatix and Vector
Securities International, Inc. Reference Exhibit 10.72.
10.34(12) Employment Agreement dated July 1, 1993, between Somatix and ▇▇▇▇▇
▇▇▇▇▇▇. Reference Exhibit 10.73.
10.35(12) Agreement dated August 30, 1993, by and between Somatix and ▇▇▇▇▇▇
Institute for Cancer Research. Reference Exhibit 10.74.
10.36(13) Employment Agreement dated November 11, 1993, between Somatix and
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇. Reference Exhibit 10.76.
10.37(14) Property Lease Agreement dated February 8, 1994, between Somatix
and Alameda Real Estate Investments. Reference Exhibit 10.77.
10.38(15) Property Lease Agreement dated May 5, 1994, between Somatix and
Alameda Real Estate Investments. Reference Exhibit 10.55.
10.39*(15) Research Collaboration Agreement dated April 29, 1994, by and
between Somatix and ▇▇▇▇▇▇ Healthcare Corporation. Reference
Exhibit 10.53.
10.40(15) Stock Purchase Agreement dated April 29, 1994, by and between
Somatix and ▇▇▇▇▇▇ Healthcare Corporation. Reference Exhibit
10.54.
10.41(15) Stock Purchase Agreement dated May 12, 1994, by and between Somatix
and Health Care Partners, LLC. Reference Exhibit 10.56.
10.42(15) Common Stock Purchase Agreement dated November 29, 1993, among
Somatix and the Investors listed on the Schedule of Investors
attached thereto. Reference Exhibit 10.52.
39
EXHIBIT
NO.
-------
10.43(15) Amended and Restated Registration Rights Agreement dated May 12,
1994, among Somatix and the parties listed on Schedule A attached
thereto. Reference Exhibit 10.57.
10.44(15) Master Equipment Lease Agreement dated May 24, 1994, between
Somatix and Aberlyn Capital Management Limited Partnership.
Reference Exhibit 10.58.
10.45(15) Agreement to Issue Warrant dated May 24, 1994, between Aberlyn
Capital Management Limited Partnership and Somatix. Reference
Exhibit 10.59.
10.46(15) Agreement to Issue Warrant dated May 24, 1994, between Aberlyn
Capital Management Limited Partnership and Somatix. Reference
Exhibit 10.60.
10.47(15) Master Equipment Lease Agreement dated June 30, 1994, between
Financing for Science International, Inc. and Somatix. Reference
Exhibit 10.61.
10.48(15) Warrant dated July 30, 1994, issued by Somatix to Financing for
Science International, Inc. Reference Exhibit 10.62.
10.49*(16) Agreement dated November 2, 1993, by and between Somatix and ▇▇▇▇▇▇
Healthcare Corporation together with Amendment No. 1 dated
September 30, 1994. Reference Exhibit 10.75.
10.50(17) Employment Agreement dated August 1, 1993, between Somatix and
▇▇▇▇▇▇ ▇▇▇▇▇▇-▇▇▇▇.
10.51(17) Employment Agreement dated August 1, 1993, between Somatix and
▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
10.52(17) Employment Agreement dated November 1, 1993, between Somatix and
▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇.
10.53(17) Employment Agreement dated December 30, 1993, between Somatix and
▇▇▇▇ ▇.▇. ▇▇▇▇▇▇▇.
10.54*(17) Non-Exclusive License Agreement dated April 20, 1994 by and between
the ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ Cancer Research Center and Somatix.
10.55(17) Research Agreement dated June 1, 1994 between ▇▇▇▇▇▇ Healthcare
Corporation and Somatix.
10.56*(17) Letter Agreement dated September 1, 1994 between ▇▇▇▇▇▇ Healthcare
Corporation and Somatix.
10.57(18) Amendment #1 to the Warrant Agreement and Shareholder Agreement
dated November 7, 1994 by and among Somatix, GeneSys Therapeutics
Corporation and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ V.
10.58*(19) Agreement and Plan of Reorganization dated December 19, 1994 as
amended on January 18, 1995 and January 31, 1995 among Somatix,
STC Acquisition Co. and Merlin Pharmaceutical Corporation.
Reference Exhibit 3.
10.59(19) Escrow Agreement, dated as of February 3, 1995, by and between STC
Acquisition Company, The First National Bank of Boston and the
stockholders of Merlin Pharmaceutical Corporation. Reference
Exhibit 4.
10.60*(19) Consulting and Repurchase Agreement, dated February 3, 1995,
between Somatix and ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇. Reference Exhibit 5.
10.61*(19) Consulting and Repurchase Agreement, dated January 21, 1995,
between Somatix and ▇▇▇▇▇▇ ▇▇▇▇▇. Reference Exhibit 6.
10.62*(19) Consulting and Repurchase Agreement, dated February 3, 1995,
between Somatix and R. ▇▇▇▇ ▇▇▇▇▇▇▇▇. Reference Exhibit 7.
40
EXHIBIT
NO.
-------
10.63*(19) Consulting and Repurchase Agreement, dated February 3, 1995,
between Somatix and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇. Reference Exhibit 8.
10.64*(19) Consulting and Repurchase Agreement, dated February 3, 1995,
between Somatix and ▇▇▇▇▇▇▇ During. Reference Exhibit 9.
10.65(19) Indemnification Agreement, dated as of December 19, 1994, as
amended by Amendment No. 1, dated as of February 3, 1995, among
Merlin Pharmaceutical Corporation and ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇. Reference
Exhibit 10.
10.66(19) Promissory Note, dated February 2, 1995, by and between ▇▇▇▇▇▇ ▇.
▇▇▇▇▇▇ and Somatix. Reference Exhibit 11.
10.67(20) Merlin Pharmaceutical Corporation 1993 Stock Option Plan.
Reference Exhibit 99.1.
10.68(20) Non-Qualified Stock Option Agreement to be generally used in
connection with Merlin Pharmaceutical Corporation 1993 Stock
Option Plan. Reference Exhibit 99.2.
10.69(20) Stock Option Assumption Agreement--Installment Option. Reference
Exhibit 99.3.
10.70(20) Stock Option Assumption Agreement--Immediately Exercisable Option.
Reference Exhibit 99.4.
10.71*(21) License Agreement, dated January 10, 1994, between Merlin
Pharmaceutical Corporation and University of Florida Research
Foundation. Reference Exhibit 10.13.
10.72*(21) License Agreement, dated May 1, 1994, between Merlin
Pharmaceutical Corporation and University of Pittsburgh--of the
Commonwealth System of Higher Education. Reference Exhibit 10.14.
10.73*(21) License Agreement, dated August 11, 1994, between Merlin
Pharmaceutical Corporation and The Research Foundation of State
University of New York. Reference Exhibit 10.15.
10.74*(21) License Agreement, dated August 17, 1994, between Merlin
Pharmaceutical Corporation and University of Pittsburgh--of the
Commonwealth System of Higher Education. Reference Exhibit 10.16.
10.75(21) Sublease Agreement, dated December 1, 1994, between Merlin
Pharmaceutical Corporation and ICAgen, Inc. Reference Exhibit
10.17.
10.76*(21) Amendment dated February 15, 1995 to License Agreement dated May
1, 1994, between Merlin Pharmaceutical Corporation and University
of Pittsburgh--of the Commonwealth System of Higher Education.
Reference Exhibit 10.18.
10.77(21) Employment Agreement, dated April 7, 1995, between Somatix and ▇▇▇
▇▇▇▇▇▇, M.D. Reference Exhibit 10.19.
10.78(22) Common Stock Purchase Agreement, dated June 17, 1995. Reference
Exhibit 10.20.
10.79(22) Preferred Stock Purchase Agreement, dated June 17, 1995. Reference
Exhibit 10.21.
10.80(22) Form of Warrant to Purchase Shares of Common Stock. Reference
Exhibit 10.22.
10.81**(24) Stock Purchase Agreement, dated August 15, 1995, between Somatix
Therapy Corporation and ▇▇▇▇▇▇▇-▇▇▇▇▇ Squibb Company. Reference
Exhibit 5.2.
10.82(25) Engagement Letter, dated April 27, 1995, between Somatix Therapy
Corporation and ▇▇▇▇▇▇▇ ▇▇▇▇▇ & Co. of ▇▇▇▇▇▇▇ Lynch, Pierce,
▇▇▇▇▇▇ & ▇▇▇▇▇ Incorporated.
10.83(26) Amendment No. 2 to the Warrant Agreement and Shareholder
Agreement, dated November 9, 1995, by and among Somatix Therapy
Corporation and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇ V. Reference
Exhibit 10.1
41
EXHIBIT
NO.
-------
10.84(26) Mutual Termination Agreement, dated September 29, 1995, between
Somatix Therapy Corporation and ▇▇▇▇▇▇ Healthcare Corporation.
Reference Exhibit 10.2.
10.85 Subscription Agreement, dated September 24, 1996, by and between
Somatix Therapy Corporation and ▇▇▇▇▇▇▇▇ International Limited.
10.86 Warrant, dated September 25, 1995, issued by Somatix Therapy
Corporation to ▇▇▇▇▇▇▇▇ International Limited.
22.1(3) Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (see pages 45 and 46).
27 Financial Data Schedule.
--------
(1) Incorporated by reference to exhibit of the registrant's Registration
Statement on Form S-1 (File No. 33-4795) as filed with the SEC on April
14, 1986.
(2) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for fiscal year ended June 30, 1986.
(3) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1989.
(4) Incorporated by reference to exhibit filed with the registrant's Form 8-K
dated September 13, 1989.
(5) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1990.
(6) Incorporated by reference to exhibit of the registrant's Registration
Statement on Form S-4 (File No. 33-4795) as filed with the SEC on January
14, 1991.
(7) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1991.
(8) Incorporated by reference to exhibit of the registrant's Registration
Statement on Form S-1 (File No. 33-4795) as filed with the SEC on January
21, 1992.
(9) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992.
(10) Incorporated by reference to exhibit of the registrant's Registration
Statement on Form S-8 as filed with the SEC on August 17, 1992.
(11) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for quarter ended September 30, 1992.
(12) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993.
(13) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1993.
(14) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(15) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
(16) This agreement was originally filed as Exhibit 10.75 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1993,
has not been changed and is being filed with Amendment No. 1 thereto for
convenience of reference.
(17) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(18) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994.
42
(19) Incorporated by reference to exhibit filed with registrant's Amendment
No. 1 to Current Report on Form 8-K/A as filed with the SEC on February
14, 1995.
(20) Incorporated by reference to exhibit of the registrant's Registration
Statement on Form S-8 as filed with the SEC on March 3, 1995.
(21) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(22) Incorporated by reference to exhibit of the registrant's Registration
Statement on Form S-3 (File No. 33-60873) as filed with the SEC on June
19, 1995.
(23) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter year ended June 30, 1995.
(24) Incorporated by reference to exhibit filed with registrant's Current
Report on Form 8-K as filed with the SEC September 20, 1995.
(25) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the fiscal ended September 30, 1995.
(26) Incorporated by reference to exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
* Confidential treatment has been granted as to certain portions of this
agreement.
** Confidential treatment has been requested as to certain portions of this
agreement. Such omitted confidential information has been designated by an
asterisk and has been filed separately with the Commission pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934, as amended, pursuant
to an application for confidential treatment.
43
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT") THE REGISTRANT HAS DULY
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED.
Dated: September 27, 1996
Somatix Therapy Corporation
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
By: _________________________________
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Chairman, President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears below
constitutes and appoints jointly and severally, ▇▇▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇.
▇▇▇▇▇▇▇▇ ▇▇, or either of them as his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and ▇▇▇▇▇, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this Report on
Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
PURSUANT TO THE REQUIREMENTS OF THE EXCHANGE ACT, THIS REPORT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇ Chief Executive September 27,
------------------------------------- Officer (Principal 1996
(▇▇▇▇▇ ▇. ▇▇▇▇▇▇) Executive Officer)
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇ Vice President, September 27,
------------------------------------- Finance (Principal 1996
(▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇) Financial and
Accounting Officer)
/s/ ▇▇▇▇▇ ▇▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇▇ ▇▇▇▇▇, PH.D)
44
SIGNATURE TITLE DATE
/s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇)
/s/ ▇▇▇▇ ▇. ▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇ ▇. ▇▇▇▇, PH.D.)
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇. Director September 27,
------------------------------------- 1996
(▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇., PH.D.)
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇ Director September ,
------------------------------------- 1996
(▇▇▇▇ ▇. ▇▇▇▇▇, PH.D., M.D.)
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, M.D.)
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇▇▇ ▇. ▇▇▇▇▇, PH.D)
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇▇ ▇. ▇▇▇▇▇, PH.D.)
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ Director September 27,
------------------------------------- 1996
(▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, PH.D.)
45
0522-AR-97